Currency Boards and Currency Restrictions

[Chris Burford]

At 01:30 PM 9/1/98 -0400, Mike Cohen wrote:

> What do you guys think of the idea of the Pacific rim imposing this.
>It seems that the countries with the least economic liberalism i.e.
>China
>and Hong Kong with its currency board is doing about the best in this
>crisis.  It seems that with a hugh flight of foreign capital in the
>region currency boards,... seem to be the best bet.


As we watch this unfold, there are further signs of a move away from
neo-liberal laissez faire. 

Interesting to see the material Michael Hoover was able to track down to
the "Hong Kong Voice of Democracy".

Yes it looks reasonable to say the Hong Kong authorities won the first
round. The fall on the Hang Seng the day after their intervention came to
an end was only comparable in percentage terms to the fall on Wall Street
the same day. Yesterday the change was not dramatic, and this morning the
index is rising. Confidence in the government to defend the HK dollar has
not been lost.

Another straw in the wind is that on Monday Taiwan nailed its colours to
the mast. This is significant because although there are presumably no
formal links between mainland China and Taiwan, there must be many informal
ones. China is seen by international commentators as one of the three areas
of the world which may grow in the next twelve months and it would be
natural that Taiwan and Hong Kong would think in terms of aligning
themselves to the Chinese market in terms of coming out of the world
financial crisis.

Taiwan's warning was sharp: "The central bank will stringently monitor the
foreign exchange market so that such speculators [as George Soros] will
find no quarter to operate here". Although they had found no evidence that
funds owned by Soros had entered local foreign exchange markets they would
be monitoring closely. 

The FT (which on reflection I bought) said that this was just the latest
blow to Soros in emerging markets. No comment came from his group. It is
ironic that shortly before losing  2bn dollars in Russia Soros had written
the letter to the FT advising a modest devaluation of the rouble, together
with the introduction of a currency board, not despised as an option later,
by Michel Camdessus for the IMF.

Taiwan is seen as having erected considerable barriers to speculative
attacks against their dollar. In May, the central bank virtually shut down
the trade of futures instruments used to pressure the local currency [which
presumably Hong Kong will now consider doing]. In addition inflows of funds
destined for the stock market are also subject to central bank approval,
allowing the authorities to influence the demand for the currency. This
would seem to be a strategic rejection of any but the most passing benefit
from short term global financial movements. 

Soros denies his culpability for the Asian financial crisis and indeed he
is presumably a good bogey man for a system that is inherently about the
rapid transfer of short term financial risks across the world. But official
Chinese papers on Monday mentioned his name in connection with the
continued pressure on the Hong Kong dollar, and Malaysia'a Mahathir
Mohammed, has publically named him as a focus of suspicion. And although
Mahathir is no Han Chinese there is perhaps a Han influenced economic zone
emerging, which is clearly prepared openly to confront Soros, and more
importantly what Soros symbolises. They are confident whether they regard
themselves as capitalists, socialists, communists, or revisionists, that
they are talking about real economies and not just the froth of short term
financial transfers. 

They may not win every round, but I doubt if they will lose them all.

Chris Buford