East Asia’s Foreign Exchange Rate Policies
Michael F. Martin
Analyst in Asian Trade and Finance
July 16, 2009
Congressional Research Service
7-5700
www.crs.gov
RS22860
CRS Report for Congress
P
repared for Members and Committees of Congress
East Asia’s Foreign Exchange Rate Policies
Summary
Financial authorities in East Asia have adopted a variety of foreign exchange rate policies,
ranging from Hong Kong’s currency board system which links the Hong Kong dollar to the U.S.
dollar, to the “independently floating” exchange rates of Japan, the Philippines, and South Korea.
Most Asian monetary authorities have adopted “managed floats” that allow their local currency to
fluctuate within a limited range over time as part of a larger economic policy.
Over the last few years, the value of the U.S. dollar has generally declined against most major
currencies, although the U.S. dollar has rebounded against some currencies in recent months. The
various economies of East Asia have responded differently to the fluctuation in the value of the
U.S. dollar. Some have allowed their local currency to appreciate against the U.S. dollar; others
have held the value of their currency against the U.S. dollar relatively unchanged. A few have
seen their currencies depreciate in value relative to the U.S. dollar. While there is some evidence
of competitive adjustments among some of the exchange rates, it is unclear if these adjustments
have had much impact on exports to the United States.
While U.S. policy has generally supported the adoption of “free float” exchange rate policies,
most of East Asia considers a “managed float” exchange rate policy more conducive to their
economic goals and objectives. In addition, it is uncertain if the adoption of “free float” exchange
rate policies across East Asia would necessarily lead to a major decline in the U.S. trade deficit
with East Asia. It is possible that U.S. complaints of “currency manipulation” and pressure on one
East Asian government to alter its exchange rate policy may foster resistance from other East Asia
governments that have adopted similar exchange rate policies. This report will be updated as
events warrant.
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East Asia’s Foreign Exchange Rate Policies
Contents
East Asia’s Exchange Rate Policies ............................................................................................. 2
Competitive Adjustments? .................................................................................................... 3
Exchange Rates and U.S. Trade............................................................................................. 5
Implications for U.S. Trade Policy in East Asia ........................................................................... 6
Figures
Figure 1. Changes in U.S. Dollar Exchange Rates for East Asian Currencies, July 2005 -
June 2009................................................................................................................................. 4
Figure 2. Currency Appreciation and U.S. Trade Growth with China, Malaysia, and
Singapore, 2006 - 2008 ............................................................................................................ 5
Tables
Table 1. De Facto Exchange Rates Policies of East Asia (as of April 30, 2008) ............................ 2
Contacts
Author Contact Information ........................................................................................................ 7
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East Asia’s Foreign Exchange Rate Policies
he exchange rate policies of some East Asian nations—in particular, China Japan, and
South Korea—have been a source of trade tension with the United States. Some analysts
T and Members of Congress maintain that these countries have intentionally kept their
currencies undervalued in order to keep their exports price competitive in global markets. Some
argue that these exchange rate policies constitute “currency manipulation” and violate Article IV,
Section 1(iii) of the Articles of Agreement the International Monetary Fund, that stipulate that
“each member shall avoid manipulating exchange rates or the international monetary system in
order to prevent effective balance of payments adjustment or to gain an unfair competitive
advantage over other members.”
Under U.S. law, the Secretary of the Treasury is required to conduct a biannual analysis of the
exchange rate policies of foreign countries and determine if they violate Article IV, Section 1.1 In
its report to Congress released in April 2009, the U.S. Treasury “concluded that no major trading
partner of the United States met the standards identified in Section 3004 of the Act during the
reporting period” (i.e. none was manipulating its exchange rate).2
Several bills have been introduced during the 111th Congress concerning the issue of “currency
manipulation” or “misalignment” in general. These include the Currency Exchange Rate
Oversight Reform Act of 2009 (S. 1254), the Currency Reform for Fair Trade Act of 2009 (H.R.
2378 and S. 1027), the End the Trade Deficit Act (H.R. 1875), and the Trade Reform,
Accountability, Development, and Employment (TRADE) Act of 2009 (H.R. 3012). While these
bills address the exchange rate issue in general, it is widely understood that the main targets are in
East Asia, particularly China.
