China hits the markets
By Peter Hartcher,
Asia-Pacific Editor
Asia's crisis threatened to move into a new realm of deflation on Friday
when the region's so-called anchor of stability - China's currency -
fell in the black market to its lowest level in five years.
As investors were gripped with new doubts about the outlook for China's
economy, the country's central bank governor reportedly hinted at the
possibility of a "a little bit" of a devaluation in the future.
At the same time, Japan's new Prime Minister disappointed international
markets with a predictable policy address, offering no new hope of an
early stabilisation of the crisis in the region's biggest economy.
The yen slumped in response, taking currencies and stocks across the
region down with it. The Australian dollar was subjected to renewed, but
mild, selling pressure.
In this way, Japan and China combined with Wall Street to deliver a
succession of three deflationary shocks to international markets during
the course of the week. These three have exerted a mutually reinforcing
downward pull on activity everywhere.
Fear of Asia forced Tuesday's 299-point Wall Street fall, and the US
nervousness in turn "was the spark that lit the tinder" in the attack on
China-related assets on Friday, according to the head of Asia research
for BankBoston in Singapore, Dr William Overholt.
The chief economist for HSBC Group in Hong Kong, Mr Jan Lee, said:
"Asia's living in a post-bubble world, and the forces of deflation are
still working their way through. The risk for China is clearly a
deflation that gets out of control."
Since the first outbreak of the Asia crisis last year, China has
consistently vowed to hold its currency steady. Along with its territory
of Hong Kong, it remains the only country in Asia which has held its
currency fixed against the $US.
But yesterday, the renminbi fell to a level of 9 to the $US in the
Shanghai black market, 8 per cent below the official exchange rate and a
clear expression of local hopes.
The governor of the People's Bank of China, Mr Dai Xianglong, was quoted
in a Shanghai newspaper as saying: "The foreign exchange rate is
fundamentally a result of the market, and I don't rule out the
possibility of a small adjustment."
A renminbi devaluation would put pressure on other regional currencies
to fall so exports from the rest of Asia would remain competitive.
In addition, Chinese buying has been an important factor in many
commodity markets; a weaker Chinese currency would imply less purchasing
power and therefore weaker commodity prices worldwide.
The $HK, closely related in many investors' minds to the renminbi, came
under renewed speculative attack and Hong Kong interest rates rose. The
price of shares in HK fell by 2.8 per cent to their lowest point in 3
years. China-based companies were particular victims.
The release of new unemployment statistics in China seemed to validate
the fears of China's prospects, with 2.73 million jobs reported lost in
the State sector and 1.62 million lost in the collective sector, offset
by only 1.49 million new jobs created in the private sector in the first
half of 1998.
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