Raju sees yuan devaluation
Currency analyst expects China will wait until the beginning of next year
August 25, 1998: 3:32 p.m. ET
CNNfn Markets
NEW YORK (CNNfn) - Pratap Raju, emerging market currency analyst at I.D.E.A., appeared on "Before Hours" Tuesday to discuss what's going on in the emerging markets.
Here's a partial transcript
DEBORAH MARCHINI, CNNfn ANCHOR, BEFORE HOURS: I'm interested in talking with you specifically about China and Hong Kong, to start, because Hong Kong is spending very heavily to intervene in its stock market, not just to prop up stock prices but to attack currency speculators, who are betting on a decline in the Hong Kong dollar. What do you think of the strategy and its likelihood for success?
PRATAP RAJU, EMERGING MARKET CURRENCY ANALYST, I.D.E.A.: Well, 15 years ago, when Hong Kong pegged the currency to the U.S. dollar, they chose not to correct their pricing in their market through the exchange rate, like the floating rate currencies, but through asset market corrections -- property markets and stock markets. The controversy over the last two weeks has been that they've been active much more so in buying spot Hong Kong dollars, buying the currency to prevent interest rates from rising, and buying stocks directly, both of which have prevented these markets -- the stock market -- to correct.
MARCHINI: Do you think the strategy is likely to succeed longer term in fending off an assault by speculators on the Hong Kong dollar?
RAJU: Well, according to our calculations, after you take into account the 15 billion U.S. dollars or so used in defending the currency in the spot market in the past two-and-a-half weeks, and assuming that if Hong Kong does de-peg, they would want to have excess reserves of three months import cover. They have something on the order of 65 billion U.S. dollars to defend the stock market and currency market, and I haven't seen $15 billion go in two weeks. They're not as strong as people make them out to be.
MARCHINI: That's a lot of money, though. I mean, $65 billion -- how much do the currency speculators have? Silly question, but it seems to me like the Hong Kong economy is pretty well armed, especially when you consider it's got China standing behind it.
RAJU: Well, our other call on China has been since this past January that, as growth slows down this year to our estimates of 4 to 5 percent in Q4 this year, that they're going to have to devalue. Unemployment, already estimated by the government itself at 17 to 20 percent this summer, could hit as high as 25, 30 percent. As a result, they're going to need something to boost growth. Our view is that they will wait until the end of Q1 of next year -- first quarter of next year -- before they devalue, until the rest of Asia stabilizes.
MARCHINI: So, you think the Hong Kong dollar and Chinese yuan will hold through the first quarter of next year?
RAJU: Well, I think right now it's basically a political decision. The Chinese need something later on this year to boost growth. Externally, their exports are falling hard. Foreign direct investment is falling. Most of their foreign direct investment is coming from Asia, and with Asia recessing, that money is not forthcoming.
MARCHINI: The question is: You think the currencies will hold through the end of the first quarter?
RAJU: Especially China, they have more of a non-convertible currency although we are seeing leakages on the capital account. It's really just a political decision right now to hold the currency, and we think they will wait until Q1 of next year. Otherwise, they devalue now and the rest of Asia goes.
MARCHINI: All right, so if they wait until the first quarter of next year, is that such a bad thing? Might we be over the hump in Asia and able to deal with it?
RAJU: Well, our view is that the -- on the real economy side, the rest of Asia will need, in perhaps six months or so before things start bottoming out. And once the real economy starts bottoming out, the financial markets will be more able to take a yuan devaluation.
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