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