Setting The Ringgit Free

China might take a page from Malaysia and revalue its currency, too

Rumors are rife in Kuala Lumpur that Malaysia is about to abandon its hard peg to the dollar. If that happens, China and its Hong Kong territory will be the last holdouts in Asia to maintain a pegged currency. The Malaysian experience, however, might offer a lesson to the Chinese, who have been resisting Western pressure to revalue the yuan for months.

The pegging of the Malaysian ringgit has a tumultuous history. Prime Minister Mahathir Mohamed, now retired, imposed it in September, 1998, at 3.8 to the dollar. He was furiously denouncing Western money managers -- George Soros in particular -- for allegedly driving down the ringgit's value. In fact, the root cause of the financial panic that was gripping Southeast Asia at the time was an overleveraged, nontransparent financial system. When that system crashed, the currency markets were merciless.

Today the situation could not be more different. Most Asian banks have been reformed and restructured. They are financing fast-growing consumer spending, not white elephant government projects and corporate cronies. Asian economies are healthy. They are exporting billions of dollars in goods to Europe, the U.S., and each other. One of Malaysia's biggest trading partners after the U.S. is China. Most of the region's economies boast big and growing pots of foreign reserves. Their floating currencies are appreciating against the dollar -- so sharply, in fact, that Japan, Korea, and others have seen fit to intervene.

Malaysia was thereby the odd man out. Moreover, its fixed peg against the dollar has been damaging its economy, making imported capital goods pricey and stoking inflation, which will hit 3% by the end of the year.

Although letting the ringgit rise against the dollar might make that nation's exports to the U.S. more expensive, analysts note that Malaysia and its neighbors no longer depend on the U.S. as their sole export destination. Since Malaysia, Taiwan, Singapore, and others trade in many currencies and import almost as much as they export, floating their currencies against a basket of other currencies is the approach that makes the most sense. That's as true for Beijing as it is for Kuala Lumpur.

Moving to such a "managed float" could correct a lot of the imbalances in Chinese trade without necessarily hurting exports. And it would get those Western critics off Malaysia's back.

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