[The Wall Street Journal Interactive Edition][Personal Journal News]
The Wall Street Journal Interactive Edition -- January 15, 1998
Analysts Say a Devaluation
Isn't in the Cards for Yuan -----
By CRAIG S. SMITH and DAVID WESSEL
Staff Reporters of THE WALL STREET JOURNAL
HONG KONG -- Economic czars inside and outside China continue to
express confidence that Beijing won't devalue its currency, even
as the yuan begins to slide on the country's black market.
China's yuan has emerged as rock of stability amid the continuing
turmoil in East Asia's currency markets. But there's increasing
concern that the country could yet devalue its currency to keep
its exports competitive with the rest of the region.
Any move by China to reduce the yuan's value would worsen Asia's
already severe currency crisis because it probably would further
depress the values of other Asia currencies, risking a round of
competitive devaluations uncomfortably reminiscent of the 1930s.
China's chief economic-policy maker, Vice Premier Zhu Rongji,
sought to allay those fears on Wednesday by repeating that China
will maintain the current exchange rate of about 8.3 yuan to the
dollar, despite any economic pain it will cause.
The Hong Kong Connection
His comments, carried on state-run television, came on the eve of
a visit by U.S. Deputy Treasury Secretary Lawrence Summers, who
is traveling through Asia on a presidential mission to shore up
confidence in the region. The future of the Chinese yuan is
certain to be on the agenda when Mr. Summers meets Thursday with
Mr. Zhu.
A yuan devaluation would have a devastating impact on Hong Kong,
which is fighting to keep its currency pegged to the U.S. dollar.
Were Beijing to let the yuan fall, confidence in the Hong Kong
dollar would most certainly crumble, deepening the region's
economic crisis and shattering Hong Kong's confidence in the
territory's new Chinese rulers. "If the Chinese currency were
devalued, the peg would not hold. The storm would grow even
stronger," warned Hungarian-American currency speculator George
Soros in a German weekly published Thursday.
Mr. Summers met Wednesday evening with Hong Kong's chief
executive, Tung Chee-hwa, as well as the head of the Hong Kong
Monetary Authority, Joseph Yam, and Financial Secretary Donald
Tsang, before leaving for Beijing. He said the U.S. Treasury is
assigning an attache to the U.S. consulate in Hong Kong, its
first in Asia outside of Japan. And he declared that Hong Kong
authorities have the "capacity and determination and the skill"
to maintain the Hong Kong dollar's peg.
Besides triggering further currency devaluations in Asia, a
weaker yuan would widen China's growing trade surplus with the
U.S. -- which reached a record $40 billion last year.
A Renewed Black Market
Just a few months ago, when U.S. Treasury Secretary Robert Rubin
was in Beijing, the U.S. suggested that China buy more foreign
goods instead of allowing its substantial U.S. dollar reserves to
continue to mount -- a subtle effort to prod the Chinese
government to allow its currency to rise. A stronger yuan would
help restrain growth of the trade surplus.
But there is no longer any immediate prospect that the yuan would
rise if the government allowed the market to have more of a say
in its value.
China's black market for U.S. dollars has sprung back to life in
recent weeks after all but disappearing a few years ago. Men now
loiter outside bank branches in many Chinese cities offering as
much as 8.53 yuan to the dollar -- a 3% depreciation from the
official rate.
"Look at Southeast Asia, the yuan is headed lower," said one
leather-jacketed man buying dollars outside a Bank of China
branch in Shanghai on Wednesday.
Still, economists argue that China won't be forced into a
devaluation because the country remains competitive with East
Asia, despite the sharp depreciations in currencies there.
China's labor costs are still about half those in Thailand, for
example, even after the roughly 50% depreciation of the Thai baht
since July.
Means of Defense
And there are no mechanisms by which speculators can force a
depreciation -- foreign investors are barred from using yuan to
invest in the country's small stock markets, for example. With
$140 billion in foreign-exchange reserves, China has the means to
defend its currency in any case.
Unlike other countries in Asia, China's yuan has gone through
sharp depreciations six times in the past 13 years -- relieving
pressure on the currency. Nor has inflation since bloated the
value of the yuan: China's inflation rate has fallen steadily
over the past four years, and the economy now appears headed into
a period of deflation -- China's retail price index dropped 0.4%
in October.
IMF Managing Director Michel Camdessus, in Indonesia, added his
support for the yuan on Wednesday, saying "the exchange rate is
appropriate as it now stands."
Return to top of page
[Toolbar]
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved. |
