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To: JRI who wrote (95473)	2/6/1999 11:13:00 AM
From: Mohan Marette	Read Replies (2) \| Respond to of 176387

<--OT-->China & currency devaluation? Say John,did we talk about this earlier or could it be somebody else? In any case I believe I said it was very unlikely that this will happen any time soon (at least not in 1999),well I found something quite interesting on the subject in case you are still wondering about it and here it is:--> BTW the highlighted paragraph sort of corroborates my view that China wouldn't devalue the Yuan in 1999,no reason to at least not yet. =================================== [Courtesy:Farastern Economic Review] RETHINKING ASIA -Currency Regimes in Flux ---------------------------------------------------------------------- By Manu Bhaskaran February 11, 1999 Some of the key policies that have traditionally shaped macroeconomic management in Asia are likely to undergo major change over the next year or so. For the moment, the managed currency floats, "crawling pegs" and interest-rate targeting of the past have given way to policies dictated by the International Monetary Fund or ad hoc measures that shift with each economic shock. But as economies stabilize and begin to recover, policymakers will be able to focus on longer-term issues rather than simply managing one crisis after another. One of these areas is exchange-rate and interest-rate regimes. First, though, let's dispense with the notion that salvation lies in some new form of regional or global exchange-rate system. There has been increasing talk of an Asian Currency Unit or ways in which Asian countries might manage their exchange rates in a coordinated fashion against a basket of the euro, the yen and the U.S. dollar. The hard reality is that such schemes are a generation from being realized: Asian governments are still too inward-looking and too inclined to pursue national interests above regional ones. There are several deep-rooted reasons for this. First, these countries have only a limited track record of cooperating successfully in key areas such as trade liberalization--hence, the trust needed to work together on grand regional schemes simply hasn't been created. Second, there's still no consensus on the basic philosophies that would have to underpin any regional framework. And, finally, there are conflicts among key nations such as China and Japan whose participation in region-wide regimes would be pivotal. So Asian countries are left to themselves to work on their exchange-rate regimes. The countries whose policies are likely to be most in question are China, Hong Kong and Indonesia. China's pegged-rate regime cannot be sustained. The key issue, however, is not the appropriate level of the renminbi--which isn't so greatly overvalued that it needs to be devalued. China's exports and market shares in regions that aren't in crisis are increasing: They are falling only in Asian countries whose economies are contracting. Moreover, the country's export difficulties in these markets are due not to poor price-competitiveness but to an income effect that will reverse as the region recovers. In addition, China's deflation and export-tax rebates, combined with the recent appreciation of the yen, the won and the baht, have already effectively devalued the renminbi even though its nominal value hasn't changed against the dollar. No, the real issue is what is an appropriate framework within which to manage the exchange rate. China has since around 1995 virtually pegged its currency to the dollar. Given its capital controls, it can sustain this for some time, but its policymakers know the policy must change sooner rather than later, particularly as their long-term aim is to liberalize the capital account. It would not be surprising if Beijing introduced a new exchange-rate regime in 2000, possibly based on a managed float with some capital controls remaining. One development to watch for would be a wider band of fluctuation around the current rate by year-end, as a first step towards a bigger change. Any hint that China might revamp its currency regime immediately sets off alarm bells in Hong Kong, which therefore may suffer further bouts of the jitters over the future of its own exchange-rate peg to the dollar. The dilemma is that no one has yet found an easy exit route for a currency board. Once a country adopts one, the costs of abandoning it are high. Hong Kong's options are to maintain the link at the current rate, devalue to a new pegged rate, float the currency or "dollarize" (replace the local currency with the U.S. dollar). The least bad option is still the first of these--keep the current system. This is because the costs of any change are raised by the likely loss of confidence that would ensue (which would mean higher, not lower, interest rates and lower investment), and because Hong Kong's economy is still flexible enough to absorb economic shocks by forcing local costs down rather than relying on the soft option of devaluation. The likely outcome, then, is that there will be no change in Hong Kong's exchange-rate system--but it will probably come under frequent speculative pressure as signals emerge of an impending policy change in China. Other countries will pursue widely divergent approaches. Indonesia is likely to try to move to a more managed form of floating rate as soon as the rupiah stabilizes. In Thailand, the likelihood is of a new policy regime based on inflation targeting. In other words, it will forgo its earlier preference for using the currency as an anchor and focus instead on using new interest-rate instruments to achieve a stated inflation target--just as Britain and New Zealand do. The bottom line is that 1999 and 2000 will see policy changes with far-reaching implications for how business is conducted in Asia. [Manu Bhaskaran is managing director and group head of research at SG Securities (Singapore) Pte. Ltd.]