SINGAPORE: Six years ago, when a tidal wave of currency selling touched off Asia’s economic crisis, China won plaudits and contributed to a recovery in regional demand by deciding against a copy-cat devaluation.

Today, in a delicious irony, Asian central bankers are trying to stop their currencies rising, not falling. But one thing has not changed: China’s pivotal role in the economic equation.

If Beijing gives in to revaluation pressure and lets its currency off the leash, others would probably follow suit, economists say. But if China digs in its heels, there is a greater risk that its neighbours will cling too long to inappropriate exchange rates, as they did in 1997.

Jim Walker, chief economist of CLSA Emerging Markets in Hong Kong, fears that Thailand and Malaysia among others are already doing just that.

“The signal it sends in terms of policy-making is unfortunately clear in my mind — that some of the lessons of past mistakes haven’t been particularly well-learned,” he said.

Of course, the differences between now and then are stark. A sudden flight of footloose capital in 1997 led to cascading devaluations, starting with the Thai baht exactly six years ago today, that sent interest rates soaring and plunged most of Asia into recession. The repercussions of big inflows of foreign money, in pushing up prices of shares, property and wages, take longer to be felt.

In the case of Thailand, which cut interest rates by half a point last Friday to relieve upward pressure on the baht, Walker said an inflationary bubble may not form for two to three years. Investment, after all, is still recovering from a post-crisis slump and inflation is close to zero.

But he said Thailand, having sacrificed itself once on the altar of a fixed exchange rate, would be able to counter the build-up of imbalances and so sustain strong growth for longer if it would only let its exchange rate take more of the strain.

“I fear there is a degree of falling back into bad habits,” he said. “The unwillingness to see any movement in the exchange rate is sad and potentially keeps misallocating resources.”

CHEAPEST PRODUCER: Adam Le Mesurier, an economist with Goldman Sachs in Singapore, said Thailand’s resistance to a rise in the baht made it look as though it had not learned the lessons of clinging tight to a particular exchange rate. But he said Thailand and other Asian countries have a good excuse for not letting their currencies float free: China.

As the producer with the lowest marginal costs across a growing range of goods, China in effect dictates terms to other manufacturers, Le Mesurier said. “China sets the bar,” he said.

The question for Asia’s economy, therefore, is when Beijing will let the yuan rise in response to heavy inflows of foreign investment and “hot” money betting on a revaluation.

Officials in Beijing acknowledge they are examining various steps to partially liberalize China’s closed capital account that would increase demand for foreign currency and so ease fundamental upward pressure on the yuan, or renminbi.

Political pressure is also building on China to widen the yuan’s tight nine-year-old band of 8.2760 to 8.2800 per dollar.

Echoing recent comments from Washington and Tokyo, South Korea’s top foreign exchange official said on Wednesday that the Chinese currency should better reflect market forces.

“As an economic leader in Asia, China needs to expand its yuan trading band gradually. As I understand, China is now considering doing so,” Kwon Tae-shin, deputy finance minister for international affairs, said in Seoul.

BIS BLAST: The United States, Japan and South Korea have a self-interest in a stronger yuan: they want to help their own exporters.

But there is a potent international case for the yuan — and hence most other Asian currencies — to rise: the need to reduce America’s gaping current account deficit for the sake of global financial stability.

In its annual report this week, the Bank for International Settlements criticized some unnamed Asian countries for opposing a rise in their currencies that would cut their current account surpluses and, by extension, help shrink the US deficit.

“Such resistance to appreciation in Asia implies that the burden of exchange rate adjustment is likely to fall disproportionately on those currencies that are truly floating, like the euro,” the Basel, Switzerland-based BIS said.

How to share the burden of currency adjustment is likely to be a talking point at a meeting of Asian and European finance ministers this weekend on the Indonesian resort island of Bali.

But not all economists agree with the BIS’s logic. Andy Xie of Morgan Stanley in Hong Kong said in a report that China could simply compensate for a revaluation by reducing nominal wages. Where economists do agree is that China will make adjustments gradually, in its own interest, at a time of its choosing.

Until China cleans up its banks and strengthens its financial markets, casting the yuan loose would run the risk of sowing the same instability that devastated much of Asia six years ago because hot money inflows can quickly become hot money outflows.

