pms laflame at
Tue Oct 6 19:09:48 PDT 1998

>October 6, 1998
>Volume: 1, Number: 2
>In This Issue:
>Asia Watch
>Red Alert: Japan Unofficially Backs Asian Currency Controls
>The World and Asia: German Agreement with France Reshapes
>Currency Control Debate
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>CAMBODIA: A government spokesperson has denied rumors that
>Cambodia will shut down English-language newspapers and expel
>foreign journalists.... King Norodom Sihanouk arrived in Phnom
>Penh on Monday, October 5, in an attempt to boost the talks
>between Hun Sen's ruling party and opposition parties in forming
>a new government.
>CHINA: U.K. Prime Minister Tony Blair will visit China October
>6-9. Blair will announce several deals between U.K. companies and
>China, and will be accompanied by Shell Group Chairman Mark
>Moody-Stuart.... Chinese Foreign Minister Tang Jiaxuan disclosed
>China's intent to support Canada's bid for a two-year seat on the
>United Nations Security Council during a low-key visit to
>Vancouver on October 4.... Hong Kong banks, businesses, and
>government offices will be closed for a holiday on Tuesday,
>October 6.
>INDONESIA: During a speech on October 5 to commemorate the
>Indonesian armed forces' 53rd anniversary, President B.J. Habibie
>called on the military to reform in accordance with the changing
>situations, while at the same time control anti-government
>opposition so that it doesn't interfere with the overall national
>reform process.... The newspaper Bisnis Indonesia reported on
>October 5 that one of the top economic ministers, Ginanjar
>Kartasasmita, revealed that Indonesia has begun reviewing methods
>for monitoring the flow of foreign exchange.... The Central
>Statistics Bureau revealed Indonesia's GDP has contracted 13.59
>percent in the first 9 months of 1998. The Bureau also announced
>that the inflation rate for the year would be greater than 80
>percent.... Police blocked a demonstration near the national
>parliament building. The demonstrators were protesting military
>involvement in politics.
>JAPAN: The Nikkei index closed on October 5 at 12,948.12, the
>lowest point since January 1986.... Once again, Japanese bank
>reforms have hit a snag, as the opposition Democratic Party is
>expected to reject the ruling Liberal Democratic Party's proposal
>to use public funds to keep weak banks afloat.
>SOUTH KOREA: A government report released Monday revealed that
>South Korea has donated over $300 million in aid to North Korea
>since 1995.... South Korean government offices, banks, financial
>markets, and businesses were closed October 5 and will remain
>closed on October 6 for a holiday.
>MALAYSIA: Expressing informal support of Malaysia's recent
>capital control policy, an unnamed Japanese finance ministry
>official said during the IMF/ World Bank meetings in Washington
>that capital controls should be accepted as part of the reality
>of the situation in Asia.... Malaysian Prime Minister Mahathir
>Mohamad is expected to be given an endorsement from his United
>Malays National Organization (UMNO) on October 6 to appoint a new
>deputy prime minister.... The trial for former Deputy Prime
>Minister and Finance Minister Anwar Ibrahim has been set to begin
>on November 2. The trial may have to be suspended temporarily
>while the APEC ministers and leaders meet in Kuala Lumpur on
>November 14-18.
>PHILIPPINES: Philippines Airlines workers returned to work on
>October 5, and flights are scheduled to resume on October 7....
>The government announced an inflation rate of only 9.4 percent
>for September, lower than the expected 10 percent level....
>President Joseph Estrada has called on Malaysian Prime Minister
>Mahathir Mohamad to settle the Anwar issue as soon as possible,
>and is still considering whether or not to attend the APEC
>meeting in Malaysia in November.
>SINGAPORE: In another move to curb the flow of illegal
>immigrants, Singapore has announced that all foreigners without
>legal documentation will be punished by caning.
>TAIWAN: Government offices, markets, banks, and businesses were
>closed for a holiday on October 5.
>THAILAND: IMF officials will visit Thailand in November to
>review the economic situation.... BMW announced that it plans to
>invest at least $25 million in a new production facility in
>Thailand to be operational by 2000.... Prime Minister Chuan
>Leekpai formally announced the makeup of the new coalition
>Japan Unofficially Backs Asian Currency Controls
>According to Agence France Presse, an official from Japan's
>Finance Ministry attending this weekend's International Monetary
>Fund and World Bank meetings in Washington argued that currency
>controls such as those imposed by Malaysia may be justified to
>protect weakened Asian economies from speculative capital flows.
>The official, who declined to be identified, said, "What we are
>saying is everybody should face reality. In that sense, capital
>controls can exist." However, the official was quick to state
>that "Japan will not and cannot implement capital controls. It
>is impossible."
