China bullish on yuan, but open to change

By William Kazer

SHANGHAI (Reuters): China made its clearest case that it had taken the worst of the Asian crisis without flinching and could hold its currency steady, analysts said on Wednesday.

But they noted central bank chief Dai Xianglong had also made it clear that no pledge was forever and he left the door open to change if China's balance of payments deteriorated.

"The renminbi (yuan) will be devalued only when there is a great imbalance in the balance of payments of China," Dai told reporters, referring to the tally of trade and services as well as capital flows.

"During the Asian crisis the renminbi was not devalued," Dai said, adding there was much less reason to do so now.

Analysts said those frank remarks, issued as markets shuddered in response to Brazil's devaluation this month, were just what investors wanted to hear.

"It helps clear a lot of worries that China would take a flexible stand on its currency policy," said Alex Tang, research director at Core Pacific-Yamaichi International (HK).

"We envisage a US$30 billion trade surplus in 1999 for China," said Samuel Chiu, economist with Kim Eng Securities in Hong Kong.

"I don't see any risk in a current account deficit."

Chinese economists agreed with the thrust of Dai's remarks.

"Fundamentals do not allow the yuan to devalue," said Wu Jianzhong, deputy director of the China Economic Monitoring Center in Beijing.

"We've been through the worst year," he said, referring to last year. "There is no significant pressure on the renminbi yet."

China maintains tight controls on its currency, keeping the yuan near its target level of 8.28 to a dollar.

Other economists said pressures could build in the future and it was useful to have a clearer view of central bank thinking.

But a senior economist from a state-run bank cautioned that the remarks were merely precautionary and did not signal expectations of a payments deterioration.

"What Dai said does not imply the yuan will be devalued next year. They (central bankers) just do not want to risk making a long-term pledge," said the economist who asked not to be named.

China has moved to bolster its foreign currency position and ensure that it does not have a problem with its balance of foreign payments. It squeezed currency curbs further last September to head off capital flight.

That program has started to show results. Foreign exchange reserves climbed to about $145 billion by the end of last year with most of the gains made after the new controls were put in place.

China benefited from a trade surplus of $43.59 billion and had foreign direct investment of $45 billion last year.

Dai forecast economic growth of seven percent this year, down from 7.8 percent last year, and analysts said that if China reached its economic growth target, currency stability would have an added measure of insurance.

But economists said what Beijing needed to do to reach that goal was boost domestic demand and step up government spending.

It was already moving ahead with an ambitious infrastructure program, spending on an array of projects from roads to railways and ports to power plants to spur flagging growth.

Analysts said Dai was probably too conservative on his money supply forecast of 14-15 percent this year and unrealistically high with predictions of consumer price inflation of 4-5 percent.

"I think this is too conservative, it should be higher and I think it will be higher," said Chi Lo, director of China research at the HSBC Corp in Hong Kong, referring to money supply growth.

Chinese economists said Dai's forecast was more of a guideline, and one that probably would be exceeded.