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ASIAN PROTECTIONISM

Who’s Pegging Who? An Examination of Asia’s , Pegs,Inflation Rates and Current Global Valuations Asian Currency Protectionism Who’s Pegging Who? An Examination of Asia’s Currencies, Pegs, Inflation Rates and Current Global Valuations

[ By Chris Devonshire-Ellis, Dezan Shira & Associates ]

s strains are caused in global NPR. In March 2009 the Indian Finance 1 RUB. was the last of the Acurrency relationships due to trade Ministry launched a public competition CIS countries to issue its own currency, imbalances and the on-goings effects of to select a symbol for the currency. The in 1991 following the breakup of the the global economic crisis, the role of is also accepted in towns of . The word tenge in the the U.S. as a currency peg in some Nepalese side of the border, while some means a set of scales. parts of Asia and the emergence of other Indian shops in the United Kingdom The origin of the word is the Turkic word regional currencies is having an impact on will also accept rupees. The rupee is teğ, which means being equal, balanced. global trade. In this special report we look commonly valued against the U.S. dollar The current rate against the U.S. dollar at which Asian currencies are pegged and and the British pound. The current rate is 149. Inflation is currently running at by and to whom, including all neighbors of against the U.S. dollar is about 46.5. about 8.7 percent. China and India. An executive summary Inflation in India is currently running at appears at the completion of this data. 11.49 percent. : (KGS)

China: Yuan (CNY) Central Asia

Afghanistan: Afghani (AFN)

The is unofficially pegged to the Russian at par. In the The Chinese yuan, or “Renmenbi” old Soviet Union, speakers of Kazakh, (people’s money) as it is commonly The Afghani has no pegs, but is commonly Krygyz and Uzbek called the ruble known in China is linked to a “basket” valued against the U.S. dollar and the som. The word som means “pure” of currencies, including the U.S. dollar, . The use of the Afghani in these languages as well as Uighur, , British pound, , South in international settlements involving and implies “pure .” Kyrgyzstan’s Korean won, , Malaysian Afghanistan trade has now increased and inflation rate is running at about 24.5 ringgit, , , taken precedence over the U.S. dollar percent. and the . and Pakistani rupee as the currency has However, the yuan’s performance against stabilized. Prices in Afghanistan have Mongolia: Togrog (MNT) that basket over the past two years should been solely denominated in Afghanis have shown a depreciation of the RMB since October 1, 2009. The current if this were truly the case. In reality, the rate against the U.S. dollar is 48.91. yuan has been unofficially pegged to Unofficially, the Afghani is linked to the primarily the U.S. dollar since July 2008 Indian rupee at par. Inflation is running at at a rate of 6.83 within a minor permitted around 13 percent. fluctuation band. The official inflation rate in China is said to be closer to 4 percent. Kazakhstan: Tenge (KZT) The Mongolian togrog is not pegged, although it is commonly linked to the India: Rupee (INR) Russian ruble. Genghis Khan appears on the higher value notes, and the founder of modern Mongolia, Sukhbatar, on the lower values. The current rate against the ruble is 47, while inflation is currently running at 8 percent.

The tenge is not officially pegged, : Ruble (RUB) Pegged by the at although it is constantly valued against The ruble is not officially pegged but par and the Nepali Rupee at 1 INR to 1.6 the Russian ruble at a rate of 5 KZT to remains the currency of the Russian

2 2point6billion.com Asian Currency Protectionism

Federation and the two partially has also been pegged by the Afghani to in 1974. India was key in assisting the recognized republics of and provide security against the new Afghan Bhutanese government as it developed . It is also commonly used currency although this has subsequently its economy in the early 1960s. When as a benchmark to value other ex-Soviet ceased in the wake of a disastrous 2008 the ngultrum was introduced, it retained states currencies and remains a dominant performance by the Pakistani rupee when the peg to the Indian rupee which the player within Central and Northeast Asia. it lost 23 percent of its value in eight Bhutanese rupee had maintained. The The current exchange rate with the U.S. months. The current rate against the ngultrum does not exchange independently dollar is 30.38, while inflation is currently U.S. dollar is 84.07, while the inflation with other nation’s currencies but is 9.1 percent. is running at 18.5 percent. interchangeable with the Indian rupee.

