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Gold/Mining/Energy : At a bottom now for gold? -- Ignore unavailable to you. Want to Upgrade?

To: Bobby Yellin who wrote (1544)	8/23/1998 9:01:00 PM
From: Vieserre	Read Replies (2) \| Respond to of 1911

Bobby, Although there are many valid reasons to conclude that China will soon devalue, including that its currency and the Hong Kong dollar are the only major SEAN currencies that have failed to do so, I am of the opinion that, unless the Yen drops substantially more in value, China will not devalue during the coming year, despite the flooding, and then only gradually for a number of reasons, the most important are stated below. Part of China's immunity is due to its still-large trade surplus ( $26.7 billion for the seven months to the end of July ) and huge foreign-exchange reserves of $140 billion is among the most substantial in the world and its foreign debt is manageable. In addition, The Yuan is convertible in current account but not capital account. Thus, the Chinese currency cannot be freely converted into foreign currencies, so there is little immediate market pressure on the yuan Although the black market for dollars has risen to about 9 to the dollar, reflecting concern among ordinary Chinese that a devaluation will eventually come. this is a far cry from the 250 percent difference between the official and black-market exchange rates a decade ago. Its Financial System is not crumbling as in other countries. Although the banking system has extensive debt, and may be technically insolvent as Merrill suggests, the Gov. recently shored it up with capital. In addition, most of its bad loans are to SOEs which the government deems to be a fiscal measure to support unemployment, not unlike welfare here in the states, except government provides the employment , and again perhaps not much different in concept than provided by US Governmental Bureaucracies. A 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. In addtion it would not necessarily accelerate export growth, primarily a function of weakening demand in Southeast Asia, that would remain weak regardless. Further, it would inflate the cost of materials to manufacture the exports which would be counterproductive. Still further, there is almost no overlap between Chinese and Japanese exports. Japan exports are more sophisticated or expensive goods. Although Japan bought about 20 percent of China's exports last year, this reportedly was primarily in low-end clothing that is not very sensitive to price changes. The government has taken fiscal expansionary measures to stimulate the economy and reduce unemployment such as infrastructure investment, and postponed the reformation of SOEs which induced unemployment and banking reform which was contractionary. Qiu Xiaohua, chief economist of the State Statistical Bureau, expects China's economy to pick up beginning from this month Many economists now predict China's 1998 GDP growth will be around 7.0%, less than 8 % predicted by the government, but still strong. One of the things that shattered ASEAN economies and which prevents Japan's economy from recovering is the constant flight of money to foreign economies, and particularly to the United States which effect China is legitimately concerned with if it devalued. In addition, China is not as dependent as others on FDI. China's leaders pledged to keep retail inflation below 3.8% in 98 which may not be possible if it devalued. The decision-making process in Beijing is heavily weighted toward political concerns, not market sensitivity. Although China's leaders face lobbying from exporters, they may stake far greater political capital on their promise not to devalue. Chinese President Jiang Zemin reiterated recently that Beijing was determined to avoid devaluing its yuan currency despite a slowing economy 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" A consensus of a broad range of economists who understand the peculiar characteristics of China's economic system do not believe China will devalue during the coming year. Finally, I am of the opinion that devaluation harms rather than benefits a country, and I particularly agree with those economists who argue devaluation 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. Devaluation, IMO, ipso facto causes inflation, reduces monetary wealth of the citizens of the state, and indeed may not even accomplish the objective of reduction in unemployment and improvement in GDP. Thank you for inviting me to respond, and I hope this has been responsive to your request.