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To: Rarebird who wrote (37086)	7/13/1999 1:01:00 PM
From: Don Lloyd	Respond to of 116972

Rarebird - (The Sinking Debt Bomb:) Read this backwards, starting with his policy recommendations, to judge his credibility. (Increased minimum wage, strengthened unions, increased government spending and 'investment') No disease would be worse than his cures. Regards, Don

To: Rarebird who wrote (37086)	7/13/1999 5:31:00 PM
From: Alex	Respond to of 116972

Sounding a Warning on the Stability of China's Currency Hong Kong--July 13--Global rating agency Duff & Phelps Credit Ratings (DCR) said today that China is likely to devalue the yuan in the next six months after holding the currency firm through the Asian crisis. "The calculus in China has changed," says Roger Scher, DCR's head of Asian sovereigns. "With a balance of payments deficit likely this year, economic growth stalled in spite of a massive fiscal and monetary stimulus, WTO membership uncertain in light of problems in the U.S.-Chinese relationship, and financial turmoil in Asia and especially in Hong Kong all but resolved, Chinese policymakers may opt for a devaluation over the next six months." China's balance of payments surpluses has supported its fixed exchange rate in recent years, but as these trade surpluses slide toward deficits, pressure for a devaluation will mount, according to a DCR report. China's exports in the first five months of this year shrank more than 5% from last year, while imports expanded more than 15%, yielding a trade surplus of $7.2 billion, less than half of last year's $18.5 billion. DCR says foreign direct investment (FDI) may be slowing as well, due partly to expectations of a devaluation. In January to May, 1999, FDI fell 17% from the same period last year. However, Scher points out that unlike what happened to its Asian neighbors, the deteriorating external situation will not force China's hand. With almost $150 billion in foreign exchange reserves -- second only to Japan -- and very little short-term debt, China has the wherewithal to maintain its exchange rate, he explains. Chinese policymakers are also keeping a close watch on domestic factors, according to DCR. The country is experiencing price deflation as fiscal and monetary stimulus measures have failed to generate sustainable growth. While industrial production was up 9.5% in the first five months of the year, it was driven by the government's massive infrastructure spending program. Moreover, there are signs that a slowdown is under way. For example, retail prices slipped 3.2% in January to May. Hence, consumers and businesses may curtail spending in expectation of lower prices. Scher says a devaluation could provide a dose of imported inflation and give an impetus to growth. While a devaluation will put heavy pressure on the Hong Kong dollar's peg to the U.S. dollar, it may not lead to a break in the link, notes Scher. He points out that Hong Kong "could stand to benefit from a devaluation in the medium term" if trade flows to the mainland increased as a result. "Of course, Hong Kong would have to adjust to a cost squeeze," he adds, "which its history of flexible wages and prices suggests the territory could do." DCR's prediction comes a day after comments by People's Bank of China Governor Dai Xianglong jarred currency markets. Observers took his remark that the value of the yuan is "determined by the market" as a suggestion that the country may abandon its fixed exchange rate. However, he said immediately afterward that China's balance of payments remain strong enough to keep the peg intact. The only clear caveat Dai has attached to Beijing's pledge not to devalue the yuan in 1999 come in January: "An unfavorable balance of payments" would prompt the government to reassess its stance. By BridgeNews businessweek.com