We Need Not Overestimate China

  • By Chosun Ilbo columnist Song Hee-young

    April 27, 2009 13:27

    Song Hee-young

    A decade ago, White House National Economic Council director Lawrence Summers emerged as a troubleshooter in the Asian financial crisis. He was U.S. treasury secretary then. His arrogance and free and easy manner of speech were notorious. He moved his address at the International Monetary Fund annual convention, scheduled for later afternoon, to around noon, saying, "I'm too busy to come back here." Following his departure, the afternoon itinerary was a mess; all finance ministers' addresses were put off.

    The U.S. is the only country guaranteed a veto at IMF board meetings. Other countries have no alternative but to retreat. Treasury Secretary Timothy Geithner is a different type of person from Summers, who fires direct shots. Perhaps thanks to his stints in China and Japan, Geithner is able to disarm his Asian negotiation partners by showing respect for their culture. As an example of his style, he eliminated China from the list of currency-manipulating countries this month, only three months after he in a parliamentary hearing said that President Barack Obama believed that China manipulated its currency exchange.

    Then there is Fred Bergsten, the director of the Peterson Institute for International Economics, who first proposed the G2 idea, calling for joining hands with China, in an article published last year in a foreign affairs journal. He is an economic policy adviser of the Democratic Party. Zbigniew Brezinski, the former foreign affairs adviser of Obama, went a step further. In January, he proposed in Beijing that a G2 summit be held annually separate from the G8 summit. China must feel elated.

    The Obama administration's approach to China is familiar to Korea. The Reagan and Bush administrations in the 1980s fully used yen funds by extolling Japan. Obama, intent on reigniting the engine of Wall Street, will likely keep extolling China. China's foreign exchange reserves, along with oil dollars and yen funds, are like a life boat out of the financial crisis.

    The atmosphere has been imported to Korea. News from China is inflated in Seoul. When the People's Bank of China proposed IMF special drawing rights as a new key currency, some Korean pundits talked as if the dollar empire would soon collapse. When China expanded the settlement of trade accounts in yuan, they made a fuss as if the yuan had emerged as a top-grade currency. We have a habit of not examining things in detail and not trying to see the big picture.

    IMF special drawing rights are a theoretical virtual currency. How can a bogus currency be used for exports and imports and foreign exchange transactions? Many experts completely ignore SDR calls. Even if things move as demanded by China, the ground on which the yuan can stand is narrow. SDR consists of 44 percent dollars, 34 percent euro, and 11 percent each yen and pound. To increase the voice of the yuan, whose share is 0 percent now, the sums China would have to donate are astronomical. It may have brought up the SDR issue because it wanted to express that it wants something in return for its promise to pay US$40 billion to the IMF this year.

    China's decision to expand settlement in yuan in paying export-import accounts should not have been exaggerated, either. The opening of its foreign exchange market is not addressed to the entire world but confined to Hong Kong and Southeast Asia.

    China permitted transactions in yuan to Mongolia, Vietnam and Burma five years ago, with little effect. Fearful of the inflow of international speculation funds, bank windows monitored transactions too strictly. As a result, the percentage of world trade settled in yuan is below a decimal point. In the accumulation of foreign exchange by countries, yuan currency is treated as scraps. And in the global foreign reserves, yuan and won are locked under "others."

    Two decades ago when the Berlin Wall fell, the yen displayed amazing potential power. Though the Japanese were upbeat, predicting that Japan would join America and Europe at the top, it still remains a minor shareholder. Even the euro sustained a major blow from the current crisis. It will take at least 20 years for the yuan to build a nest in a corner of the global market where currencies that might replace dollars are defeated one by one.     

    China's international standing has climbed a notch and chances are that it will have the last laugh along with the U.S. But the government and press should reflect if they are not getting swept up in American overestimation of China. It is not pleasant to see foreign brokers classify Korea as belonging to the Chinese economic zone.

    If our past attitude of looking down on China was problematic, our current crawling posture looks equally wrong.

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