China's dollar peg suits Asian neighbours

China is following a cautious route out of the global crisis. Photo / AP

While China's currency peg to the United States dollar is often decried in the West as a beggar-thy-neighbour policy which keeps its exports artificially cheap, China's actual neighbours do not necessarily see things that way.

"Their neighbours have got used to it and are grateful for the growth side of it," said Asian Development Bank principal economist Ganeshan Wignaraja.

China's fiscal stimulus measures undertaken in response to the global financial crisis had driven a pick-up in its own growth (to nearly 10 per cent this year, the ADB forecasts) and a V-shaped recovery in the wider region.

"China in that sense has done its bit and acted as the main engine, through its demand for imports," he said. "The exchange rate issue is a secondary point."

China's position seemed to be that an exchange rate adjustment would occur, but gradually and within some sort of band.

"It will come in a cautious manner but that is probably not a bad thing. Sudden exchange rate adjustment can also be destabilising."

Wignaraja associates criticism of China's currency peg with a rising tide of protectionism, inevitable perhaps in a time of high unemployment and also evident in a gradually increasing number of anti-dumping cases before the World Trade Organisation.

But fears of a return to the virulent protectionism of the 1930s - such as fears of another Great Depression - have not eventuated.

And the broader context is one of a proliferation of bilateral and plurilateral free trade agreements in the region, from just three 10 years ago to 44 now, with another 85 at various stages of preparation.

A disparaging view of this development had developed in the academic literature, Wignaraja said. "The view is that they are dirty and shallow FTAs - with a lot of exclusions - and that they have complex and very bureaucratic rules of origin which deter firms from using them."

But research by the ADB does not bear that out. It surveyed 840 exporters from East and Southeast Asia and found almost a third use the FTAs, in the sense of taking advantage of the tariff preferences available to them. When those which plan to are included, the number rises to more than half.

Chinese companies had the largest uptake rates, especially taking advantage of an FTA with Asean.

Only a fifth of the firms surveyed thought there was a "noodle bowl" effect, with a tangle of different rules of origin under different agreements driving up transaction costs.

But clearly there were still constraints, Wignaraja said. Firms cited lack of information about the agreements, continuing non-tariff barriers, delays and bureaucratic costs relating to rules of origin, and relatively low margins (between claiming or not claiming tariff preferences).

In the medium term consolidating overlapping bilateral FTAs into a simpler region-wide agreement would make life easier for businesses, the ADB argues, and might make a deep trade deal under the WTO's Stalled Doha Round easier to achieve.

Wignaraja noted that while New Zealand's trade flows had expanded greatly after agreements with China and Asean, outbound investment had not followed suit.