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Technology Stocks : Deswell Industries (DSWL)

DSWL 3.440

+5.2%

Oct 31 9:30 AM EST

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To: Ron Bower who wrote (1397)	7/2/2000 1:11:25 PM
From: Ron Bower	Read Replies (2) of 1418

I've been reading many articles about a yuan devaluation prompted by an IMF recommendation that China allow the yuan to float and a meeting between Zhu Rongi and a group of HK businessmen wherein he appeared taking the IMF suggestion seriously. There are strong arguments both for and against. These last few years, I have frequently scoffed at those suggesting a yuan devaluation because it would not be beneficial to China's overall economy. This situation changes with WTO membership. The Treaties signed cause China to open their markets resulting in problems for many Chinese businesses, particularly the inefficient, struggling government owned industries. A weaker yuan would have the effect of replacing the lowered tariffs thereby supporting those industries the tariffs were protecting. It would provide lower costs to the exporting companies and stimulate additional foreign investment. However, Zhu must also consider the adverse impact on China's stock markets and avoid causing regional instability. Do the positive impacts of a lower yuan now outweigh the negatives? The main obstacle to a devaluation or free floating yuan is pressures from the US and ASEAN countries - the fear of another cycle of devaluations. Many believe (includes me) the 'crisis' was prompted by China's earlier major devaluation and that a free floating or non-supported yuan would cause another regional if not global destabilization of currencies. Because of their large export surplus, it is possible the yuan could strengthen if China allows it to freely float. This is something China must avoid. IMO - The leadership of China doesn't like any situation that isn't under the control of the government. A free floating yuan is not acceptable to the ideology. I believe they will quasi maintain the $US peg, but lower the spread allowance in increments - allow it to trade at successively lower values over a period of years while maintaining the upper limits. This would allow the yuan to weaken, but prevent it getting stronger. By doing it in controllable increments, the impact on the region would be lessened and the rate of devaluation adjustable to the needs of China's economy. Impact on Deswell? After reading the terms of the US/China Trade Treaty, I see a more flexible yuan to be beneficial. JMHO, Ron

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