China buys time to stave off devaluation<\/p>\n
By Bill Savadove<\/p>\n
SHANGHAI (Reuters): China has bought itself some time to hold
\noff a currency devaluation with a new economic stimulus plan, but
\neconomists feel the real test will come next year.<\/p>\n
Beijing said last week it would issue 60 billion yuan (US$7.2
\nbillion) in bonds to fund infrastructure development and would
\ntax interest on bank savings to flush money out of accounts and
\ninto the stores.<\/p>\n
The aim is to stimulate an economy which grew 7.6 percent in
\nthe first half of this year, above a target of 7.0 percent for
\n1999, but below last year's 7.8 percent.<\/p>\n
Those figures look good, but they mask stubborn deflation. The
\nbenchmark retail price index has fallen for 22 months.<\/p>\n
China has said repeatedly it would not devalue the yuan and
\nhas launched a state spending spree on infrastructure to
\ncompensate for flagging exports and weak consumption.<\/p>\n
\"We are expecting a devaluation in the first quarter of next
\nyear,\" said Kate O'Donoghue, regional economist for Barclay's
\nCapital in Singapore.<\/p>\n
\"It is almost inevitable because of the imbalances in the
\nChinese economy caused by current methods of attempting to
\nsupport growth.\"<\/p>\n
\"By trying to engineer an investment-led growth, you're seeing
\novercapacity worsen which then means that deflationary pressures
\nare also worse,\" O'Donoghue said.<\/p>\n
Beijing must loosen monetary policy further and tackle
\npersistent deflation to avoid a devaluation which would help
\nboost exports and spur imported inflation, economists said.<\/p>\n
For now, China is still protected by massive foreign exchange
\nreserves of over $147 billion which help maintain the stability
\nof the yuan, they said.<\/p>\n
China reported a healthy trade surplus of $11.3 billion in the
\nfirst seven months of this year, though this was down from $26.7
\nbillion in the same period last year.<\/p>\n
Actual foreign direct investment was $21.49 billion in
\nJanuary-July, down 10 percent on the same 1998 period.<\/p>\n
\"Nothing is going to happen this year,\" said Steven Xu,
\nregional treasury economist for Standard Chartered Bank in Hong
\nKong. \"Even from a policy perspective, the market wants to give
\nthe new package the benefit of the doubt.\"<\/p>\n
\"My own perception is that there is no compelling reason to
\nchange (the exchange rate),\" he said. \"Having said that, there is
\nno compelling reason for a huge economy like China to peg its
\ncurrency to the U.S. dollar perpetually.\"<\/p>\n
Technically, China has a managed float system, but in practice
\nthe central bank has kept the yuan firmly pegged at around 8.28
\nto the U.S. dollar.<\/p>\n
Amid the range of views on if and when China might devalue,
\nthere is consensus on one issue -- Asian economies are better
\nprepared for such a move than a year ago.<\/p>\n
Chinese officials have previously cited fears of another round
\nof regional currency devaluations as a justification for keeping
\nthe yuan stable.<\/p>\n
\"If the renminbi (yuan) were to devalue some time next year,
\nthere will still be a negative shock on the region's currency
\nmarkets, but that shock will be very short lived,\" said Chi Lo,
\nchief Asia economist for HSBC Markets in Hong Kong.<\/p>\n
\"For all the Asian economies, the fundamentals have improved
\nquite dramatically,\" he said. \"Even in the event of a yuan
\ndevaluation, the Hong Kong peg will stay.\"<\/p>\n
Hong Kong is a Special Administrative Region of China and its
\ncurrency is pegged to the U.S. dollar. Beijing has vowed to
\nprotect the financial stability of Hong Kong.<\/p>\n
Chinese officials still insist the yuan will not be devalued,
\nat least for now.<\/p>\n
\"The renminbi (yuan) is stable,\" said Ji Xiaohui, vice
\npresident of the Shanghai branch of the Industrial and Commercial
\nBank of China, a state-owned commercial bank. \"The situation has
\nnot changed.\"<\/p>\n
But central bank officials have left the door open for change
\nby saying the exchange rate would depend on China's balance of
\npayments -- the record of a country's trade, services and capital
\nflows with the rest of the world.<\/p>\n
\"The significant change this year, from the government
\nperspective, is that discussing the exchange rate is no longer
\ntaboo,\" said Xu of Standard Chartered.<\/p>",
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