China WTO entry may fuel devaluation push

By William Kazer

SHANGHAI (Reuters): China's accord with the United States on joining the World Trade Organization (WTO) has been widely hailed as a major boost for trade and investment.

But economists said on Wednesday the landmark agreement, which paves the way for Beijing's WTO entry after a marathon campaign, could help tip the scales toward a devaluation of China's currency.

Policymakers were already being pushed in that direction by a need to reflate the economy.

"Late next year we could see pressure building up for a devaluation," said an analyst at domestic brokerage house China Securities.

Expectations for such a move are extremely wide-ranging.

Many economists see a gradual adjustment of the yuan, which is not freely convertible, under a "more flexible" exchange rate system, replacing the tight controls in place now, while some are more extreme.

"If there is no big change in the value of the dollar (against other currencies), I would expect a 20 percent devaluation," said the analyst from China Securities.

The WTO agreement takes away many of China's key trade weapons -- such as export rebates and import quotas -- which have been used successfully to help deflect heavy pressure to devalue the yuan.

At the same time, a devaluation would be a tempting political tool for China's Communist leaders, who will need to counter criticism from local manufacturers facing stiffer competition from imports.

The yuan barely blinked during the tense final round of WTO talks and after the agreement was reached, holding near its official target level of 8.28 to the dollar. On Wednesday, it finished unchanged at 8.2780.

But there are clearly a number of Chinese economists who see greater fluctuations in the exchange rate ahead.

"I wouldn't rule out the possibility of using the exchange rate to an appropriate extent as a way of adjusting foreign trade," said Gan Shingdi, an economist at the Shanghai Academy of Social Sciences.

China still needs to nail down separate deals with some other major trading partners before it can join the WTO, and does not expect to join until the first half of next year.

The net effect of membership on the balance of payments is still unclear, though China is generally expected to see a boost in investment alongside higher imports.

Under the accord with the United States, China has agreed to cut its import tariffs to an average of 9.4 percent by 2005 from 22.1 percent now.

It also pledged to end its import quota system and drop tight restrictions on determining who has the right to import.

Beijing has still not disclosed the more troublesome details of the WTO accord to its people, fearing a less than positive public reaction.

The Economic Information newspaper offered the preferred view: "WTO entry will give us a great opportunity to further our development," it said.

But the stock market has already begun punishing those companies, such as automotive and telecommunications firms, which are seen losing out in the scramble for market share.

In the past China has said repeatedly it had no reason to devalue the currency due to its strong trade surplus and a healthy inflow of foreign investment.

It has reported improved trade of late, showing four consecutive months of higher exports. Exports climbed 23.8 percent year-on-year in October, and the surplus for the first 10 months of the year was a healthy US$23.8 billion.

Economists said WTO would be a factor in the currency debate, but the key impetus for a devaluation would be as a way to reflate the economy, which has now seen 25 consecutive months of deflation despite massive government spending.

"I think a devaluation is more a policy instrument for reflating the economy," said a Chinese bank economist who asked not to be named.

"The government has tried almost everything to kickstart the economy," he said. "As far as I can see, this is the only policy option left."

Xi Junyang, an economist at Shanghai University of Finance and Economics, said an immediate devaluation was unlikely upon entry into the WTO.

"This would look irresponsible and damage our image," he said. "But there is a possibility of using a devaluation to stimulate the domestic economy."