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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Michael Sphar who wrote (5445)	8/11/1998 6:33:00 PM
From: Stitch	Read Replies (2) \| Respond to of 9980

Thread; China seems steadfast: Reprinted for personal use only: China Says It Won't Devalue Yuan; Signals Intent to Continue Reforms By IAN JOHNSON Staff Reporter of THE WALL STREET JOURNAL BEIJING -- With attacks intensifying against the Hong Kong dollar and its own yuan, China's central bank launched a forceful broadside against speculators, saying China was a "big player" that wouldn't cave in and devalue. At the same time, the bank signaled its intention to pre-empt the financial turmoil that has gripped much of Asia by pushing ahead with financial reform. It unveiled cautious new measures that would allow foreign banks to do more local-currency business and detailed domestic banks' efforts to deal with bad debt and streamline their operations. Although China has consistently said this year that it won't devalue the yuan, the comments Tuesday at a press conference by Liu Mingkang, deputy governor of the People's Bank of China, were the most forceful and coherent case China has made yet for why it won't devalue. Although in the past some Chinese officials have tied the yuan's stability to Japan stopping its currency from falling, Mr. Liu stated unambiguously that the yuan "doesn't need to be devalued and it won't be devalued." Mr. Liu took aim at China's growing currency black market, where U.S. dollars fetch a 10% premium over the official rate, and at speculators attacking the Hong Kong dollar; its stability has often been tied to the yuan's. With worries about the Hong Kong dollar's peg to the U.S. dollar driving down Hong Kong stocks Tuesday to five-year lows, Mr. Liu warned: "I'd like to advise speculators inside and outside China that China is a big player. Don't miscalculate here." Growth Has Slowed Some economists have noted that although China's economic growth this year was a strong 7%, it has slowed rapidly and is below the government's 8% target. With unemployment rising and a government-spending plan not likely to reverse the trend, some have said that a devaluation, which would help reverse slowing exports, is China's only alternative. But Mr. Liu noted that exports account for a relatively small percentage of total economic output; last year it was 20%. Even that overstates the effect of a devaluation, Mr. Liu said, because for every dollar exported, China has to import 50 cents of raw material or equipment, which would become more expensive if China devalued. Thus a 10% devaluation of the yuan would only boost exports by 5% at most, or about 1% of economic output. The alternative, a drastic devaluation, would spark another round of competitive devaluations across the region, he said. Mr. Liu said Chinese exporters should instead concentrate on competing on better quality and service rather than price -- a comment that seemed aimed at coastal provinces that have been agitating for a devaluation. A devaluation now, he warned, would undermine public confidence in the yuan. 'On the Offensive' Chinese economists said the central banker's comments were aimed at home and abroad. Zuo Dapei, with the Chinese Academy of Social Sciences, said a growing number of Chinese believe the yuan will devalue soon. "Credibility is an issue, so the government went on the offensive," he said. Hu Biliang, a Beijing-based economist with SG Securities Ltd., said Mr. Liu was also trying to build support for the Hong Kong dollar: "It's important they speak out now because the Hong Kong dollar is taking a pounding." The government also signaled that the turmoil wouldn't slow its cautious opening of its financial system, announcing reforms that would license more foreign banks to deal in the yuan in Shanghai and license foreign banks to handle for the first time yuan operations in Shenzhen. Other reforms would expand foreign banks' scope of operation, allowing foreign banks to increase their yuan working capital, borrow on China's interbank market, issue certificates of deposit and issue joint yuan loans with Chinese banks. The reforms are designed to counter a main criticism of China's current rules governing foreign banks's yuan business -- that the amount of yuan they can handle is so limited as to be meaningless. Mr. Liu also gave some details of China's ongoing efforts to modernize its tottering financial system. He said an experiment in Guangdong province to classify bad loans more in accordance with international standards would be completed this month and the system expanded across China next year. This move would give China a better handle on its bad loans, which experts say easily account for a quarter of all loans. In addition, Mr. Liu said streamlining efforts were making progress. The central bank would fire 10% of its staff by year end, while the big commercial banks would fire 20% of their staff -- several hundred thousand employees -- within two years.