This report examines the de facto foreign exchange rate policies adopted by the monetary
authorities of East Asia. In some cases, there is a perceived discrepancy between the official (de
jure) exchange rate policy and the observed de facto exchange rate policy. This report will focus
primarily on the de facto exchange rate policies At one extreme, Hong Kong has maintained a
“linked” exchange rate with the U.S. dollar since 1983, under which the Hong Kong Monetary
Authority (HKMA) intervenes to keep the exchange rate between 7.75 and 7.85 Hong Kong
dollars (HKD) to the U.S. dollar.3 Such an arrangement is often referred to as a “fixed” or
“pegged” exchange rate. At the other extreme, Japan, the Philippines, and South Korea have
usually allowed their currencies to float freely in foreign exchange (forex) markets over the last
few years—an exchange rate arrangement often referred to as a “free float.” However, all three
nations—much like the United States—have intervened in international currency markets if
fluctuations in the exchange rate are considered too volatile and pose a risk to the nation’s
economic well-being.4 Most of East Asia’s governments, however, have chosen exchange rate
policies between these two extremes in the form of a “managed float.”
1 Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), codified into U.S. Code
Chapter 22, Sections 5304-5306.
2 U.S. Treasury, “Report to Congress on International Economic and Exchange Rate Policies,” April 15, 2009,
available online at http://www.ustreas.gov/press/releases/reports/fxreportfinalfor%20webapril152009.pdf.
3 For more information about Hong Kong’s exchange rate policy, see the HKMA’s web page: http://www.info.gov.hk/
hkma/eng/currency/link_ex/index.htm.
4 According to the Federal Reserve Bank in New York, the United States intervened in foreign exchange markets twice
between August 1995 and December 2006, for more information see http://www.newyorkfed.org/aboutthefed/fedpoint/
fed44.html.
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East Asia’s Foreign Exchange Rate Policies
East Asia’s Exchange Rate Policies
Much of East Asia has adopted an exchange rate policy commonly referred to as a “managed
float.” Cambodia, China, Indonesia, Malaysia, Singapore, Taiwan, Thailand, and Vietnam allow
their currency to adjust in value in forex markets so long as the fluctuations in value do not
violate some other economic policy goal
(such as inflation limits or money supply
constraints). In addition, China and
Table 1. De Facto Exchange Rates Policies of
Vietnam have officially adopted a type of
East Asia (as of April 30, 2008)
managed float known as a “crawling
Economy
Exchange Rate Policy
peg”—that typically includes either the
gradual appreciation or depreciation of
Cambodia
Managed Float
the currency over time against one or
China
Crawling Peg*
more currencies. Table 1 lists the current
de facto exchange rate policies of East
Hong Kong
Pegged
Asia according to the International
Indonesia
Managed Float
Monetary Fund (IMF) as of April 30,
Japan
Free Float
2008, divided into four general categories:
Laos
Managed Float
1. Pegged; 2. Crawling Peg; 3. Managed
Float; and 4. Free Float.
Macau
Pegged
Malaysia
Managed Float
Categorization of a government’s
Philippines
Free Float
exchange rate policy can be complicated.
For example, according to South Korea’s
Singapore
Managed Float
central bank, the Bank of Korea, the
South Korea
Free Float
nation’s official exchange rate policy has
Taiwan
Managed Float
been a “free floating system since
December 1997.”5 However, it was
Thailand
Managed Float
reported that the South Korean
Vietnam
Crawling Peg*
government sold about $1 billion for won
on March 18, 2008, to stop a “disorderly
Source: International Monetary Fund, De Facto
decline” in the value of Korea’s currency.6
Classification of Exchange Rate Regimes and Monetary Policy
Framework, http://www.imf.org/external/np/mfd/
There were also reports that Korea sold
er/2008/eng/0408.htm.
more dollars for won in early April 2008.7
*Note: Status of exchange rate policies of China and
At the time, some forex analysts claimed
Vietnam subject to debate; some analysts think both
that the new South Korean government
nations have recently adopted a managed float.
had de facto adopted a pegged exchange
rate policy of holding the exchange rate
between the won and the U.S. dollar at 975-1,000 to 1.8 Since the summer of 2008, the won had
sharply declined in value against the U.S. dollar, hitting a low of 1,569.61 won to the dollar in
March 2009.
5 See the Bank of Korea’s webpage for a description of its exchange rate policy: http://www.bok.or.kr/template/eng/
html/index.jsp?tbl=tbl_FM0000000066_CA0000001186.
