An article from CNNFN on China devaluation:
Falling yen threatens China
Yen-led decline in region's currencies
could crush China's Asia-heavy exports
August 4, 1998: 8:51 a.m. ET
HONG KONG (Reuters) - The falling yen has
prompted renewed fears of a Chinese devaluation, but
analysts said the weak yen poses a much more
immediate and far-reaching threat to the region that, in
turn, could do further damage to China.
If the dollar/yen exchange breaches the 150 yen
level, it threatens Asia with a second financial shock
that will hurt China badly, said Dong Tao, economist at
Credit Suisse First Boston.
"The real risk is that the Asian economies collapse
again," he said.
"Given the integration between China and the rest
of Asia, it will be much more meaningful and cause
much more damage to China if the other Asian
economies collapse again."
Many analysts are forecasting a more gradual
decline in the yen than the rapid plunge seen in June.
The yen was trading at 144.70 to the dollar late in the
Asian session Tuesday.
Asian currencies, some of which have decoupled
from the yen in recent weeks, were expected to
abandon that independence in favor of a steady
decline.
As the Asian currencies decline, the implications
for China, which so far has resisted the currency
contagion, would be for a further collapse in demand
in its most important export market.
Asia accounts for 60 percent of China's exports.
Japan alone takes 17 percent of China's total exports,
and exports account for about 20 percent of China's
gross domestic product.
But the links between the yen and the yuan are
mostly indirect, and few Asian analysts were prepared
to be pinned down on the likelihood of a yuan
devaluation if the yen reaches beyond 150.
Japan's beleaguered new government went on the
offensive Tuesday to protect the sagging yen, warning
world financial markets to beware of central bank
currency intervention.
The last time the yen was this weak was in
mid-June, before monetary authorities of Japan and
the United States intervened to prop it up.
But most markets remained skeptical over whether
Japanese officials would back words with action and if
the United States would be willing to join in again.
Some analysts said a Chinese devaluation is not in
the cards. But others suggested that a gradual
depreciation of between 10 and 20 percent is possible,
starting at the beginning of next year.
On deflation, smuggling and depression
Still others said all this is, perhaps, beside the point.
Rather than the specific risk of a Chinese
devaluation if dollar/yen breaches 150, that level
symbolizes the much greater risk of more turmoil and
a deeper regional depression.
"There's good reason why we don't want to look
beyond 150 because it's pretty damn dire, not just for
Asia but for everyone," said Peter Perkins, strategist
at Daiwa Securities.
Japan, China and the rest of Asia account for
about one-third of global gross domestic product.
"That level brings the risk for regional depression,
with spillover onto the global economy, to a meaningful
level," said Perkins.
Depression, defined as negative growth with
deflation, has yet to hit Asia but the threat is real.
Asian economies are contracting sharply and, as the
yen continues falling, prices in Asia's most savaged
economies are dropping.
Deflation is taking hold, particularly in China, the
world's seventh-largest economy and Asia's
second-biggest.
With domestic demand in retreat, China is cracking
down on smugglers in a bid to prevent better quality,
lower-priced black market goods from disrupting
domestic prices.
"Smuggling into China is severely undermining the
state enterprise sector and the stability of the Chinese
economy in general," said Mark Mcfarland, economist
at Santander.
"It is the only option the authorities have, to reduce
the value of the renminbi and equalize domestic
prices."
But Qu Hong Bin, economist at Dresdner
Kleinwort Benson, argued that smugglers will continue
smuggling for as long as import tariffs make it a
profitable business.
"Smuggling is not a reason for devaluation," he
said.
Deflationary pricing pressure could exert indirect
pressure on the renminbi by reducing domestic
demand yet further, but China is addressing this
consumption downturn through a variety of fiscal and
monetary policy tools.
"If all those measures fail to boost growth, once
China comes to that stage, then maybe devaluation
becomes a policy option for them," Qu said.
The cost of a 150 yen level and beyond
Consumption accounts for 60 percent of China's
economy; if domestic demand remains weak, China
could be forced to act to shore up its smaller, but more
dynamic, export sector.
But dollar/yen at 150 is certainly an important level
for China and the rest of Asia.
Beyond this level, trade and investment losses due
to the strong yuan will obliterate gains from cheaper
yen-debt service. At 160, the yen will cost China $2.5
billion, CSFB said.
Other countries in Asia already are moving quickly
to counter deflationary forces gathering steam in their
economies.
Interest rates and bank reserve requirements are
falling and fiscal spending is on the rise as Taiwan,
Malaysia, South Korea and Thailand try to offset
collapsing domestic demand. |