>Japan is not the only country to favorably evaluate Malaysian
>currency controls. The daily "Bisnis Indonesia" on October 5
>cited Indonesia's coordinating minister for Economy, Finance, and
>Industry, Ginanjar Kartasasmita, as saying "A study on an
>appropriate mechanism for a monitoring [of foreign exchange
>flows] has already begun." Ginanjar, Indonesia's top finance
>official, said that one option being examined is the possible
>reversal of a 1982 decision that freed Indonesian exporters from
>having to deposit their export earnings in local banks. Ginanjar
>insisted that if a system is introduced it will "not involve the
>type of controls introduced in Malaysia." Maybe not, but the
>ball is rolling, and without the possibility of a substantial IMF
>bailout package, Indonesia has little incentive not to impose
>such controls.
>The IMF and the World Bank are locked in a debate over whether to
>ease requirements that countries seeking loans impose strict
>austerity measures and free-market reforms, and instead allow a
>limited degree of national control of economies and currencies.
>The gradually emerging consensus, at least within the IMF's
>interim committee, is that, while capital controls are
>inappropriate tools for solving fundamental economic problems,
>temporary impediments to capital movements may be acceptable.
>The question is, acceptable to whom?
>The United States made it clear over the weekend that it would
>not tolerate currency controls, nor the establishment of a U.S.
>funded IMF as a control mechanism. As the IMF is impotent
>without U.S. backing, this effectively ends the debate. IMF
>acceptance of currency controls is moot if the IMF has nothing to
>loan the countries that have chosen to impose such controls.
>However, Malaysia has imposed controls, Indonesia appears to be
>preparing to impose controls, and others are likely to follow.
>This means that, if Asia is to continue on this course, it must
>finance its own bailout. Japan seems ready to do just that.
>Japan is comfortable enough with Malaysian currency controls to
>be moving ahead rapidly on the disbursement of loans to Kuala
>Lumpur. Speaking at the Japan Department Stores Association
>conference, which was officiated by Malaysian Prime Minister
>Mahathir Mohamad, Japanese Ambassador to Malaysia Issei Nomura
>said, "It is in my great concern that Malaysia will get an
>appropriate and considerable share" of Japan's $30 billion dollar
>aid package to Asian nations. "We hope we can give 2 billion
>U.S. dollars to Malaysia," the ambassador said. According to
>Nomura, Japan is moving quickly to disburse the loans, and both
>the Economic Planning Unit of Japan's Ministry of Finance and the
>Ministry of International Trade and Industry were currently
>negotiating the yen loans disbursement.
>Nomura's comments raise one question. Does Japan intend to loan
>Malaysia 2 billion U.S. dollars, or an equivalent amount of yen?
>This is particularly significant in light of assertions made by
>Bank of Japan Governor Masaru Hayami in Washington on Saturday.
>In a meeting with U.S. Treasury Secretary Robert Rubin and
>Federal Reserve Chairman Alan Greenspan, Hayami said that the
>capital reserves of Japan's 19 largest banks were so low that
>"the banks would be forbidden from operating abroad if strict
>banking rules were imposed."
>So coming out of the weekend we have Western financial
>institutions potentially willing to support an Asian bailout on
>Asian terms but due to lack of U.S. support, unable to do so. We
>also have Japan perfectly willing to bail out Asia on Asian
>terms, and even moving ahead on such a plan, but simultaneously
>claiming to be short on capital reserves. The question: How does
>Asia bail itself out when it's short of funds? The answer, more
>likely every day: Currency controls, an Asian Monetary Fund, and
>an Asian reserve currency - the Yen Bloc.
>German Agreement with France Reshapes Currency Control Debate
>In sorting through the debris of this weekend's G-7 meeting,
>perhaps the single most important fact that emerged did not
>happen in Washington and did not happen this weekend. It
>happened on Thursday in Paris, when the new German
>Chancellor-elect made it clear that Germany is now supporting the
>French call for emergency currency controls designed to halt the
>panicky movement of capital during financial crises. A little
>over a week ago, a very different Germany rejected the French
>initiative. Then German Economics Minister Gunther Rexrodt said
>that, "Shooting from the hip is the last thing we need now. It is
>playing dangerously with fire to put this system at risk by
>introducing protectionism and controls on capital flows."
>However, by last Thursday the Chancellor of a very new Germany
>was meeting with French President Jacques Chirac in Paris and
>saying that he agreed both with the need for stand-by controls
>and with a French call for a new Bretton Woods-type summit
>intended to overhaul the international financial system.