The inflation rate is currently about 4.9 Tajikistan: Sonomi (TJS) Sri Lanka: Rupee (LKR) percent.

Maldives: Rufiyaa (MVR)

The sonomi was introduced in 2000 and is not pegged. Tajikistan is landlocked The Sri Lanka rupee is not pegged to any and is the smallest nation in Central Asia currency but is frequently valued against by area. In 2008, the harshest winter in the Indian rupee and the British pound. The currency is pegged to the U.S. dollar a quarter century caused financial losses Sri Lankan bank notes are unusual in that at a rate of 12.8 to the U.S. dollar. The of US$850 million. Russia pledged US$1 they are printed vertically on the reverse. earliest form of currency used in the billion in aid, while Saudi Arabia sent The unofficial linked rate with the Indian Maldives was cowrie shells (Cypraea about 10 planes carrying 80 tons of relief rupee at 2 to 1 Indian rupee, while the U.S. moneta) and historical accounts of and emergency supplies in February and dollar is at 114.22. Inflation is currently travelers indicate that they were traded in another 11 tons in March. The sonomi is running at 17.5 percent. this manner even during the 13th century. commonly valued against the Russian The explorer Ibn Batuta observed that ruble and is currently at 0.15 to the ruble. East Asia more than 40 ships loaded with cowry The inflation rate is currently running at shells were exported each year. A single Hong Kong: Dollar (HKD) 20.5 percent. gold dinar was worth 400,000 shells. The

South Asia current inflation rate is 11 percent.

Bangladesh: Taka (BDT) Nepal: Rupee (NPR)

The is pegged with the US dollar in a small trading band of The is pegged to the between 7.75 to 7.85 to the U.S. dollar, The taka replaced the Pakistani rupee Indian rupee at a rate of 1.6 to the Indian and also by the Macau Pataca at a rate in 1972 following the civil war with rupee and has maintained this position of 1.03 Patacas to 1 Hong Kong dollar. Pakistan. It is not pegged but is commonly since 1993. The exchange rate to the It is also commonly valued against the valued in comparison to the U.S. dollar. U.S. dollar is 74.55. Inflation is running Chinese RMB. The currency is managed The current rate against the U.S. dollar is at 14 percent. by the Hong Kong Monetary Authority 69.2. The inflation rate is currently 5.39 who maintain exchange rate stability percent. Pakistan: Rupee (PKR) within the framework of the linked No pegs, although it was previously exchange rate system. The important : Ngultrum (BTN) pegged to the U.S. dollar until 1982. underpinnings of the linked exchange The ngultrum is pegged to the Indian It is still commonly valued against the rate system include the strong official rupee at par. The currency was introduced U.S. dollar, while the Pakistani rupee reserves of Hong Kong, a sound and

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robust banking system, fiscal prudence and the Bank of Trade issues a separate and a flexible economic structure. In this currency for visitors, like many other way, China’s management control of socialist states much as China used the yuan position is unofficially linked to do with its old FEC system. North directly to the U.S. dollar through the Korea has two varieties of foreign Hong Kong dollar peg, a situation that has exchange certificates, one for visitors lead to some criticism of the continuation from “socialist countries” which are of the Hong Kong dollar peg to the U.S. itself. The Monetary Authority of Macau colored red, and the other for visitors from dollar. Jim Rogers, a partner in George has a statutory obligation to issue and “capitalist countries” which are colored Soro’s Quantum Fund, has previously redeem patacas on demand against the blue/green. It is illegal to take any North said that the Hong Kong government Hong Kong dollar at a fixed exchange Korean currency out of the country, while should adopt the RMB as the official rate and without limit. The name pataca many cross-border transactions are settled currency of the territory when the RMB was derived from the Mexican peso, in hard currency – yuan, U.S. , or becomes freely convertible. “I don’t know or Mexican silver dollar, which was . why the Hong Kong dollar exists any in common use throughout Asia until more,” said Rogers. “The territory has a the early part of the last century. At the South Korea: Won (KRW) gigantic neighbor who is becoming the time Macau was under Portuguese rule, most incredible economy in the world.” where the peso was known as the pataca Inflation in Hong Kong is currently about mexicana. Macau’s current inflation rate 2.2 percent. is 4.9 percent.

