By JC Collins
Every once in a while we need to take another look at the Asian currency situation, and in particular the Vietnamese dong. Long-time readers will understand that the appreciation of the VND is something which I have focused a lot of time on in the past.
When I first heard about the potential of the dong appreciating, the field was trashed with so much misleading and unproven information that it was hardly worth the effort to read and consider. But there was something about the VND that struck a chord with me and I began to dig deeper and analyze the real potential of such a thing happening.
Over numerous posts I presented this analysis and probability of the dong appreciation. The study of the Asian Currency Unit (ACU) and forthcoming ASEAN Economic Community (AEC) trade agreement created a sort of validation of something larger happening in East Asia regarding currency appreciation.
The balance of payments deficits and the need for large trade surplus countries to have their currencies appreciate against the USD, Vietnam being one of these countries, further supported the conclusion that the Vietnamese dong would experience some level of appreciation in the coming years.
Many readers have carried the torch on researching and providing more detailed information which not only supports the broader POM thesis presented here, but also the appreciation of emerging currencies which has remained as a POM sidebar.
Reader and commenter Alan recently compiled a nice list of links supporting the appreciation of East Asian currencies. From Alan’s comment:
A google search query that yields a wealth of information in support of the PoM thesis uses the following keywords:
“…The enormous surpluses in processing trade relative to the U.S. generate pressure for nominal exchange rates throughout Asia to appreciate relative to the dollar. If East Asian currencies were to appreciate against the dollar, it would be advantageous if they could appreciate together while maintaining some measure of intra-regional exchange rate stability. By reducing intra-regional exchange rate volatility and the associated uncertainty, this would facilitate the flow of FDI and intermediate goods in Asian production networks. It would also produce a smaller appreciation of real effective exchange rates in East Asian countries since the majority of their trade is intra-regional. Finally, it would overcome the collective action problem that arises as individual countries in the region resist appreciations because they do not want to lose competitiveness relative to neighboring countries…”
“…Since ordinary exports tend to be simple, labor-intensive goods while processed exports are sophisticated, capital-intensive goods, a generalized appreciation in East Asia would generate more expenditure-switching towards U.S. and European goods and contribute more to resolving global imbalances than an appreciation of the RMB or other Asian currencies alone…”
“…Recently, the global current account imbalance has received considerable attention in the international financial market. In this paper, we focus on the relationship between US and East Asia from the perspective of the trade balance and examine whether the appreciation of East Asian currencies against the dollar would affect the respective outputs of East Asia and the US or be effective in reducing the global imbalance. There are few empirical studies directly focused on the trade and output between the US and East Asia. Our empirical results suggest that currency appreciation is expansionary for East Asian economies and will increase the East Asian output, which will contribute to the reduction in US trade deficits…”
“…regional financial cooperation is essential. East Asian economies need to strengthen the Chiang Mai Initiative, regional economic surveillance, and financial market development and integration (especially through the Asian Bond Markets Initiative). They must also embark on exchange rate coordination.
The impetus toward policy coordination may come sooner rather than later—as the US dollar depreciates sharply against East Asian (and other major) currencies in the light of the weak economic and financial prospects in the US. If East Asian economies must accept currency appreciation vis-à-vis the dollar, they had better do so collectively, while maintaining intraregional exchange rate stability. This will facilitate rebalancing the sources of growth away from external demand towards the region’s internal demand, thus contributing to the resolution of global payments imbalances. Such policy coordination will help East Asia achieve noninflationary sustainable growth…”
These links provided by Alan clearly support the thesis and analysis presented here, including that of a Vietnamese dong appreciation, as well as the depreciation of the US dollar against those currencies.
In order to give old readers a refresher, and new readers a place to start, here are links to the previous POM articles on the VND:
It is interesting that the ongoing POM thesis on the multilateral transition is now beginning to merge with the mechanics of a dong appreciation. The astute reader will make the connections between the ACU and AEC, along with the rise and internationalization of the Chinese renminbi.
More and more pieces are coming together and the POM analysis will remain here as a record of what took place, how it took place, and the time frames involved. It will be the virtual library on the multilateral transformation of the international monetary system. – JC
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