China/WTO a fortune for Asia

By Andrew Priest

LONDON (Reuters): China's historic U.S. trade deal signed on Monday should be a major boost for other Asian countries as it will lower trade barriers into China without raising the risk of a yuan devaluation, fund managers said.

But investors advised against a short-term lift in allocations to Asian assets, citing strong gains over the last year and the likely slow progress of the opening up of China's vast internal markets as reasons for caution.

"This is fantastic news for Asia, but in the short-term it's not an issue as the benefits will be staggered over years," said Ashok Shah, emerging market fund manager at Old Mutual Asset Managers.

"China has always been an important market for Asian companies due to its potentially huge consumer markets and cheap labor costs. This deal makes it easier for them to tackle one of the more important markets in the region."

The trade deal, under which China agreed to reduce import prices and eliminate export subsidies, is expected to pave the way for China's membership of the World Trade Organization (WTO).

News of the deal sent Hong Kong stocks to their highest levels in more than two years with Chinese red chip stocks rising almost 10 percent.

Fund managers were optimistic that China would avoid having to devalue its currency in the face of a likely rise in imports following the deal. They noted strong recent export data and the prospect of rising foreign direct investment if China opened up.

"We don't see China's trade surplus slipping into a deficit in the foreseeable future and as a result of that we see little pressure on the renminbi through the end of 2000," Christine Rowley, a portfolio manager at Invesco in London, said.

"The deal is positive for WTO membership but the implementation process will take time and anyway the Chinese borders have been a permeable membrane for imports for some time," she said.

The threat of a yuan devaluation has cast a shadow across Asia's fragile economic recovery. Such a move is seen as undermining the competitive position of Asian exports at a time of low domestic demand following the region's economic crisis.

Chinese officials, who pledged repeatedly not to devalue the yuan during the Asian currency upheaval after 1997, have identified a strong balance of payments figure as one of the yuan's key supports.

Central bank governor Shi Jilian was quoted last week as saying the yuan was underpinned by solid fundamentals including its 7.4 percent economic growth in the first nine months of 1999, still positive balance of payments and strong foreign exchange reserves.

But China trade figures out last Friday showed China's trade surplus was US$4.4 billion in October, up 41.9 percent from a year earlier.

"When things are going like that it is encouraging," said Chris Ruffle, who manages Martin Currie's $36 million China Heartland fund.

"Driving these figures are higher exports to Asia and particularly Japan," he added.

International rating agency Standard and Poor's said China's exports had increased more than 250 percent during this decade, largely because of its policy of attracting foreign direct investment into export production.

WTO entry would anchor China's policy of trade liberalization fortifying its credit standing, S&P said.

"The immediate impact on China's trade balance is expected to be mild, but the long-term impact should be deeper. WTO membership will challenge the government to maintain the momentum of economic restructuring in order to meet more intense foreign competition," said David Beers, managing director of S&P's sovereign ratings group.

To be sure, a Chinese currency devaluation may only have a marginal impact on Asian economies given the strong forecasts for economic growth both in the region and elsewhere.

"The external situation for China and Asia is as good as it gets at the moment," said Old Mutual's Shah.