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G20: Why the US should worry if Asian currencies strengthen

As world leaders gather in Seoul for their first G20 meeting in Asia, some economists argue that the push for stronger Asian currencies – particularly the Chinese yuan – will spur productivity gains.

By Staff Writer / November 10, 2010

One-hundred Yuan notes are seen in this picture illustration taken at the Korea Exchange Bank in Seoul on Nov. 10.

Lee Jae-won/Reuters

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Tokyo

Currency war? What currency war?

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As G20 leaders gather in Seoul Thursday – their first meeting in Asia – to seek to rebalance the world economy, some economists here are warning the United States that it should not worry about China's and other regional currencies being too weak; rather, it should worry if they get stronger.

That runs counter to a consensus in Washington that US economic recovery depends heavily on exports that will grow only if Asian importers let their currencies rise, making US goods cheaper.

But if Asian currencies, notably the Chinese RMB, strengthen, as US officials are demanding, the only way Asian exporters will be able to stay competitive will be through “a real push to increase productivity” that Western firms will be unable to match, says Martin Schulz, an analyst at the Fujitsu Research Institute in Tokyo.

“The emerging economies in Asia will take more and more export markets,” predicts Hiromichi Shirakawa, chief economist at Credit Suisse Japan. “Weaker companies from industrialized nations will be kicked out.”

That bodes ill for President Obama’s goal of doubling US exports over the next five years, targeting the sort of Asian countries he is currently touring.

Fears are rising in some quarters of a “currency war,” a vortex of “beggar thy neighbor” competitive devaluations by governments using exports as an easy engine of economic growth – and wanting to keep them cheap.

G20 Finance ministers agreed last month to “refrain" from such competitive devaluations. But “currency coordination is not easy,” warns Yasunori Sone, a professor of politics at Tokyo’s Keio University. “The G20 can announce" that members will not fight a currency war, "but who will behave?” he wonders, especially at a time when “each country is seeking to defend its own interests.”

A prime example of such a defense, from the Asian viewpoint, is the $600 billion “quantitative easing” that US Treasury Secretary Timothy Geithner announced last week in a bid to jump start the US economy. Whatever its effects on the US economy, say economists in Asia, “QE2” will be bad for this region.

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