“The Asian crisis has taught China’s leaders the valuable lesson that, for an economy with weak domestic fundamentals, sudden capital account liberalization leaves it vulnerable to capital exodus,” said Rob Subbaraman of Lehman Brothers in Tokyo.—Reuters

IS the MMA phenomenon beginning to unravel? The alliance recovered from the ‘administrative action’ of the federal government, but whether it will be able to withstand the legal challenge to its parliamentarians facing possible disqualification will be known in the next few weeks.

Will any large-scale disqualification of MMA parliamentarians mark the beginning of the end of the six-party religious alliance? Can the present democratic system withstand such a dramatic parliamentary change and not go down with the MMA? And the most important question: what political cost are we willing to pay for sending the MMA home as quickly as it had burst on to the scene seven months ago?

From the heyday of Gen Zia-ul-Haq when the religious parties played second fiddle to the establishment to the present dispensation when they find themselves at odds with the khakis, the religious-political leadership has come a long way. From two per cent to over 13 per cent of the votes polled the religious alliance has asserted itself as a potent force.

How did this alliance come into existence and who  facilitated them on the way to becoming a force does not require too much imagination. Those who had helped form the Afghan Defence Council to stir up the heat on the streets of Peshawar for the all-too-keen eyes of the western media during the US campaign in Afghanistan surely had no idea of what they were letting themselves in for by denying the mainstream political parties a level playing field.

Then came the elections. The military rulers decided to  make do with what now Gen Musharraf says is the ‘available’ lot and do away  with what it perceived was the corrupt element. In the event, the MMA (which cynics then called the Mullah Military Alliance)  also came into existence.

So where did things go wrong? Was it really a  mullah-military alliance  or  was it that for the first time in  the  history  of Pakistan, the traditional allies were finding themselves opposing each other?

The  military and its intelligence outfits had miscalculated not only the true strength of the religious combine but had also failed to correctly gauge the  public  mood. The Musharraf regime must have watched in shocking disbelief as the religious parties together posted  their  most remarkable performance since Pakistan’s birth.

Since then the MMA has survived despite all the predictions that it will fall apart over differences over the interpretation of religious doctrine. It has not only survived but has become a thorn in the side of the Jamali government.

So reading the ‘administrative’ action and possible large- scale disqualification of MMA parliamentarians in the context  of the continuing tug of war over the Legal Framework Order presents all the contours of a serious political crisis in the  making. Any attempt at dislodging the MMA government or sending their MPs home on qualification ground will have serious ramifications both in the short and the long term.

There are no two opinions that the MMA government in the  NWFP is  doing its first and possibly last stint in office. The Shariah Bill has now become an act, but the contradictions are beginning to be felt. The tenuous relationship between the JUI and its junior partner, the Jamat-i-Islami is also now the subject of a whispering campaign carried on by the two against each other.

Some MMA leaders now do not hide the fact that Qazi Hussain Ahmad is  spoiling  the  broth for them. If one is to  believe  an  MMA leader, the Qazi is going around telling his partners to play it cool and not be scared of any possible disqualification. “If  we  go, the  system goes and so will the top man,” says this MMA MNA, quoting the JI leader.

Qazi Hussain Ahmad is no novice to the political game but somehow he has come to believe that if dismissed, the MMA has the potential  of staging a similar show in Punjab as it did  in  the NWFP. Also, he beieves, that not everyone in the  establishment is against the religious parties and their agenda.

But while political observers will watch what course the MMA adopts in the face of the upcoming hearing of a petition  challenging the qualification of its MPs, it will be interesting to see how the JUI leader Maulana Fazlur Rehman reacts.

Unlike the Jamaat-i-Islami, the JUI has a major stake both in the NWFP and in Balochistan. It has more MNAs and  it has got more to lose should the  SC backs the judgment delivered by the Election Tribunal in Peshawar. Maulana Fazlur Rehman is among the 65 MNAs whose qualification to become a parliamentarian has been challenged. Certainly, he would not like to lose his seat.

Will he soften his opposition to the LFO and ask his party in the NWFP to play more sensibly or  will  he stick  to  the position taken by the MMA and face  the  consequences?  Surely, the Jamali government and its  backers  in the establishment will not like to take any political  risk  by taking on the MMA both in the centre and in the NWFP. But the MMA on  its part cannot afford to drag the LFO issue for  too  long. This is a war of nerves and wits. Let’s see who wins it.