The Almighty Yuan; Beijing inspires a new Asian mercantilism.

Byline: Stephen Glain

Old habits are hard to kick, particularly profitable ones. The Asian practice of fixing currencies to the American dollar at rates that boost exports is back, seven years after it collapsed in the currency crises of 1997. A chain of de facto currency pegs have resurfaced, most famously in China and Japan, but also in such countries as South Korea, Taiwan, and India.

Alleged currency manipulation in Asia is likely to be the 800-pound dragon at the G7 and IMF meetings in Washington this week. Rising imbalances between the Far East and the United States, say economists, is subverting the U.S. Federal Reserve's ability to manage interest rates and could destabilize the global economy. But neither the fund nor Washington have been able to do much about it. In the last two quarters, foreign central banks purchased dollars and U.S. securities at an annual rate of $402 billion, up from $248 billion last year.

Asian governments accounted for 80 percent of the foreign inflows, accelerating a trend led by Chinese-government dollar-buying that keeps the yuan cheap relative to the U.S. currency. That in turn obliges the region's other export powerhouses to do the same. "This all started as a way for Asian economies to compete and do business with China," says Laurie Cameron, head of global foreign exchange at JP Morgan Private Bank in New York. "They want to export to the U.S. but also to China, to participate in the China explosion. It's as much a peg to the yuan as it is to the dollar."

The return of fixed exchange rates to the Far East comes with a few ironic twists. Before the 1997 crisis, many Asian currencies were officially pegged to the dollar, albeit with low reserves to back them up. In the mid-1990s, speculators sensed those currencies were overvalued given the region's high debt levels and began to sell them short. That prompted Asian central banks to drain their dollar reserves in defense of their currencies, which only delayed the collapse.

Amid the wreckage, China resisted the urge to depreciate the yuan to keep pace with its neighbor's collapsing currencies and was hailed as a stabilizing agent. Today Beijing is under fire as the vanguard of a new generation of Asian mercantilism. And other Asian governments are aggressively buying dollar assets--the opposite of their tactics in 1997, but with the same strategic end: aggressive export promotion.

After the crisis, many Asian governments lifted the controls and import barriers they had used to limit domestic spending, so capital could be funneled into export companies. With many of those restrictions lifted, often by IMF fiat, Asian governments are turning to currency manipulation to revive the export-led growth that led the boom of the 1970s and 1980s. "This is not in keeping with the spirit of financial liberalization because it makes these ...