East Asian currencies

With all the political rhetoric calling for a stronger Chinese yuan, it is easy to lose sight of the fact that export weights to China rose steadily between 2000 and 2006. Moreover, as China’s wealth level grows, so should both the volume and the value-added content of its imports from the U.S. This socalled “marginal propensity to import” is characteristic of all growing economies.

The surge in import weights from China is, of course, the dominant feature. No nation on earth has China’s cost advantages in labor, a state-controlled banking system with over $1 trillion in foreign exchange reserves, low levels of environmental and safety costs, and productivity advantages from new plants and equipment. Given these advantages, we do need to ask whether any level of the yuan (CNY) would have offset these formidable advantages; the betting here is the yuan could be much stronger with no adverse effects on Chinese exports.

Taiwan’s importance as an exporter to the U.S. has been declining steadily since the mid- 1980s. In all likelihood, exports from Taiwan have been displaced by exports from China. The island’s share in U.S. export weights has tracked changes in the TWD to a degree.This indicates some measure of currency price elasticity in Taiwan’s import decisions.

Hong Kong provides an interesting rebuttal to the protectionist argument. Although its currency has been locked in a tight range since the mid-1980s, its import weights have fallen steadily since then. If the protectionist argument was correct, we would have to conclude the Hong Kong dollar (HKD) was overvalued at this lower range. Moreover, we also would have to conclude the uptrend in export weights between 1986 and 1996 meant the HKD was overvalued.

Neither is likely. As in the Taiwan example, the simplest explanation is the best. Hong Kong’s exports to the U.S. have been displaced by exports from China.

We can draw the same conclusion by examining Singapore, which we will group with the East Asian rather than the South Asian countries by virtue of its largely Chinese population. The 1997-2001 decline in the SGD did nothing to arrest its falling import weights, and the 2002-2006 rally didn’t do anything to accelerate the downtrend already in place. These simply reflect China’s ascendancy. Export weights to Singapore rose modestly in the mid-1990s “Asian Tiger” epoch, but have flattened since.
The final East Asian currency is the Korean won (KRW). This currency was hugely affected by the 1997-1998 Asian crisis. Although import weights from Korea — which had been in decline since 1988 — reversed after the KRW’s plunge and declined after the KRW’s post-2004 rally, the real impact was the large drop in export weights to Korea during the Asian crisis. This reflected both changes in the currency and the large drop in Korean national income during this period.