>This means that the center of gravity inside the G-7 is shifting
>dramatically. Since Japan's Finance Minister has already made
>his support for emergency currency controls clear, this means
>that three out of the seven members of the G-7 are now in favor.
>One more will make a majority. With France and Germany on the
>same side of the issue, Italy will not resist for long. We
>therefore have an interesting re-alignment taking place. What
>used to be called the Anglo-Saxon nations (the United States,
>United Kingdom and Canada) are standing in favor of the
>unregulated flow of capital while much of the rest of the world
>is lining up in favor of some sort of controls.
>Of course, the G-7 is not the world. Nevertheless, the United
>States is becoming increasingly isolated in its insistence that
>controls not be imposed, as nations outside of the G-7 are
>becoming even more favorably inclined toward controls. Neither
>is the G-7 a democracy. A consistent regime of controls is
>impossible without U.S. agreement and active participation.
>Opposition to controls is deeply embedded in the core
>philosophies dominating both political parties. Agreeing to
>currency controls would require a wrenching readjustment in
>American establishment thinking. To say the least, it would
>require a substantially greater sense of urgency than the current
>20 percent decline in U.S. markets compels. U.S. officials are
>simply not prepared to accept the risks inherent in currency
>controls at the current level of perceived danger to American
>Part of the problem is what the French mean by currency controls
>and their reasons for advocating them. The French want currency
>controls to be administered by the IMF's Interim Committee. This
>committee currently has an advisory role. Under the French
>proposal, this committee would be transformed into a controlling
>body, able to authorize the IMF Managing Director, Michel
>Camdessus, to impose controls on countries experiencing financial
>crises. Now, the definition of financial crisis has been left
>vague by the French, as has the precise meaning of controls.
>Were this proposal to be accepted as it stands, it would
>effectively make the Interim Committee and the IMF's director the
>Czars of the international financial system.
>This extraordinarily sweeping proposal has an important sub-text.
>Since 1992, U.S. economic power has been soaring, along with
>American political and military power. The French have
>increasingly felt that the international system had become
>unbalanced. American power has been completely unchecked, which
>the French regard as extremely unhealthy. Quite apart from
>traditional French distrust of American motives and abilities,
>their sense that the overwhelming power of the United States is
>dangerous is shared quietly by many countries in the world.
>This proposal is, therefore, as much political as it is economic.
>If it were adopted, power would shift away from the United States
>Treasury Department and the Federal Reserve Bank, and toward a
>committee on which the United States has a very powerful voice
>and vote, but not absolute control. This committee would become
>an arena for controlling American economic power. Helmut Kohl's
>Germany would have none of this. Gerhard Schroeder's Germany is
>another matter entirely. In wooing the Greens into a coalition
>government, Schroeder will have political reasons for resisting
>the United States as well as the natural inclination of a Social
>Democrat to do so. What is most important is that Germany's
>reversal turns an idiosyncratic French proposal into a serious
>European initiative.
>The United States is now faced with Asia and Europe both lining
>up in favor of controls. The United States cannot possibly live
>with the French proposal. Creating an international entity with
>that much power would be politically unacceptable in the United
>States. But the French aside, both the Germans and Japanese are
>going to insist on currency controls. The Germans need to
>protect German investment in Russia as best they can, while the
>Japanese are not going to get out of their banking crisis without
>a major currency panic. Thus, both economic powers are going to
>press for the creation of some sort of financial controls.
>If controls are not going to be controlled by some central
>entity, then they will be imposed unilaterally on a
>nation-by-nation basis. From the American point of view, this
>would probably be better than institutionalizing controls
>permanently. It would certainly be more bearable politically.
>Indeed, we suspect that senior American officials have already
>accepted the idea that controls are inevitable. They are in a
>damage control mode now, trying to prevent institutionalization
>of these controls. By resisting the strengthening of the IMF,
>the United States is increasing the likelihood of national
>controls. One of the reasons that the G-7 talks ended so
>incoherently is that incoherence suited the United States, since
>it channeled the discussion away from systematic controls toward
>ad hoc controls.
>Oddly, we see the German endorsement of French proposals as
>forcing the U.S. to give Japan a reluctant green light to impose
>controls on the flow of capital. The problem for the United
>States is this: there is an option between purely national
>controls and the IMF. That option is regional controls. Giving
>Japan the green light may solve a dispute with France, but it
>could open the door to a more serious challenge: regional trade
>blocs. Nevertheless, absolute opposition to the currency
>controls is increasingly difficult. The politics no longer
>support what the economics may require. That renders policy
>making difficult indeed.
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