China in Transition

Why ASEAN did not Seek a Stronger Yuan - Apprehensions over the spread of currency appreciation pressures

Chi Hung KWAN
Consulting Fellow, RIETI

Amid a chorus of calls from industrialized nations such as Japan, the United States and Europe for China to allow the yuan to appreciate, ASEAN has taken a "wait-and-see" approach. In essence, the economy-boosting effects of a stronger yuan would be greater for ASEAN, which is in a competitive relationship with China, than for industrialized nations, whose ties with China are complementary. According to our estimates, the degree to which ASEAN competes with China in the U.S. market is high all around, such as 83.5% for Indonesia and 76.1% for Thailand (table). The fact that ASEAN members are not demanding a stronger yuan despite this is probably because they fear that they may be next in line to be pressured to appreciate their currencies.

Based on the premise that the economic relationship between ASEAN and China is a competitive one, the effects of a stronger yuan can be analyzed as follows.(diagram)

First, on the demand side, a stronger yuan would raise the price of Chinese products in international markets, and the cost competitiveness of products made by ASEAN would improve. (The demand curve would shift sharply to the right.) At the same time, because ASEAN's dependence on the Chinese market is still low, even if exports to China fall as a result of a slowdown in the Chinese economy due to a stronger yuan (the demand curve would shift slightly to the left), its members should be able to sufficiently cover this by expanding their exports to other markets. Meanwhile, on the supply side, the price of imports from China - such as parts - would rise and push up production costs. However, because imports from China are still small in scale, the negative impact on production would be slight. (The supply curve would move slightly to the left.) When we consider factors on both the demand side and the supply side, it can be concluded that the effects of a stronger yuan on ASEAN's output through trade would be positive. This result contrasts with the case of Japan, for which the negative effects of a stronger yuan would be greater than the positive effects, because it is in a complementary relationship with China.

Furthermore, from the viewpoint of transnational corporations, ASEAN's relative attractiveness as a production base would rise compared to that of China should the yuan appreciate. In recent years, competition between ASEAN and China for foreign direct investment has been becoming increasingly intense, and industrialized nations such as Japan have been actively shifting their investments in Asia from ASEAN to China. The yuan's appreciation would help stem such moves.

The above analysis is based on the assumption that the ASEAN currencies will continue to be stable against the dollar. However, ASEAN members harbor the apprehension that should China cave in to external pressure and decide to let the yuan appreciate, the same fate would befall them sooner or later. In fact, Japan's demands for a stronger yuan have ironically led to a rise in the yen. Also, these fears cannot be shrugged off as being entirely groundless given a past example in which the U.S. shifted its attack toward the NIEs, such as South Korea and Taiwan, in response to the yen's appreciation after the Plaza Accord of 1985. Compared to then, the scale of global speculative capital has become larger and controlling capital flow has become more difficult. As such, ASEAN members are not just nervous about appreciation demands from their trading partners such as the U.S., but also about the speculative moves of private-sector capital.

Looking back, during the Asian currency crisis of 1997-1998, China helped prevent the crisis from spreading further and deepening through its efforts to keep the yuan stable. This was in contrast to the Japanese government, which let the yen weaken, and Beijing was held in high regard by ASEAN for its efforts. Now, at a time when China is being pressured to appreciate the yuan, ASEAN's intent may be to repay the favor by not siding with Japan, the U.S. and Europe.

Table: The extent to which Asian nations compete with China in the U.S. marketTable: The extent to which Asian nations compete with China in the U.S. market
Source: U.S. import statistics (some 10,000 product categories of manufactured goods based on the 10-digit HS commodity classification system)
Diagram: The effects of a stronger yuan on ASEANDiagram: The effects of a stronger yuan on ASEAN
October 3, 2003
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October 3, 2003