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To: Rarebird who wrote (37396)	7/20/1999 9:18:00 AM
From: Rarebird	Respond to of 116770

Is China Ready To Devalue The Yuan? Monday, July 19, 1999 Published at 14:30 GMT 15:30 UK Business: The Economy China hints at devaluation China's industries are vulnerable to foreign imports The Chinese Government appears to be seriously weighing the possibility of devaluing its currency, the renminbi, for the first time. China has stuck by its policy of maintaining a fixed link to the dollar during the two years of the Asian crisis, fearful that any move to devalue would touch off a further collapse of Asian currencies. Zhu Rongji failed to get a trade deal with the US But with the Asian economies now in recovery, attention is focusing on the heavy price China has had to pay for maintaining its international credibility. Economic growth is slowing, exports are becoming uncompetitive, and soaring imports have put pressure on domestic manufacturers. Articles have begun to appear in the Chinese press calling for a discussion of the economic merits of changing the exchange rate. As the currency is still not traded freely, it would be up to the government to take that decision. Dai Xianglong, the central bank governor, said that the currency's value should be determined by supply and demand, or the balance of payments - implying that a deteriorating balance of payments could lead to devaluation in the future. That is in sharp contrast to his remarks earlier in the year, when both he and Prime Minister Zhu Rongji categorically ruled out any devaluation. And an economist from China's development bank, Gao Jian, has gone further and published an article urging an exchange rate adjustment "at the appropriate time" to boost exports. China still has $140bn in foreign exchange reserves. But its trade surplus has fallen by 64% so far this year as a result of the strong currency. Companies suffer The high exchange rate has hurt exporters by some $8.7bn (£5.6bn), according to estimates by a Chinese government think tank. For instance, a Daewoo factory in Yantai that makes excavators is unable to export any of its diggers this year as they have become uncompetitive with those made in Korea. But domestic producers are suffering too. Imports rose by 16.6% in the first half of 1999, and the highly competitive import prices pushed down overall prices in China by 3.2% this year. The price deflation is weakening demand, slowing growth, and hurting company profits. Last week the government was forced to announce further measures to boost growth. "Cheap imports are one important cause of deflation. Lowering the exchange rate would help deal with that," said one official. Senior officials are due to gather at Beidaihe later this month to discuss economic policy. Costs of devaluation Although devaluation would benefit domestic Chinese companies, there are other problems that might make China reluctant to go down that route. A stable currency has been one of the main attractions for foreign investors, who do not have to worry that their investments could become less valuable. It has also helped protect China's shaky banking system, with some $160bn in foreign borrowings, from the possibility of default. A weaker currency would mean that it would become more expensive to service that foreign debt. The Hong Kong dollar is also pegged to the US dollar, a link considered important for investment in the former British colony. Last August the government of Hong Kong spent $10bn buying shares indirectly supporting the currency. A devaluation of the Chinese currency could threaten stability in Hong Kong. The currency peg was also considered important in convincing the West that China was willing to play a positive role in the international economic system, as part of its plan for closer integration with international trade and financial institutions. Now, however, those plans are stalled. Trade talks on hold The troubles of China's manufacturing sector have made negotiations with the World Trade Organisation more difficult. China has long sought membership of the WTO, and appeared close to a deal with the United States on market-opening measures in April. But since then, China has refused to re-enter negotiations until it has received a full apology for the bombing of its Belgrade embassy by NATO warplanes. And internal opposition to making more concessions to the West on trade appears to be growing. Chinese negotiators have begun to stress that any opening-up would be gradual and subject to considerable safeguards. "Some people also say that joining the WTO means matching international price levels and the large-scale influx of foreign goods into the Chinese market," said Vice Foreign Trade Minister Long Yongtu. "This problem does not exist." news.bbc.co.uk