Even as Asians Worry, China Is Unlikely to Devalue
By SETH FAISON
HANGHAI -- China's leaders have so often promised not to devalue their currency that
markets virtually ignore official remarks on the subject. Yet a broad range of economists who
understand the peculiar characteristics of China's half-reformed economic system agree that China
will not devalue in the coming year.
Nearly every day, markets around Asia seesaw sharply as traders play on concerns that China will
follow the path taken by other Asian nations roiled by financial crisis and reduce the value of its
currency. The concerns have reverberated outside Asia, as investors fear that a Chinese devaluation
would deepen the Asian crisis, pulling down more markets with it.
Monday, stock markets in Japan, South Korea, Singapore and Thailand all fell. Traders and analysts
cited worries that a weakening Japanese yen would force Beijing to cave in on its promise to remain
a primary source of stability in Asia. Stocks in Hong Kong, which fell sharply last week, partly on
concern that a Chinese devaluation would affect the currency there, rose slightly Monday.
Market rumor that China's currency will be devalued has echoed around Asia since the end of last
year. Yet it feeds on an analysis, as faulty then as it is now, that fundamentally misunderstands some
basic political and economic realities in China today.
"If Zhu Rongji allows a devaluation, his political career is over," an investment banker in Shanghai
said of China's Prime Minister. "The political advantages of maintaining the currency far outweigh
the temporary advantages of devaluing."
While Chinese leaders, after their repeated pledges, now have a political stake in maintaining the
value of their currency -- the yuan, also known as the renminbi -- there are some reasons for Beijing
to devalue. A weaker yuan could spur export growth at a time that the economy is weakening,
foreign investment is falling, and millions of urban workers are facing unemployment. Chinese
exporters of steel and other products have started grumbling that it will be hard to pay employee
salaries without income.
There are deeper reasons, however, for Beijing not to devalue. China is in the middle of a
wrenching shift from a state-run to a market-driven economy, trying to sell the bulk of
Government-owned industries, and about the last thing its leaders want is a further cause of
disruption.
Making Chinese exports cheaper, many economists argue, is an inefficient way to strengthen the
economy. In the long run, maintaining the currency makes economic sense by providing a stable
environment for investment, foreign and domestic.
Sensing those imperatives from the beginning of the Asian economic crisis, Chinese leaders decided
they would maintain the yuan's value for the time being, and have repeatedly said so. On Sunday,
President Jiang Zemin reasserted that stance in a meeting with Japan's Foreign Minister, Masahiko
Komura.
Outsiders often overlook that China's economy is not yet fully integrated with those of other trading
nations. The Chinese currency cannot be freely converted into foreign currencies, so there is little
immediate market pressure on the yuan. Exports accounted for about 20 percent of the gross
domestic product last year, leaving the bulk of China's output domestic.
More important, the decision-making process in Beijing is heavily weighted toward political
concerns, not market sensitivity. Although China's leaders face lobbying from exporters, they seem
to stake far greater political capital on their promise not to devalue.
And devaluation might not give much of a boost to the nation's already strong exports, which grew 5
percent in the first half of this year.
Fred Hu, executive director for Asian economic research at Goldman, Sachs & Company in Hong
Kong, who predicts that no devaluation will come for at least a year, argued that a change in China's
currency would not accelerate sluggish export growth, primarily a function of weakening demand in
Southeast Asia that would remain weak regardless.
Besides, China's foreign debt is manageable, and even though its foreign-exchange reserves of $140
billion have begun to slip, they are among the most substantial in the world.
Of the worries that have buffeted Asian markets of late, the concern that a falling Japanese yen is
adding pressure to the Chinese yuan is the most difficult to understand.
There is little connection between the two currencies, said Dong Tao, an economist who follows
China for Credit Suisse in Hong Kong. There is almost no overlap between Chinese and Japanese
exports, and while Japan bought about 20 percent of China's exports last year, that was primarily in
low-end clothing that is not very sensitive to price changes.
Chinese leaders have adeptly used the falling yen to their advantage, raising concern about the
Asia-wide effects of unstable currencies. The markets have interpreted such rumbling -- inaccurately,
economists say -- as a sign that China would devalue the yuan.
"The Chinese are legitimately saying to the U.S. and Japan: You've got to straighten out the situation
in Japan for the stability of Asia," said John Pinkel, director of China research at Merrill Lynch in
Hong Kong. "They're saying, you want us to open our markets -- well, only when the overall picture
is calmer."
In Shanghai Monday, currency traders said China's central bank had intervened in the
foreign-exchange market to hold the yuan at a level of 8.28 to the dollar.
On the street, the black market for dollars has risen to about 9 to the dollar, reflecting concern
among ordinary Chinese that a devaluation will eventually come. But that 9 percent discounting of the
currency is a far cry from the 250 percent difference between the official and black-market exchange
rates here a decade ago.
Eventually, some economists say, falling demand for the yuan may cause it to fall in value, but
probably by less than 10 percent, and not in any sweeping devaluation. "It's much more likely that
the Chinese currency will gradually weaken," Pinkel of Merrill Lynch said. "Demand for the renminbi
will fall. But there is no question of a sudden 30 percent devaluation."
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