6 Yoo Choonsik and Cheon Jong-woo, “S. Korea Sold Dollars to Calm Markets-Dealers,” Reuters, March 18, 2008.
7 “Intervention Detected as S. Korea Won Pares Gains,” Reuters, April 4, 2008.
8 Yoo Choonsik, “S. Korea Won Hit by New Policy, Consumption at Risk,” Reuters, April 7, 2008.
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East Asia’s Foreign Exchange Rate Policies
Another source of complication arises when there is a seeming discrepancy between the official
exchange rate policy and observed forex market trends. For example, both China and Vietnam
officially are maintaining a crawling peg policy that allows their currencies—the renminbi and
the dong, respectively—to adjust in value with respect to an undisclosed bundle of currencies
within a specified range each day. In theory, this allows the renminbi and dong to appreciate or
depreciate in value gradually over time, depending on market forces.
However, in recent months, both the renminbi and the dong have been comparatively stable in
value relative to the U.S. dollar. This has led some analysts to assert that China and Vietnam have
abandoned the crawling peg in favor of either a pegged exchange rate or a managed float. Other
analysts maintain that the stability of the value of the currencies with respect to the U.S. dollar is
an artifact of the bundle of currencies being used by China and Vietnam. Because some major
currencies have strengthened against the U.S. dollar while others have weakened, the weighted
average used by China and Vietnam in determining the band for the crawling peg has resulted in a
relatively unchanged value when compared to the U.S. dollar.
Competitive Adjustments?
There are indications that some of the economies of East Asia monitor the region’s exchange rates
and attempt to keep the relative value of their currencies in line with the value of selected
regional currencies. These “competitive” adjustments in exchange rates are allegedly made to
maintain the competitiveness of a nation’s exports on global markets. For example, one scholar
maintains, “Countries that trade with China and compete with China in exports to the third market
are keen not to allow too much appreciation of their own currencies vis-à-vis the Chinese RMB
[renminbi].”9 The scholar, Taketoshi Ito, also speculates, “China most likely is more willing to
accept RMB appreciation if neighboring countries, in addition [South] Korea and Thailand, allow
faster appreciation.”10
An examination of East Asian exchange rates over the last four years (July 2005 to June 2009)
appears to support the supposition that some nations are engaged in competitive exchange rate
management (see Figure 1). The two pegged currencies—the Hong Kong dollar and the Macau
pataca—remained virtually unchanged throughout the time period considered, as would be
expected. The two currencies that appreciated the most over the last four years—the Laotian kip
and the Chinese renminbi—appear to have followed a very similar path, which is not surprising
given Laos’ economic ties to China. The Malaysian ringgit and the Singaporean dollar seem to
have followed along the same path as the kip and renminbi until May of 2008, when the ringgit
and the Singaporean dollar began a period of depreciation against the U.S. dollar.
9 Takatoshi Ito, “The Influence of the RMB on Exchange Rate Policy of Other Economies,” paper presented at Peterson
Institute for International Economics Conference, October 19, 2007.
10 Ibid.
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Figure 1. Changes in U.S. Dollar Exchange Rates for East Asian Currencies, July 2005 - June 2009
(base value = June 2005)
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
5
5
6
6
7
7
8
8
-0
-0
-06
06
-0
-0
-07
07
-0
-0
-08
08
-0
-0
-09
09
ly
y
il-
ly
y
il-
ly
y
il-
ly
y
il-
Ju
Ju
Ju
Ju
tober
uar
Apr
tober
uar
Apr
tober
uar
Apr
tober
uar
Apr
c
n
n
n
n
a
c
a
c
a
c
a
O
J
O
J
O
J
O
J
Cambodia
China
Hong Kong
Indonesia
Japan
Laos
Macau
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Source: CRS calculations based on publicly available data.
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East Asia’s Foreign Exchange Rate Policies
In a similar fashion, the two currencies with the peak level of appreciation against the U.S. dollar
over the last four years—the Philippine peso and the Thai baht—also have fluctuated along
comparable trend lines since July 2005, possibly indicating that the managed float baht was
following the lead of the free floating peso. Another pair of currencies that moved along similar
paths since July 2005 were the Indonesian rupiah and the South Korean won; both currencies
have depreciated against the U.S. dollar during the last four years, with the won down by over
20%. The reasons for the apparent link between the rupiah and won is unclear.
