Folks,
An interesting view as to why China doesn't need to devalue the Yuan. From the WSJ:
Reprinted for personal use only .
The Outlook
SHANGHAI, China
It has become an almost daily routine: Chicken Littles scream that the
Chinese yuan is falling, and then a colorless Beijing bureaucrat denies a
devaluation is anywhere in the cards.
But ignored by the alarmists and unmentioned by Beijing is that China,
unlike the battered island and peninsular nations in the rest of East Asia, is
a continental economy with ample means to spur growth without marking
down the currency.
"The rest of Asia can't survive without external support, but China can cut
off the world and still manage without an economic collapse," says Dong
Tao, a senior economist at CS First Boston in Hong Kong.
So China keeps the world on the edge of its seat while basking in
the praise and newfound stature won by showing restraint -- a New
Zealand politician called it "heroic" -- knowing it can hold off a
devaluation that, in any case, wouldn't do it much good.
Everyone seems to agree a Chinese devaluation would be devastating for
Asia's punch-drunk economies, if not for the world. While a discounted
currency would make Chinese exports cheaper, helping keep its economy
strong, a depreciated yuan would wipe out the average Zhou's purchasing
power for foreign-made goods and hammer regional currencies already
reeling from devaluations of their own. The resulting mess could finally
infect the West with economic ills as yet confined to Asia.
Those worries increased with the recent plunge of Japan's yen, though a
weaker yen alone isn't enough to back China into a corner. While Japan
buys about 20% of China's exports, those goods are mostly low-end
products, like cheap apparel, that aren't particularly price sensitive. And
China doesn't compete with Japan's exports in other markets. Only if the
yen were to resume its slide and set off another round of steep
devaluations in the region would China need to consider lowering its
currency a notch against the U.S. dollar. The Chinese currency trades in a
narrow, tightly controlled range, though it has occasionally slipped below
its bottom level. It was quoted Friday at 8.2799 to the dollar. The yen was
quoted Friday at 134.71 to the dollar.
Even if China decided to devalue the yuan, it has the resources to put off
such a move for months, if not years. Besides having amassed one of the
world's biggest piles of foreign reserves -- $141 billion at last count -- the
country has $600 billion in domestic savings in individual bank accounts.
That's more than double its stock-market capitalization and equal to 13
years of foreign investment. All China need do is coax some of the cash
into circulation to offset lost export income and falling foreign investment
due to the region's troubles.
And that's exactly what it is doing. Already, it is relaxing rules on
real-estate sales and pushing people to buy homes with new,
cut-rate mortgages. In Shanghai, residents are now allowed to
purchase at discounted prices the state-owned apartments they live
in -- and flip them for an easy profit. Previously, they had to wait
five years and share any gains with the state. The new rules will
soon be applied nationwide. The more people convert to
homeownership, the more sinks, bathtubs, wallpaper and air
conditioners the country's factories can sell.
And having endured tight-fisted fiscal policies since 1993, local
governments are now being told to spend, spend, spend. Shenzhen,
China's perennial southern boomtown, has suffered one of the biggest
shocks to exports of any Chinese city as a result of the Asian crisis. But it
has revived plans to build a subway, costing $812 million for the first
phase, a project that was shelved by Beijing three years ago when the
government was worried about economic overheating. Other projects are
on the table that should help Shenzhen come close to its 12% growth
target this year.
China is even encouraging private enterprise, rather than just tolerating it.
Most banks now have an officer dedicated to making small-business
loans. To encourage borrowing, lower domestic interest rates are also on
the way, even though they tend to weaken the currency. That China can
ease rates at a time when everyone is so worried about the yuan is a
testament to how tightly it controls capital flows across its borders.
The effort will mean fatter fiscal deficits and slimmer
current-account surpluses, a painful prospect for China's
conservative leaders. But many local governments are running
budget surpluses, thanks to the divestiture of state-owned
factories, and so have some cash on hand. And China is also
expected to float more than $30 billion of domestic treasury bonds
in the next several months -- another way to put the country's high
rate of saving to work.
Meanwhile, the economic benefits of devaluing the yuan aren't clear. The
most direct impact would be cheaper export goods. Yet exports made up
only 20% of China's gross domestic product last year. The bulk of its
production is consumed at home. With export markets already flooded
with cheap goods, devaluing the currency to push exports is probably the
least efficient way to strengthen the economy. Competitive devaluations by
other Asian countries would probably cancel the gains.
China will probably devalue its currency at some point, but the move will
be political, not market-driven. "They don't need to devalue in the midst of
the crisis," say Jason Kwok, a senior economist at Citibank in Hong
Kong. He adds, "After the crisis, when the region has stabilized, China can
think about whether they need to devalue."
--CRAIG S. SMITH |
