Asia may benefit from yuan devaluation<\/p>\n
By James T. Areddy<\/p>\n
HONG KONG (Dow Jones): As economists' expectations grow that
\nChina will eventually devalue its currency, so are hopes that
\nother Asian countries might benefit from such a move.<\/p>\n
In a number of recent reports highlighting the chance for a
\ndevaluation, economists tell their clients not to mistake knee-
\njerk financial market turmoil -- widely expected to follow any
\nfall in the Chinese yuan -- with a reversal of Asia's improving
\nregional economic trends.<\/p>\n
Salomon Brothers Asia Ltd. Managing Director Stephen Taran
\nasks investors to consider the chance of \"a few nervous days in
\nHong Kong, and then a relief rally everywhere.\"<\/p>\n
He notes, \"We do not expect the Chinese to change the renminbi
\n(yuan) exchange rate in 1999, but (if there is one) the impact of
\na modest renminbi devaluation on the sovereign credit profiles of
\nother Asian countries should be modest.\"<\/p>\n
Despite the analysts' confidence, financial markets continue
\nto worry deeply about a change of policy from Beijing,
\nparticularly in Hong Kong where debate rages about whether the
\nlocal government could, would or should maintain its U.S. dollar
\ncurrency peg if China devalues.<\/p>\n
An emerging view is that a Chinese move would lead to a few
\ndays of extreme financial market upset in Hong Kong before
\nconfidence returned.<\/p>\n
In this scenario, the Hong Kong Monetary Authority would
\nhearten investors by resolutely demonstrating that the currency
\npeg to the U.S. dollar will remain unchanged and by emphasizing
\nthe broader benefits of stronger Chinese economic growth over the
\nshort-term pain that higher local interest rates would cause, a
\ngrowing number of analysts say.<\/p>\n
In their relatively bullish call on Asian financial markets,
\nBarclays Bank Ltd. analysts are assuming that in the next several
\nmonths Beijing will engineer a 20 percent reduction in the
\nChinese currency's value, to around 10.5 versus the U.S. dollar.<\/p>\n
\"We do not believe that a Chinese yuan devaluation will spark
\nanother Asian currency crisis,\" says a report last week by
\nDesmond Supple, the firm's chief currency researcher in
\nSingapore.<\/p>\n
Underpinning Supple's argument that Chinese devaluation would
\nbe a net positive for Asia is his view that it would be adopted
\nas part of a domestic, growth-oriented package that would also
\nspark an uptick in regional trade and inflation.<\/p>\n
Market players who equate Chinese devaluation with another
\nround of currency contagion are wrong because China won't react
\nas other Asian countries did in 1997, when they followed advice
\nfrom the International Monetary Fund and pursued austerity
\npolicies after devaluation, Supple says.<\/p>\n
And Barclays argues that a potentially bigger risk to Asian
\neconomies would be for China to be stuck in a rut for much
\nlonger, unable to generate domestic demand. The country accounts
\nfor half of Asia's gross domestic product, excluding Japan, and
\n60 percent of its trade, according to Barclays.<\/p>\n
Stephen Roach, the New York-based chief economist of Morgan
\nStanley Dean Witter & Co., says in a report following a recent
\nvisit to Beijing that a Chinese devaluation last year \"could well
\nhave been game over for world financial markets.\"<\/p>\n
But \"that was then,\" he says, and now the reality is that
\ncyclical recovery is well underway in South Korea, Malaysia,
\nSingapore and Indonesia, while there are signs of bottoming in
\nJapan and strengthening in India.<\/p>\n
\"I do not believe that a moderate devaluation of the renminbi
\n-- in the 10 percent to 15 percent range -- would arrest these
\nincreasingly powerful cyclical dynamics,\" he says. \"Chinese
\ndevaluation should not pose a threat to Asian or global healing.\"<\/p>\n
Roach's view matches that of the Paris-based Organization for
\nEconomic Cooperation and Development (OECD), which two months ago
\nestimated that a 20 percent yuan and Hong Kong dollar devaluation
\nwould cost member economies a mere 0.1 percentage point in
\neconomic growth.<\/p>\n
If other Asian currencies slipped 10 percent, the cost would
\nbe up to a 0.4 percentage point reduction in OECD growth, it
\nestimated.<\/p>",
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