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Analysis: Inflation, hoarding, hot money — why the "currency wars" will only get worse.
TAIPEI, Taiwan — They're called the "dolphin tribe," a pun on the Mandarin word for "hoarding."
They're an example of how a weaker U.S. dollar is starting to affect everyday lives in China and across east Asia — and why, even as Asia-Pacific leaders meet in Yokohama to hash out a free trade agreement, the "currency wars" have only just begun.
"Dolphin tribe" (haitunzu) is one of the latest buzzwords on the Chinese-language internet, and it refers to Chinese who have begun hoarding everyday goods on expectations of more price hikes.
Ms. Zhang, from the southern metropolis Guangzhou, told China's Southern Daily that hoarding had become an obsession, and she's even snatching up makeup and towels. "I'm hoarding everything I use — I've become a 'dolphin'," she told the paper.
It's not just hysteria. China just shocked analysts by posting 4.4 percent rate of inflation in October, far higher than expected — and some economists are now saying the rate could soon hit 6 percent. According to the Southern Daily, prices at Guangzhou supermarkets are soaring: cooking oil shot up 15 percent in late October; sugar, 13 percent, ditto garlic, ginger, apples and rice wine.
Why the sharp rise in prices? One of the reasons, explains Taiwan finance expert Norman Yin, is the weak dollar. "When the U.S. dollar is going down, people holding U.S. dollars dump them to buy other things to secure value, so it pushes everything up," said Yin. "So the price of imported goods and all kinds of materials is soaring."
Commodity prices are also sharply up in Taiwan, prompting the government to slash tariffs on key imports like corn flour, soybean flour and cane sugar to ease the burden on consumers.
Now, central banks in both Beijing and Taipei are expected to hike interest rates as they pivot from stimulating the economy to taming inflation. Expectation of those hikes from China — possibly over the weekend — sent commodities tumbling Friday, a sign of markets' ultra-sensitivity.
But hiking rates is likely to worsen another long-standing problem: hot money inflows. "Hot money" refers to short-term speculators looking to turn a quick buck on the currency or another craze du jour — be it New Taiwan dollars, South Korean won or Indonesian rupiah. Such investors are basically turning East Asian currency markets into casinos, pumping in funds by the billion only to dump the local currency when they think it has peaked.
According to one Chinese official, there's now $10 trillion — that's trillion with a 't' — in "hot money" sloshing around the globe, looking for easy returns. Buying in mass amounts creates self-fulfilling prophecies: whatever the hot money thinks will go up, usually does.
But exporting countries don't want their currencies to climb too much, because that makes their goods pricier abroad, and so slows business, sags economies and kills jobs. To keep their currencies from spiking up and then cratering like Pets.com stock circa 2000, China's central banks and others engage in massive interventions. Basically, they're sopping up all the "hot money" to keep their currency stable.
Now, the U.S. Federal Reserve has just made their job that much more difficult — turning the headache of "hot money" into a serious migraine. From East Asia's perspective, the $600 billion "QE2" injection plan has sent a tsunami of new "hot money" rolling toward their shores.
"The U.S. is trying to boost domestic demand in America, but that money will go abroad instead of staying in the U.S.," said Yin. "So it causes problems. When it goes abroad, it just pushes the U.S. dollar's value further down, and then it triggers a currency war."
Yin says Washington may not mean badly, it just don't "give a damn" about what QE2 will mean for China or other Asia exporters. "Americans aren't really taught to see this kind of thing as a concern," said Yin. "But for us, if there is such a large quantity of money flowing in in a very short period, then it really causes a lot of trouble, because most Asian countries have quite shallow financial markets."
"Hot money" inflows account for about 20 percent of China's accumulated reserves, says Yin; some economists say much more. And it's not just China; Japan, South Korea and Taiwan are also struggling to sponge up hot money inflows and hold down currency values. Yin said hot money began surging into Taiwan's currency market at $1 billion a day starting in mid-September when QE2 was first signaled, at least twice the typical daily flows before. It's coming in at $1.5 billion a day now.
"The four central banks are very busy in dealing with hot money from abroad, and they'll use every means," said Yin.
That means loading up their weapons of mass intervention. In Taiwan, sipping coffee with foreign bankers and hinting politely that maybe they should lay off the NT dollar didn't work so well (they called it "moral suasion.") So Taiwan's central bank is now selling massive amounts of Taiwan dollars toward the end of daily trading sessions to keep the currency down, adding steadily to its more than $380 billion pile of foreign exchange reserves — the world's fourth-largest reserves after China's, Japan's and Russia's.
Taiwan and South Korea are also dabbling with capital controls; changing rules to discourage short-term speculators. Japan is ready to sell massive amounts of yen into the market to keep down its value.
And China will continue to do the same with its own currency, the yuan. In fact, its intervention is only likely to increase, and its reserves balloon more (they're now a cool $2.65 trillion), as higher interest rates attract even more hot money.
That means despite what Obama and his "dogs" at the IMF may say (see Next Media Animation rap below), China's not likely to throw Washington a bone on the value of the yuan.
Yin says that QE2, by irritating Asian central banks, is likely to accelerate plans for an Asia-wide currency modeled on the euro and an Asia monetary fund. Both would provide more financial stability than any single central bank can provide on its own, and give Asian countries bigger guns to fend off speculators.
In the meantime, global finance experts like the Beijing-based Michael Pettis don't see any way out for Beijing and Washington. Since "neither can force the other except by accelerating their incompatible currency policies, there is almost no possibility of a happy solution to the trade disputes," he wrote in a recent commentary.
Economist Andy Xie is downright alarmist, writing in a recent commentary in China International Business that tit-for-tat attempts to drive down currency values are wreaking havoc on the global economy.
"If you print a trillion, I'll print a trillion. No change in exchange rate after a trillion? Let's do it again, QE2," writes Xie. "The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis."
Think we're in a currency war? The dolphin tribe's rise is a sign you ain't seen nothin' yet.
GlobalPost's coverage of the global economy:
|What you need to know about QE2 — in plain English.||The world reacts (angrily) to the Fed's QE2||Ground truth: global economic crisis|