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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (21865)	8/3/1999 10:19:00 AM
From: Les H	Read Replies (1) \| Respond to of 99985

ASIA ANALYSTS EXPECT CHINA DEVALUATION IN 2000 By Matthew Saltmarsh HONG KONG (MktNews) - Although most analysts think China will not devalue its currency until next year for political reasons, speculation about a move has resurfaced to spook Asian markets in the last two weeks as an increasing number of mainland officials question the rational for maintaining the current exchange rate. Economists remain divided about the merits of a devaluation for the Chinese economy but feel the impact will be less marked than it would have been last year. For prestige reasons alone it is very unlikely that China would break its pledge not to devalue ahead of the fiftieth anniversary of the founding of the People's Republic of China on Oct. 1. "Allowing for complications such as WTO and the Taiwan imbroglio, it is unlikely that any devaluation would come before next year," said Chin Loo Thio, foreign exchange analyst at Paribas. Last week, a report on a July 17 meeting of more than 20 top Chinese economists from prestigious official institutes like the Chinese Academy of Social Sciences and the State Council's Research and Development Center was published in the mainland's Economic Daily. Many of the economists reportedly urged the government to reconsider its pledge not to devalue. World Bank chief economist Joseph Stiglitz last week appeared to lend his voice to the campaign to de-link the yuan. "One of the lessons that came out of the Asia crisis was that fixed-exchange rate systems do not work, or work very, very seldom. The world is now moving away from fixed exchange rates [and] moving more towards a system of market determined exchange rates, and that is obviously going to affect the thinking of virtually every country," he said. China Development Bank economist Wang Dayong was also recently quoted as saying the country should "adjust" the yuan's exchange rate to help spur exports now that the Asia crisis is easing. Wang reportedly said the mainland "should appropriately adjust the [yuan] policy to benefit and stimulate exports." The devaluation story was also given more credence last week when a Hong Kong tabloid newspaper quoted the Chinese Ambassador to South Korea as saying China may be looking into the feasibility of adjusting the yuan exchange rate based on market changes. The reason given by most who advocate a change of policy is that the no devaluation pledge was intended to give stability to regional currencies and economies at the height of the crisis to give them a good chance of recovery. But now the need is reduced and the yuan is overvalued against other regional currencies. Before the recent reports, there were already rumors in the markets that proposals for a 10% devaluation are being discussed at high levels. Analysts expect that between now and next year there will be similar stories quoted from Chinese officials, although they will not come from the key policy makers themselves. Given the deteriorating balance of payments and slowing growth, China appears to be actively exploring all avenues to help the economy adjust and a devaluation is moving to the forefront. Most analysts are starting to bring forward their expectations for the timing of a devaluation because of deteriorating macro numbers coming out of the mainland. Desmond Supple, senior regional analyst at Barclays Capital in Singapore, said in a recent research report that a devaluation in 2000 remains probable, with the magnitude likely to be less than 25%. "The sustainability of the current informal yuan peg remains questionable given our assumption of continued deflationary pressure -- driven by weak aggregate demand and excess capacity -- and a strong dollar internationally." he said. Don Read, said his company expects "to see a devaluation by the third quarter of next year in line with their balance of payments performance and weakening exports." Growth in the second quarter slowed to 7.1% year on year from 8.3% in the first quarter, led down by weak fixed-asset investment. The State Information Centre's Economic Forecasting Department said last week that GDP growth in the fourth quarter could slow to below 6% and possibly even below 5%. As a result, the key 7% annual growth target now looks threatened. Meantime, exports have not increased despite various schemes designed to boost the sector, including higher subsidies and tax rebates. In the first half, exports fell 4.6% and were also down in June. Analysts also point out that higher import prices would bring some much-needed inflationary pressure. Also, the clampdown on illegal capital outflows has not yet been able to boost foreign exchange reserves which have been stuck around $145 billion all year. Because of the yuan peg, foreign exchange reserves have become a key tool to manipulate money supply. The government has also tried to boost sluggish demand with a series of fiscal stimulus moves -- the latest of which is a tax on deposits -- which will continue into the second half with a 200-billion-yuan fiscal expansion package, as well as monetary easings that have failed to boost demand or stem deflation. And the official criteria for a devaluation -- an overall balance of payments deficit -- is not far off, Warburg's Wu points out. Warburg Dillon Read forecasts the current account surplus will fall to $11 billion in 1999 and $12.5 billion in 2000, still leaving a small balance of payments surplus despite current negative capital account growth. That contrasts with levels of $29.7 billion in 1997 and $25 billion last year. The bank believes exports will drop an annual 7.5% this year after 21% growth in 1997 and slight growth last year. Wu said slower exports and overall weaker balance of payments will contract forex reserves and that would also dampen money-supply growth and could set in motion a more protracted deflationary spiral. He also noted that any growth in black market currency trade on the mainland could hasten the date for a devaluation as that detracts from official reserves and ultimately affects money supply.