Print

Mail

wiki links

China hides motives on yuan policy

Repercussions * The economic benefits of devaluing the yuan could be eclipsed by a fallout in global markets which would damage President Jiang Zemin's leadership and China's efforts to reform its economy. * A devaluation could derail Beijing's efforts to join the WTO. * It may trigger social instability, if inflation surges. * Communist Party powerbrokers may fear that lowering the yuan would be seen as a sign of weakness. * A devaluation could put a stop to inflows of foreign direct investment. Source: bloomberg

Beijing is again making noise about the yen's weakness and its effect on China's economy.

The saber rattling, which is code for "watch it, or we'll devalue our currency," has raised few eyebrows in global markets, and for good reason.

China's complaints that a soft yen is hurting its competitiveness have become a routine event in foreign exchange circles. In 1997 and 1998, markets shuddered at the mere suggestion Beijing might weaken its currency, the yuan. Such a move, it was thought, would prompt a disastrous round of copycat devaluations across Asia. It was a similar scenario that touched off the Asian financial crisis to begin with, and China hasn't been shy about threatening to stir things up again.

Today, the global financial system is a wiser place, at least where China is concerned. It's become painfully clear that Beijing's devaluation talk always was just that -- talk. Complete bunk. Spin. Economic Strategy.

Call it what you will, Beijing outfoxed investors and global economic policy makers alike, including the likes of US Treasury secretaries Robert Rubin and Lawrence Summers. China, plain and simple, was using its currency policy as leverage over the US and Japan. And it worked brilliantly, until now.

That's why Beijing's not-so-subtle hints at devaluation last week fell on deaf ears. Two different economic reports, one from the Ministry of Foreign Trade and Economic Cooperation, the other from the central bank, warned of dwindling demand for Chinese exports.

Both mentioned the weakness of the yen and other regional currencies as a problem. "China needs to take measures to improve the competitiveness of its exports," the trade ministry's outlook said.

Markets paid little attention, as did Washington. During the 1997-1998 international financial crisis, the Clinton Administration was so worried a Chinese devaluation would worsen the turmoil that it pressured Tokyo to stop the yen's decline. It even intervened in foreign exchange markets to do just that.

Today, Washington's relationship with China looks very different. While former President Bill Clinton sought to improve US-Sino relations -- at the expense of Washington's relationship with Tokyo -- President George W. Bush is working to restore Japan as the anchor and focus of American policy. As a result, the US is likely to be far less sympathetic to China's concerns about the yen's value and Beijing's warnings about devaluation.

One side effect of Japan's renewed clout as strategic partner in the region could be a weaker yen. Many analysts believe the Bush Administration is amenable to a weaker yen as long as Tokyo is serious about reforming its fragile banking system and comatose corporate sector.

And given Prime Minister Junichiro Koizumi's hopes of limiting government bond sales and the fact Japanese rates are at zero percent, a weak yen may be as safe a bet as there is in the currency markets.

"We're negative towards the yen," says Adrian Cunningham, who helps oversee US$28.6 billion of assets at Abbey National Asset Managers in Glasgow. The US dollar is changing hands at ?122.77, compared with 115.06 at the start of the year. The yen weakened 1.1 percent in recent trading to ?122.13 per dollar.

The markets' indifference to Beijing's threats may explain why Dai Genyou, general director, Monetary Policy Committee of the People's Bank of China, told the Economic Daily newspaper that the yuan will be kept "basically stable."

The central bank has fixed the yuan at 8.2800 to the US dollar. Yet all Dai did was confirm what the global economics community already knew: While a devaluation may come at some point, one isn't likely anytime soon.

The Chinese economy is expected to grow at a 7 percent rate this year, a rate that far exceeds output in the US, Japan and Europe. Besides, the economic benefits of lowering the yuan could be eclipsed by a fallout in global markets. Doing so would likely come at a great cost to China's efforts to reform its economy and to President Jiang Zemin's leadership.

A devaluation could derail Beijing's efforts to join the WTO. It also may trigger social instability, if inflation surges. Communist Party powerbrokers also may fear that weakening the yuan would be seen as a sign of weakness.

Beijing doesn't want to see headlines about how China had to alter its economic policies to compete against mighty Japan.

It's the last thing China needs as it struggles to win credibility in the global economic and political establishment.

China continues to attract impressive levels of capital inflows, a trend that isn't escaping the attention of officials in Tokyo.

In 1997, China became the world's largest recipient of foreign direct investment after the US. In the first four months of 2001, investment rose 12.4 percent as more overseas companies turned to China amid slowing gross domestic product elsewhere. A devaluation could put a stop to such inflows.

To be sure, the slowdown in the US economy -- and the global economy too -- is problematic for a country as dependent on exports as China. But "the market is correct not to overreact to devaluation fears," says Andrew Delano, a currency analyst with IDEAglobal.com in New York.

One reason is because "it's not only China but the whole of Asia which is suffering on the back of the US slowdown." China's neighbors also are smarting from falling US demand.

Figures showing that Chinese exports still grew at 13.2 percent year-over-year in the first four months of 2001, less than half the 27.8 percent rate during the same last year, suggest China "won't be willing to jeopardize its WTO bid with a dramatic shift" in its foreign exchange regime, Delano adds.

At the same time, Beijing has considerable latitude where fiscal spending is concerned. China surprised the global economics community between 1997 and 1999 with its ability to raise government spending to boost growth. Many observers expect a repeat of that fiscal-spending spree this year to meet the government's 8 percent growth target.

Debates aside, there's a question about whether a yuan devaluation would be as disastrous as pundits believe. Most Southeast Asia currencies are floating freely in global markets.

In 1997, many were fixed to the US dollar, whose strength forced Asia's central banks to raise interest rates to support currencies. That killed economies in the region, as did the mountains of foreign-currency debt these nations had taken on.

Today, with many currencies floating and countries holding less external debt, there's far less risk to the region if the yen slides. Even if China devalued the yuan, Asia's financial system is on sounder footing.

"Who, after all, really believes Asian policy makers will forever eschew currency devaluations as a policy tool? Exchange rates are the primary macro tool in the Asia Pacific region because these economies have a high degree of dependence on trade," says Andy Xie, a Hong Kong-based economist at Morgan Stanley Dean Witter & Co.

Yet even though Beijing is hinting at a devaluation, it's doubtful currency traders will hold their collective breath.
This story has been viewed 2308 times.