Exchange Rates and U.S. Trade
There is a widely held notion that if a nation’s currency appreciates in value relative to other
nations’ currencies, its exports will tend to decline and its imports will tend to rise. In practice,
there has been little apparent correlation in recent years between the growth of U.S. trade with
East Asia and changes in the relative value of East Asian currencies. The example of U.S. trade
with China, Malaysia, and Singapore—three significant trading partners in East Asia whose
currencies have followed similar paths over much of the last four years—shows that changes in
relative exchange rates do not necessarily lead to the anticipated changes in bilateral trade flows.
Figure 2. Currency Appreciation and U.S. Trade Growth with China,
Malaysia, and Singapore, 2006 - 2008
(percentage change from 2005)
80%
2006
70%
2007
2008
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
a
a
a
in
ysia
in
ysia
in
ysia
Ch
apore
Ch
apore
Ch
apore
Mala
ing
Mala
ing
Mala
ing
S
S
S
Exchange Rate
U.S. Imports
U.S. Exports
Source: CRS calculation based on USITC data and publicly available exchange rates
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East Asia’s Foreign Exchange Rate Policies
The reasons for the comparative stability of the relative exchange rates of China, Malaysia, and
Singapore is a complex issue beyond the scope of this short paper.11 However, official U.S. trade
data appear to indicate that economic forces in addition to relative exchange rates are influencing
U.S. trade with these three nations (see Figure 2).12 Although their currencies appreciated against
the U.S. dollar in 2006, 2007, and 2008 by similar amounts, U.S. trade with China, Malaysia, and
Singapore grew or fell at different rates. U.S. trade with Malaysia showed the anticipated rise in
U.S. exports and slowdown or decline in U.S. imports with the appreciation of the ringgit.
However, both China and Singapore showed strong—and differing—increases in both U.S.
exports and imports despite the strengthening of their currencies relative to the U.S. dollar.
Implications for U.S. Trade Policy in East Asia
While U.S. policy has generally supported the adoption of “free float” exchange rate policies,
most East Asian governments consider a “managed float” exchange rate policy more conducive to
their overall economic goals and objectives. In part, East Asian governments may be resistant to a
“free float” policy because of the commonly held view in Asia that the economies with more
liberal exchange rate policies suffered more during the 1997-1998 Asian financial crisis than the
economies with pegged or managed exchange rates.13 As a result, there may be skepticism about
U.S. recommendations for adoption of “free float” exchange rate policies.
In addition, as indicated above, it is uncertain if the adoption of “free float” exchange rate policies
by more monetary authorities in East Asia would significantly reduce the U.S. trade deficits with
countries in the region.14 Among economists, there is no consensus that the resulting appreciation
of East Asian currencies against the U.S. dollar would either significantly increase overall U.S.
exports or reduce U.S. imports. However, for some price-sensitive industries where U.S.
companies are competitive, the appreciation of a competing nation’s currency may stimulate U.S.
export growth and/or a decline in U.S. imports.
11 In particular, this paper does not analyze the possible “J-curve”—an economic theory that the value of a nation’s
imports may actually rise for a short period of time following the depreciation of its currency because the increase in
the price of imports may outweigh the decline in the quantity of imports.
12 These other forces may include the U.S. federal trade deficit, comparatively low U.S. interest rates , and/or various
tariff and non-tariff trade barriers. For more information, see CRS Report RL31032, The U.S. Trade Deficit: Causes,
Consequences, and Cures, by Craig K. Elwell.
13 For more about Asian views of the causes of Asian financial crisis of 1997-98, see Pradumna B. Rana, “The East
Asian Financial Crisis—Implications for Exchange Rate Management,” Asian Development Bank, EDRC Briefing
Notes, Number 5, October 1998; and Ramkishen S. Rajan, “Asian Exchange Rate Regimes since the 1997-98 Crisis,”
Singapore Centre for Applied and Policy Economics, September 2006.
14 In his abstract of his 2006 study, “The Effect of Exchange Rate Changes on Trade in East Asia,” Willem Thorbecke
concluded, “The results indicate that exchange rate elasticities for trade between Asia and the U.S. are not large enough
to lend confidence that a depreciation of the dollar would improve the U.S. trade balance with Asia.” Complete text of
paper available at http://www.rieti.go.jp/en/publications/summary/06030003.html.
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East Asia’s Foreign Exchange Rate Policies
Author Contact Information
Michael F. Martin
Analyst in Asian Trade and Finance
mfmartin@crs.loc.gov, 7-2199
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