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.