Japan: Yen (JPY) North Korea: Won (KPW)

The is not pegged to any currency, following the fallout from the Asian Financial Crisis. It had previously been pegged to the U.S. dollar. The won was floated on December 24, 1997 when an agreement was signed Japan has no currency pegs, although it is with the IMF. Shortly afterwards, the won widely used as a global reserve currency Since 2001, the North Korean government was devalued to almost half of its value. and is the third most traded currency abandoned the previous iconic rate of 2.16 It does however form part of the basket worldwide. It forms part of the IMF won to the U.S. dollar (which is said to of currencies the Chinese yuan is said to basket of currencies, known as the Special have been based upon Kim Jong-Il’s be linked to. The current exchange rate Drawing Rights (SDR) Valuation. The birthday, February 16) and banks in the with the U.S. dollar is 1161.43. Inflation SDR is linked to a basket of currencies country have been issuing notes at rates is currently running at 2.5 percent. with 44 percent for the U.S. dollar, 34 closer to the black market rate. However, percent for the Euro, and 11 percent rampant inflation has been eroding the Taiwan: (TWD) each for the yen and British pound. The ’s value. A report by exchange rate for the Japanese yen is defectors from North Korea claimed that expressed in terms of currency units per the black market rate was 570 to China’s U.S. dollar; other rates are expressed as yuan in June 2009. The North Korean won U.S. dollars per currency unit. The SDR was been further disrupted in December currency value is calculated daily and the 2009 when the government effectively valuation basket is reviewed and adjusted devalued it by a multiple of ten, making The Taiwan dollar is not pegged to any every five years. The SDR was created old bank notes illegal tender and issuing currency, however was backed by silver in 1969 to support the fixed exchange new notes reflecting the change. Citizens reserves until 2000. It is commonly system. The yen is currently valued at were given just a matter of days to compared to the U.S. dollar and the 87.96 to the U.S. dollar, while inflation exchange limited amounts of old notes Chinese yuan. The current exchange is running at -1.8 percent. for new at par value, leaving many with rate with the U.S. dollar is 33.25, while distressed savings. Bearing these very Macau: Pataca (MOP) inflation is running at 3.7 percent. recent changes in mind, this should reflect The pataca is pegged to the Hong Kong Taiwanese currency is not valid in an exchange rate of 900 won to the U.S. dollar at a rate of 1.03 to the Hong mainland China. dollar and 131 won to the Chinese yuan. Kong dollar under the currency board However, the black market rate for the system. This means it is 100 percent U.S.dollar is currently about 3,000 won. backed by the Hong Kong dollar, and as the Hong Kong dollar is pegged to the The North Korean won is intended U.S. dollar, indirectly to the U.S. dollar exclusively for North Korean citizens,

4 2point6billion.com Asian Currency Protectionism Southeast Asia Malaysia: Ringgit (MYR)

Brunei: Dollar (BND)

