SUNS  4365 Tuesday 2 February 1999


Finance: Yuan jitters show up nervous markets



Manila/Beijing, Jan 29 (IPS) -- The spread of this week's currency jitters around the world -- sparked by one sentence in the Chinese press -- shows just how nervous financial markets are so soon after
Brazil's meltdown.

Going by the markets' logic, now that financial woes have shaken the sizeable markets of Russia and Brazil, the next most likely economy to follow is China.

Two weeks after Brazil was forced to devalue the real, which has since fallen by nearly 40 percent against the dollar, the Chinese economy found itself branded the next domino in the advance of currency instability.

After a string of denials by Chinese officials, the rumours quieted down a bit but a careful watch on the yuan, which is not fully convertible and whose trading is tightly reined in by the state, continues.

In many ways, the episode underlines the workings of the faceless financial markets that often seem to operate on their own, self-fulfilling prophecies: Concern about the yuan spooked Asian
markets early this week, and financial analysts began quoting the fluctuations they caused as more basis for concern.

"The forces of financial markets seem to be running amok, humbling governments, reducing the power of unions and other groups of society, creating a sense of extreme vulnerability for the individual confronted with forces and decision-making processes way beyond his reach," Klaus
Schwab and Claude Smadja of the Switzerland-based World Economic Forum said in a commentary.

Fears about a yuan devaluation have risen and fell since 1997, when currency instability struck Asia.

But this time, the fears were caused by a vague mention of devaluation in the Jan 24 issue of the state-owned, English-  language daily 'China Daily Business Weekly'.

It carried an article that said "some analysts" believe a devaluation of the renminbi (the Chinese currency's official name) "would not definitely be a bad thing and not trigger the fresh round of
devaluation that has been feared by most people".

Ironically, the article was about how Brazil's woes would not much affect the Chinese economy, and how the aftermath of the real's effective devaluation had not been as bad as predicted.

But though there are few economic links between China and Brazil, many nevertheless began speculating that Beijing would be next in line -- since Brazil up until this month had a fixed exchange regime as well.

Chinese officials have been saying there are no plans for devaluation this year.

"The Chinese government has repeatedly emphasised its resolve not to devalue the renminbi on many occasions. Although China encountered great difficulties and made great sacrifices last year, we still follow this policy and this year as well, we will continue to uphold this policy," foreign ministry spokesperson Zhang Qiyue said.

If his statement stressed the political side of China's vow to hold the yuan steady, the central bank focused on the country's economic policies thus far.

"During the crucial period of the Asian crisis, the yuan was not devalued, and at the moment, it is not necessary for it to be devalued," People Bank of China chief Dai Xianglong in a rare press
conference Wednesday.
He says the economic impetus for devaluation lies in excessive imbalances in the balance of payments -- and that does not apply.

China reported a trade surplus for 1998 of $43.6 billion and has the world's second biggest foreign exchange reserves of $145 billion, after Japan. These signal little immediate pressure to adjust the yuan's value against the dollar.

"China's problem is not a strong currency," Gilbert Choy, director at Dresdner Kleinwort Bensen Securities (Asia) Ltd said in the 'Asian Wall Street Journal' Thursday.

He said China has in fact increased its share in many overseas markets, adding that its weaker exports were unrelated to product competitiveness. "Engineering a currency devaluation without reaping quantifiable economic benefits would be political suicide for policy makers in Beijing," he noted.

Some add the fact that market forces do not fully control the yuan -- it is largely within Beijing's control -- ought to mean the government's word should be taken seriously. In fact, administrative
controls over the yuan were tightened recently.

"Since China is not a total market economy and government has a very tight control on everything, as long as the renminbi remains stable through the first half of this year, expectations of a devaluation will gradually subside," an economist from the China Centre for Economic Research said.

That is not to say that China has no problems, or that it has escapedAsia's economic crunch. Exports are sluggish, foreign investments dipped and economic growth projected to fall to 7% this year, from 7.8% last year.

China's failure to meet the target of 10% GDP growth for 1998 is in fact a key consideration in doubts about the economy's performance. Sceptics say that just as the Asian crisis forced a growth slowdown despite government promises, there might yet be a change in the yuan due to forces it cannot control.

Despite tight government control, dollar trade is robust in the black market, where one U.S. dollar can get as much 9.30 yuan. The official rate is 8.27 yuan to a dollar.

Yet there are key decisions that shape China's economic reputation that have not always gotten as much space as the devaluation fears -- the fact that the Chinese government this month allowed the country's biggest failure since the People's Republic was formed in 1949.

Guangdong International Trust & Investment Corp (GITIC) filed for bankruptcy in January, under debts worth $4.37 billion. The move elicited approval from financial analysts, who lauded the state's
non-intervention.

China's move should also have drawn impressive nods all around for tackling the concern that creditors should share the pain of bad business judgements -- but foreign creditors balked because Beijing did not come in to bail them out and said the claims on unpaid debts should be left to the courts.

More debt defaults are expected as China's tighter controls on foreign exchange -- imposed by Beijing to curb the growing outflow of hard currency since the Asian crisis -- take effect.

But analysts say that far from weakening the yuan, the defaults reflect policies that aid it. The controls on foreign exchange, for instance, have boosted China's reserves.

The debate on the yuan's fate, however, is not over. Some economic forecasters are convinced that the Business Daily article of Jan 24 was a test of global reaction to a devaluation. To one Singaporean trader, devaluation talk is "rubbish".