Chinese mercantilism: currency wars and how the east was lost

Abstract

The Asian financial crisis has generated a lot of research, analysis and debate. The exact causes of the crisis are not firmly established, although various hypotheses have been offered. This paper presents one view of the genesis of the East Asian crisis. Several explanations are examined: managed exchange rates, over and undervalued currencies, crony capitalism, asset bubbles, Japanese devaluation, or “too much” capital account liberalization. A large part of the analysis centers around the proposition that the regime of managed exchange rates was at the core of the problem. In addition, the paper offers an additional contributory cause of the crisis - China’s mercantilist policy. The role of the international system in allowing China to devalue its currency (by over 50 percent), despite burgeoning trade surpluses, is also addressed. The paper also explores the question of whether the Chinese economy needed any devaluation in the early nineties. I have no doubt that this paper will provoke debate and contribute to a better understanding of an issue which is occupying the minds of most policy makers around the world.