directly tied to people’s perception of the stability of the current regime and its ability to repay the debt. The currency is Malaysia ceased its long held currency however often valued against the U.S. The is pegged with the peg to the U.S. dollar in 2005 when the dollar, and the current exchange rate is Singapore dollar at par, and the currency Chinese decided to revalue the yuan 46.14. Inflation is 0.2 percent. is in fact managed by the Monetary against a basket of currencies instead of Authority of Singapore. Early currency purely a U.S. dollar peg, and consequently Singapore: Dollar (SGD) in Brunei included cowrie shells, while announced the same measures within 24 the current currency was introduced hours. The Ringgit is part of the basket in 1967 following independence as a of currencies the yuan is valued against, British protectorate. The Brunei dollar a position the Ringgit reciprocates in a is accepted as “customary tender” in managed currency basket system. The Singapore according to the Currency make up of the basket is a state secret but Interchangeability Agreement, although is believed to be similar, or identical to it is not there. Likewise, the the Chinese system. The Ringgit suffered The Singapore dollar is currently pegged Singapore dollar is customarily accepted badly during the Asian Financial crisis to the Brunei dollar at Par, and since 1985 in Brunei. The Brunei dollar is currently of 1997, losing 50 percent of its value has been part of a currency board – in valued at 1.39 to the U.S. dollar. The against the U.S. dollar in 12 months. which the Singapore dollar is allowed to current inflation rate is 0.4 percent. World Bank estimates show that about float (within an undisclosed bandwidth 30 percent of all Malaysian goods are of a central parity) against a concealed Indonesia: Rupiah (IDR) price controlled. The current exchange basket of currencies of Singapore’s major rate is 3.39 to the U.S. dollar. Inflation is trading partners and competitors. This currently running at -2.4 percent. allows the Singaporean government to have more control over imported inflation Myanmar: Kyat (MMK) and to ensure that Singapore’s exports remain competitive. All issued Singapore dollar currency in circulation is fully backed by international assets to maintain The rupiah is not pegged to any currency public confidence, while this basket is and has had a recent checkered history, managed by the Monetary Authority of losing over 80 percent of its value in the Singapore. The basket contents remain Asian Financial Crisis. It is commonly a state secret and are moved and re- valued against the U.S. dollar. The current The Kyat is pegged by the government weighted on occasion, however are exchange rate is about 9,400 to the U.S. to the U.S. dollar, Euro, British pound, believed to be close to the Chinese model. dollar. Inflation currently runs at 3.65 Japanese yen and the Chinese RMB, The current exchange rate to the U.S. percent. although these rates differ considerably dollar is 1.38 while the inflation rate is from the reality of the black market 2.1 percent. Laos: Kip (LAK) rates on the streets. In this way, the ruling Myanmar junta buys in foreign Thailand: Baht (THB) currency from tourists at vastly inflated rates of exchange. To compare this, the official rate against the U.S. dollar is 6.69, whereas the current black market rate is at 960, a multiple of close to 150. Myanmar’s inflation rate is currently 27.3 The kip is not pegged to or by any other percent. currency and is considered a least valued The baht is not pegged to any currency, currency unit. The kip was reintroduced Philippines: Peso (PHP) having given up its U.S. dollar peg in to Laos in 1952 following independence The peso is not pegged to any currency, and 1978. A strengthening U.S. economy from France. The kip is valued at around has been floated since 1964, meaning that caused Thailand to re-peg its currency 8,500 to the U.S. dollar. Inflation is the currency is a physical representation at 25 to the dollar from 1984 until 1997, running at 6 percent. of the domestic debt and whose value when the country was seriously stung by

2point6billion.com 5 Asian Currency Protectionism

the Asian Financial Crisis. The baht was dollar while inflation is running at 1.3 reason why China is so reluctant now to subsequently floated and halved in value, percent. freely float the yuan as the United States although it has since risen. The current keeps asking it to do. U.S. responsibility exchange rate is 33.17 to the U.S. dollar, Papua New Guinea: Kina (PGK) for the events leading up to the Asian while inflation is running at 5.1 percent. Financial Crisis has not been forgotten in Asia. Vietnam: Dong (VND) Secondly, the calls for the Chinese currency to replace the position of the U.S. dollar seem absurd when measured up against other countries. The yuan is The kina is not pegged to any currency not as strong as the Chinese government but is traditionally valued against the would like to portray it as being. In fact, it is still broadly linked to the U.S. dollar The dong is not pegged to any currency and Australian dollar, which it replaced in despite the official peg having been is a least valued currency. However, recent 1975 at par value. The current rate against moved three years ago. Had the yuan moves by China in neighboring Yunnan the Australian dollar is 2.30; inflation been truly linked to a basket of currencies, Province now permit interchangeable is currently running at 1.8 percent. All then the performance of the yuan against transactions between the yuan and the Papua New Guinea bank notes are issued them would have been far different than it dong in China. The term dong is from in polymer. Papua New Guineas inflation has been, when taking into consideration the phrase “đồng tiền” (money) which rate is currently 10.8 percent. it’s US dollar position. Economists may is a cognate of the Chinese “tong qian.” care to plot the value of the yuan against The word refers to Chinese bronze coins Summary its apparent basket – the weighting of which were used as currency during the I will be the first to admit that I am not the basket contents of course taken into dynastic periods of China and Vietnam. an economist, and readers are encouraged consideration – and compare that with the The current exchange rate against the to make up their own conclusions about actual margin of trade it has performed yuan is 2,600 while Vietnam’s inflation the statistics presented. I have also, where against the U.S. dollar in comparison. A is running at 2.4 percent. information is scarce, tried to supplement this with a little cultural background. further problem for the Chinese position of the yuan is the fluctuation the U.S. Oceania However, on a more practical note, several things become apparent when dollar has had against the Euro – which

