We must not let the 1997 Southeast Asian financial crisis happen again!
Recently, the US dollar has caused a lot of headaches for non-US currencies. Yesterday, after the US dollar index hit a new high in this round of rebound, the Japanese yen, Korean won, Indian rupee, Indonesian rupiah, Thai baht, and Philippine peso all fell sharply. There is a feeling that the 1997 Southeast Asian financial crisis is about to happen again.
After the United States, Japan and South Korea launched the first trilateral financial leaders' meeting, the United States, Japan and South Korea issued a trilateral joint statement, in which the finance ministries of the three countries agreed to maintain close consultations on foreign exchange market fluctuations. They acknowledged Japan and South Korea's serious concerns about the recent sharp depreciation of the yen and won. At the same time, the central banks of China, Japan, South Korea, the Philippines and Indonesia collectively took action to manage foreign exchange market expectations.
It is worth mentioning that the RMB also received some good news in the early trading today. According to the data of the Society for Worldwide Interbank Financial Telecommunication (Swift), the share of RMB in global payments rose to 4.69% in March, up from 4% in the previous month.
So, how will the foreign exchange market develop in the future?
The United States, Japan and South Korea issued an emergency statement
Yesterday, the yen continued to hit a new low since 1990, and the dollar approached 154.80 against the yen, hitting a new high since 1990 for the fourth consecutive trading day. The Thai baht fell 0.5% at one point, leading the decline among Asian currencies. The Philippine peso fell below the key level of 57 for the first time since the end of 2022. The Indian rupee remains at a historical low, continuing to fall below 83.50 in November last year. The Korean won also fell below 1,400 against the US dollar yesterday, the first time since November 7, 2022.
Amid the turmoil in the Asia-Pacific market, the United States, Japan and South Korea launched the first trilateral financial leaders' meeting. The three countries issued a joint statement, and the finance ministries of the three countries agreed to maintain close consultation on foreign exchange market fluctuations. The joint statement said: "We will continue to cooperate to promote sustainable economic growth, financial stability, and orderly and sound financial market operations." The statement reads: "We will also continue to consult closely on foreign exchange market developments in accordance with existing G20 commitments, while acknowledging the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and won."
This morning, central banks in Asia and the Pacific took collective action to manage expectations. The Theoretical Study Center of the CPC Central Committee of the People's Bank of China published an article in the People's Daily stating that in terms of exchange rate, the RMB exchange rate should be mainly determined by the market, and at the same time, pro-cyclical behavior should be corrected, the risk of overshooting of the exchange rate should be prevented, and unilateral consistent expectations should be prevented from forming and self-reinforcing, so as to keep the RMB exchange rate basically stable.
The governor of the Philippine central bank said the peso's decline was not enough to affect policy, and that the problem was not the weakness of the Philippine peso but the strength of the U.S. dollar. The core scenario is a rate cut in the fourth quarter, and if the situation worsens, the rate cut may be postponed to the first quarter of 2025.
Japanese Chief Cabinet Secretary Yoshimasa Hayashi said the country is closely monitoring foreign exchange fluctuations and is ready to take comprehensive measures.
Indonesian officials said they would continue to intervene in the foreign exchange market to ensure a balance between foreign exchange supply and demand. A few days ago, the Indonesian central bank directly bought the rupiah to limit its depreciation and planned to support the currency through intervention and the sale of high-yield securities this year.
South Korea's central bank governor Chang-yong Rhee said that if necessary, we have the resources and tools to take action on foreign exchange.
Boosted by this, the foreign exchange market was relatively stable in the morning session today, and the Asia-Pacific stock markets did not see a sharp drop. The South Korean stock index rose by more than 1.5%, the Japanese stock market also fluctuated and strengthened after opening low, and the Hong Kong market also turned positive.
The impact of the political and economic divide in the United States
As the governor of the Central Bank of the Philippines said, the core of the market is the US dollar, and the core of the US dollar is inflation. But now, the political and economic divisions in the United States have a great impact on inflation. In recent days, the US government and Congress have done a lot of things around raising taxes and hindering supply chains. In fact, none of them are conducive to the decline of inflation. But the decline of inflation is a prerequisite for the United States to lower interest rates.
First, according to Reuters, the Biden administration is expected to approve a request by South Korean company Hanwha Qcells to revoke a two-year trade exemption that allowed imports of dominant solar panel technology from China and other countries to avoid tariffs.
Second, the Biden administration said it would not renew a license that was set to expire early on Thursday that had broadly eased oil sanctions on Venezuela and was preparing to reimpose penalties in response to Venezuelan President Maduro's failure to meet previous commitments.
Third, on April 17, local time, the United States once again took action. The Office of the U.S. Trade Representative announced the launch of a Section 301 investigation into China's maritime, logistics and shipbuilding industries. According to Bloomberg, Biden called for higher tariffs on Chinese steel and aluminum to support the U.S. steel industry.
Fourth, according to a report by Bloomberg on the 15th, the U.S. House of Representatives passed a bill aimed at preventing China from purchasing Iranian oil with an "overwhelming majority" that day.
If Iranian oil is banned, global oil prices will inevitably soar to unimaginable levels, which will be counterproductive for U.S. inflation. In addition, imposing tariffs on goods will also increase corresponding costs.
According to this logic, inflation will remain high for a long time, and so will the dollar. The cost of US Treasury bonds will become a time bomb.
Big news for the RMB
The high level of the US dollar will bring one consequence: as rising US interest rates drive the US dollar to appreciate against other currencies, commodities denominated in US dollars become more expensive, and countries that borrow in US dollars face a heavier debt burden.
Then came the big news of RMB internationalization: data from the Society for Worldwide Interbank Financial Telecommunication (Swift) showed that the share of RMB in international payments rose to 4.69% in March (previous value was 4%), which was the highest level since Swift established a new benchmark in July last year. According to Swift data, the RMB has become the world's fourth most traded currency since November, surpassing the Japanese yen for the first time since 2022.
In addition, there is another big news: ACWA Power, a major power, desalination and green hydrogen developer in Saudi Arabia, recently obtained an $80 million equity bridge loan from the Bank of China for its Uzbekistan project. According to the company's press release, the funds will be paid in two currencies, 50% in RMB and 50% in US dollars. This is the first time that an Asian national bank has signed a local currency loan cooperation agreement with a Saudi company.
According to Cailianshe, ACWA Power has become the first Middle Eastern company for a Chinese bank to implement RMB loans overseas. At the same time, it has also become the first Middle Eastern company to promote the internationalization of RMB in a third-party market with Chinese financial institutions, helping local infrastructure construction and energy transformation.