Yuan seen safe but exports at risk

Yuan seen safe but exports at risk

BEIJING (Reuter): Southeast Asia's currency crisis will have little effect on China's yuan currency but is seen hitting Chinese exports, an official newspaper said on Sunday.

China's huge foreign exchange reserves, which topped US$120 billion at end-June, and tough controls over capital flows would protect China's currency, the Business Weekly, published by the China Daily, said.

"The country has enough foreign exchange reserves to guard against possible crises," the newspaper quoted foreign exchange analyst Chen Quangeng as saying.

Several Asian currencies have come under speculative attacks in recent weeks, with Thailand forced to float its baht, meaning an effective devaluation of about 20 percent since July 2.

The currencies of the Philippines, Malaysia and Indonesia also came under pressure.

Although a small amount of short-term speculative funds had made their way into China, the effect on the Chinese financial markets would be limited, Chen said without elaborating.

The recent devaluations were mainly a result of the sudden withdrawal of foreign capital by overseas investors shaken by weak fundamentals and expanding current account deficits, Chen said.

He said that scenario was unlikely to happen in China, which notched up a current account surplus of $7.2 billion in 1996 and capital account surplus of nearly $40 billion.

"More importantly, China has a strong economic base," he said.

The Chinese economy has boomed in the first half, with gross domestic product growing by 9.5 percent and its trade surplus ballooning to nearly $17.8 billion.

Beijing also had strict controls over the inflow and outflow of capital and the yuan was not freely convertible, making it difficult for foreign speculators to operate in China, he said.

"Therefore it is impossible that a large amount of funds flow out of China to trigger a financial crisis and currency devaluation," he said.

The yuan exchange rate would remain stable against the U.S. dollar in the second half of the year, he predicted. The yuan closed at 8.2906 against the dollar on Friday and has long hovered around the 8.3 mark.

"The rate will fluctuate around reasonable levels according to changes of foreign currency supply and demands in the market," he said.

However, Southeast Asia's currency crisis could hit China's exports by reducing the region's demand for Chinese products and making countries there more competitive against Chinese goods, he said.

"The currency devaluation in Southeast Asian countries would probably result in some negative effects on China's exports," he said but gave no further details.

China exported $80.82 billion worth of goods in the first half of the year, and the member countries of the Association of South East Asian Nations collectively were China's fifth largest trading partner, the newspaper said.