Manuel Marfán, vice-governor of the Central Bank of Chile, told CNBC Europe Tuesday that the Chileans are concerned about what is happening in the currency markets. He said their first responsibility was to be "good global citizens". But he suggested that China is the big problem because the burden of currency revaluation in the Emerging Markets vis-a-vis the developed economies is falling on countries like his because of China’s peg and capital controls. Here’s the money quote:
The main problem here is with those countries that have non-convertible currencies on the one hand and also that they use their exchange rate as a device for their own industrial policy.
Very strong words.
We saw this on display yesterday because the Chinese raised the Depo rate on 1-year money by 25-basis points (see Michael Pettis and Win Thin‘s comments on this here). Without the capital controls the increased interest rate differential would have meant pressure on the currency peg. Instead what you will see is either a mini-revaluation or the need for more currency intervention by the Chinese central bank.
Marfán says the Encaje-style capital controls that Brazil is now imposing to deal with the problem are not appropriate for Chile. The Chileans tried this in the 1990s and it failed (see Marc Chandler’s note on this from last month). For his part, Marfán says that Chile’s biggest problem is that it is seen as a commodity currency and this drives its exchange rate up as commodity prices increase. The same is also true for commodity currencies like the Australia and Canadian dollar which have reached parity with the US dollar.
Bottom line: the currency crisis is a multilateral one. Much of the developed world is beset by slower growth debt-laden economies. They are looking to export their way out of this fix. This requires a depreciated currency and several developed economies are in the process of taking steps which depreciate their currency via quantitative easing or currency intervention. In this two-tier world, emerging markets are doing better across the board and this is attracting hot money flows from the developed economies, driving up their currencies and making their exports less competitive. China is insulated from this to a large degree by its currency peg to the US dollar. In fact, because the dollar has become so weak recently, the Chinese yuan is actually depreciating against a basket of currencies. This is an untenable situation which is in need of a fix. Marfán hopes some of this can be hashed out at the G-20.