China's vow not to devalue yuan tested

China's vow not to devalue yuan tested

SHANGHAI (Reuters): China's stumbling economy will test the will of policymakers to stave off a devaluation of the yuan this year as the Asian economic crisis brings new pain, analysts said on Friday.

Chinese leaders have said repeatedly Beijing will not devalue its currency. But exports slumped 10.8 percent in January from the same month in 1998, giving a taste of things to come and raising the possibility of devaluation, analysts said.

Recent weakness in the Japanese yen had also raised alarms as the market worries China may have to devalue to keep its exports competitive, they said.

"The full impact of the Asian crisis has not reached China yet," said a foreign exchange dealer in Shanghai.

"Foreign investment and the trade surplus are the two major suppliers of U.S. dollars in China," he said. "If both disappear, then the yuan looks more risky."

China's trade surplus was expected to narrow this year and foreign investment would slow, undermining the support which has allowed Beijing to keep the yuan steady, analysts said.

China reaped $45.58 billion in actual foreign direct investment last year and notched up a massive trade surplus of $43.59 billion, official figures showed.

Although China has been praised widely for a move to reform its financial system by closing the Guangdong International Trust and Investment Corp (GITIC) last year, that caused some foreign investors to reconsider their plans, analysts said.

Confidence in the yuan could also be shaken if China's economic growth stumbled or the budget deficit widened sharply this year, they said.

Beijing embarked on a massive infrastructure spending program last year to boost economic growth. China's gross domestic product (GDP) rose 7.8 percent year-on-year in 1998, narrowly missing a government target of 8.0 percent.

"China is determined to undertake this 'New Deal' of the government spending money," said Steven Xu, regional treasury economist for Standard Chartered Bank in Hong Kong.

"But the market is not going to give the benefit of the doubt to this policy perpetually," he said. "This one year is going to be very crucial."

"Are we going to see consumption pick up? This is the issue we should watch very carefully."

Premier Zhu Rongji was the latest leader to repeat the "no- devaluation" pledge, telling visiting U.S. Deputy Treasury Secretary Lawrence Summers on Tuesday China would not devalue.