From Sunday's NY Times:
By JONATHAN FUERBRINGER
Last summer, when the Japanese yen plunged to more than 140 to the dollar, investors were worried that the weak yen would force the Chinese to devalue their currency, the yuan. And that, analysts said at the time, would send the Asian economies into yet another downward spiral.
Well, China did not devalue. The yen did an about-face, rising 29 percent in two months. And when Brazil devalued its currency in January, China moved to quash any new investor tremors by reassuring the world, again, that it would not follow suit.
But this does not mean that investors can take China off their early-warning screen. In fact, there may be more reasons to be worried about China -- and its potential impact on global financial markets -- now than there were last summer.
The news from China is not positive at all, even if it is not making waves. The economy is slowing, analysts say, pointing to indicators like slow growth in electricity consumption, falling exports and declining growth in retail sales.
Analysts don't believe China's report that its economy grew 7.8 percent last year. "That is not even close," said Nicholas R. Lardy, a China economic specialist and senior fellow at the Brookings Institution in Washington.
At the same time, foreign investment in the form of loans, bonds and stock sales seems to be declining, with much of the decrease following the closing in October of a big nonbank financial institution, the Guangdong International Trust and Investment Corp., or Gitic.
It has since formally gone bankrupt, and other trust and investment companies have also rolled over. More failures are expected.
The way China handled the collapse of Gitic "is going to have long-term consequences," Lardy said, adding that "the environment has never been worse for China in the raising of capital in foreign markets." He thinks foreign bank loans are down sharply from their $59 billion total in June 1998, the most recent data from the Bank for International Settlements.
The last few attempts at public stock offerings, including that of Shandong International Power Development, have been withdrawn. David Lee, the analyst for Asia at Fiduciary Trust International, a New York-based global fund manager and longtime investor in Hong Kong and China, said underwriters had invited him to a road show on Shandong, but he didn't bother to attend. "It wasn't worth our time to look into that deal," he said.
The bad news has not been enough to set investors trembling again. But the recent fall in the Japanese yen may reawaken concerns, even if the decline is not likely to be the catalyst for a devaluation.
In the last two months the yen has dropped 9 percent, to 118 to the dollar. That is not the 140 of last summer. But the yen could return to that neighborhood if the Japanese take the steps that American officials are urging to stimulate their economy.
"If you get the yen weakening, China is going to come back into the picture," said Desmond Lachman, director of emerging-markets economic research at Salomon Smith Barney.
A weaker yen would make Chinese exports less competitive with those of Japan. But today, analysts do not think that such a competitive disadvantage would be painful enough to prompt a Chinese devaluation.
Instead, they think the catalyst would be a deterioration in China's balance of payments. Lardy argues that this deterioration could already be under way because of the loss of foreign credit and the slowdown in the Chinese economy. There are no data to prove that -- yet.
"I think they're going to be looking at devaluation much sooner than you'd expect, if there is a significant reduction in their ability to borrow from banks or to sell debt internationally," Lardy told a group of money managers recently.
It it worth noting that the governor of China's central bank, Dai Xianglong, did not rule out a currency devaluation when he sought to reassure the world and investors in January. The yuan, he said, will be devalued only "when there is a great imbalance in the balance of payments of China and there is a great increase in the cost of exports."
"But I do not think these conditions exist this year," he continued.
We'll see.
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