Friday July 23, 12:23 am Eastern Time
ANALYSIS-China devaluation seen coming next year
By Apu Sikri
NEW YORK, July 21 (Reuters) - Struggling to revive a slackening economy and slumping
exports, China has opened the door to a currency devaluation, but it is likely to delay the
move until next year, Wall Street analysts said.
''Pressure is clearly building on the exchange rate,'' said Tom Byrne, chief analyst for
China at Moody's Investors Service. ''You see it on a number of fronts -- in the reemergence of the black foreign exchange
market in Shanghai and the fact that the Chinese are resorting to tax incentives on export rebates to offset the price effect of
an appreciating exchange rate.''
China's central bank governor Dai Xianglong sparked speculation of a potential devaluation last week when he said the
exchange rate is determined by market forces such as the balance of payments.
Analysts said the official's statements reflected a subtle shift in China's foreign exchange policy but did not necessarily signal
an immediate devaluation.
Analysts contend the yuan could be over-valued 10 to 15 percent. But they believe Chinese officials will wait until after the
50th anniversary of the founding of the People's Republic this October for any foreign exchange initiatives. Officials may also
want to see negotiations in China's bid to join the World Trade Organization out of the way.
''We're moving toward a devaluation but I don't think it will happen before the beginning of the year,'' said Gene Frieda,
head of emerging markets research at 4Cast, a forecasting firm.
Merrill Lynch analyst Chia Liang Lian said in a recent report that ''growing external imbalances in the face of lackluster
export performance and a pick-up in imports, together with persistent weakness in domestic demand, may galvanize official
rethinking on exchange rate policy.''
Rather than an outright devaluation against the U.S. dollar, Chinese officials might think in terms of adjusting the yuan and
fixing it against a trade-weighted index consisting of the Euro and the yen, as opposed to the current focus on the dollar,
wrote Merrill analyst Chia Liang Lian. Currently, about 8.3 yuan fetch one U.S. dollar.
As it weighs its options, ''China has been implicitly devaluing for a year through taxes and rebates,'' said Martin Anidjar,
Asia strategist at J.P. Morgan. ''Doing it that way has two consequences -- it is healthier for the economy in terms of
external indebtedness. While people who export get better rates, the negative effect is the fiscal cost.''
''At some point, it becomes more costly than actually devaluing,'' said Anidjar.
Even as many analysts and investors see the inevitability of a devaluation of the yuan, most say the transition is likely to be
well-managed and without any wider impact on the region.
''Clearly the impact (of a devaluation) on other countries in Asia would be less today than last year. The world economy is
much more stable now,'' said Joydeep Mukherji, chief analyst for China at Standard & Poor's rating agency.
S&P Wednesday lowered China's sovereign rating to double-B from double-B-plus, citing slower expected economic
growth of four to five percent over the next few years and imbalances in the country's economy. |