comparing currencies across Asia. has strengthened considerably against : Dollar (AUD) the dollar. Conversely, the path the yuan Firstly, the damage caused to a lot of has taken against the U.S. dollar and the them during the Asian Financial Crisis Euro are not aligned, leading to claims of in 1997. If I recall correctly, currencies currency manipulation. Therein lies the were undermined initially by a run on the truth. The yuan is still heavily weighted Thai baht, instigated in part by seemingly to the U.S. dollar and is only paying lip rapacious currency traders in the United service to its basket. The implications The Australian dollar is pegged to the States who bet huge amounts of money are multifold, not least the fact that the Tuvaluan dollar and dollar on them being unable to support their Chinese do not actually view the yuan as at par, while these island nations use then peg to the U.S. dollar. In the short potentially capable of standing up to free Australian bank notes they do issue their term, this succeeded, and Wall Streets movements, and that it is not as strong as own coins. The Australian dollar is the financiers made billions, yet in doing its politicians would have media generally sixth most traded currency globally. so brought several Asian economies, believe. The yuan is a long way from The Australian dollar is popular with including important ones such as South being accepted as a tracker currency by currency traders due to comparatively Korea and Malaysia, to their knees. In most other countries in the region; the US high interest rates in Australia, the some cases these economies have not yet dollar still reigns supreme. relative freedom of the foreign exchange fully recovered. Consequently, the U.S. market from government intervention, the dollar peg that was put in place by several Thirdly, the concept of pegs seems to general stability of Australian economy Asian countries to ironically protect them indicate two things: either a smaller and political system, and the prevailing against currency movements was rejected value currency, such as the Nepali rupee, view that the Australian dollar offers by several governments, wary of being seeking some protection against the diversification benefits in a portfolio exposed to U.S. traders’ avarice. The wider world by having a measure of containing the major world currencies, concept of the “basket of currencies,” refuge against the Indian rupee; or larger especially because of its greater exposure which is gaining in popularity, is a currencies, such as the Chinese yuan, to Asian economies and the commodities direct result. It may also have lead to a simply trying to manipulate trade and cycle. It is frequently compared to the weakening of the popularity of the U.S. engage in protectionism. China cannot U.S. dollar. The exchange rate with the dollar as a global currency overall and justify a peg, unofficial or not, given U.S. dollar is currently 1.09 to the U.S. especially in Asia. It may also be the the vast reserves the country has and the

6 2point6billion.com Asian Currency Protectionism clout it possesses. The implications for and independent veracity of its financial or directions to international standards China’s position are that it is acting as a information. The collection and when applied to the Chinese currency and small currency seeking built in protection. publication of government information financial system in particular. The question should be, protection is strictly controlled and ranks alongside from what? Either there are significant, only the notoriously obtuse Central Asian I hope you find this report of interest. inherent problems within China’s banking States when it comes to transparency. Chris Devonshire-Ellis system that are yet to come to light, or China truly needs to improve this if it is Publisher, 2point6billion.com the U.S. suspicions that it is engaged in not to relapse into a pre-Deng Xiaoping protectionism are in fact true. The stark era of secrecy, avoidance and deliberate Comments may be directed to fact is that when looking at China’s confusion of data. China is currently at an [email protected]. position amongst Asian currencies, it information crossroads, and recent signs alone as one of the largest has such a peg are not encouraging in this respect. I add Note: Utmost care has been taken in place. It’s time to join the big boys, or that if China truly wishes the yuan to take when providing data and statistics, and risk having the reluctance to join in the its position as a major global currency, wherever possible these have been as likes of India, Korea, Japan and Australia with regional clout, it cannot achieve this current as could be found. However, no continue to perform freely with all the without media openness and financial responsibility can be taken by the author merits that brings. transparency. It remains, in summary, far or 2point6billion.com for any mistakes, from certain that the existing Government discrepancies or incorrect data contained In terms of the ease of obtaining data, has acknowledged or even understands within this report and readers using it I may also caution that China ranks this truth, and this element does need to for base research are advised to check poorly when it comes to transparency be factored in when assessing movements themselves against the data provided. ADVISING CLIENTS IN ASIA? Asia Briefing’s Online Research for Legal Counsel

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