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To: long-gone who wrote (39469)	8/23/1999 2:41:00 PM
From: Alex	Read Replies (3) \| Respond to of 116836

Why China won't devalue By Steve H. Hanke FOR THE CHINESE, 1999 is the year of the rabbit, but for those of us who try to make sense of the Middle Kingdom, it has turned into the year of the renminbi, China's currency. A big wave of worry about the renminbi started in June, when concerns about slowing growth and price deflation in the Chinese economy spurred the Chinese government to lift its no-devaluation pledge and its prohibition of public debate on the subject. This opened the door for airy-fairy devaluationists, like World Bank chief economist Joseph Stiglitz, to beat the drums for a currency devaluation as a way to reinvigorate the economy. A Chinese devaluation would certainly roil currency and stock markets in Asia. Will it happen? For a country with a pegged exchange rate (the renminbi is pegged to the dollar) the best way to judge international economic performance is with balance-of-payments statistics. And the most important balance is the change in official reserves, the amount of foreign currency the central bank has had to buy or sell to maintain the peg. China's foreign reserves ballooned by 5% over the past year and are now a staggering $150 billion. This means that to hold the peg at 8.28 renminbi to the dollar, the central bank had to buy dollars and sell renminbi. And were it not for illegal capital flight (private parties selling renminbi and buying foreign currency) of almost $70 billion last year, official foreign reserves would be significantly larger. The central bank would have had to purchase even more foreign exchange to hold the renminbi peg. Yet the official renminbi/dollar exchange rate has not budged during the past year. Indeed, absent the central bank's accumulation of foreign reserves, the renminbi would have appreciated. ------------------------------------------------------------------------ The Chinese are arresting currency traders, steamrollering trading sites and confiscating money. This is hardball, not hot air. ------------------------------------------------------------------------ To solve this Chinese reserve mystery we don't have to look far. China's trade and current account balances are both in surplus. Yes, the trade balance has been deteriorating, primarily because of strong import growth. But that growth is partly just an artifact of a crackdown on illegal imports that now are counted as legitimate imports. There is no downward pressure on the renminbi and it remains competitive. Indeed, competitiveness (measured by the renminbi's effective real exchange rate, which is the weighted average of the bilateral renminbi rates adjusted for inflation differentials between China and its trading partners) has fallen by only 1% since the beginning of 1997. But this is not the end of the story. With an interest rate cut in June, China embarked on a strategy of monetary easing intended to stop deflation and boost growth. Without airtight exchange controls, such easing would eventually put downward pressure on the renminbi. So China, also in June, beefed up its foreign exchange controls. It ordered foreign banks with renminbi accounts at Chinese banks to close those accounts, and gave them a week to do it. It decreed that offshore Chinese banks could no longer convert renminbi into foreign currencies or remit renminbi to China. And if the closing of these loopholes were not enough, the authorities have begun a serious crackdown on illegal capital flight. Chinese citizens wishing to take more than $10,000 in cash out of the country--in any currency--must now apply for a license. This is hardball, not just hot air. In June alone, nearly 300 people who allegedly engaged in illegal foreign exchange trading were arrested, several dozen trading sites were publicly steamrollered and (the government says) large amounts of foreign currency were confiscated. Not surprisingly, it now takes fewer renminbi to buy a dollar on the black market, where the renminbi has moved to its strongest level this year. Most Western economists (and therefore the press) continue to obsess over China's abandoning its no-devaluation pledge. But the real story is that China has begun to pursue an independent, easy monetary policy, and that it is coupled with an iron box around China's exchange controls--designed to protect the renminbi's peg at all costs. For now, the Chinese have waved off the foreign experts. The devaluation of the renminbi is not imminent and does not pose a threat to other Asian currencies and stock markets. forbes.com