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.
* 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
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."
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