01/26/98 COMMENTARY: A CHINESE DEVALUATION? DON'T BET ON IT

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COMMENTARY: A CHINESE DEVALUATION? DON'T BET ON IT

It was an unusually strong plea for such a staid diplomatic gathering. At last month's ASEAN meeting in Kuala Lumpur, Chinese President Jiang Zemin suddenly found himself approached by other Asian leaders. They urged him not to devalue China's renminbi. