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.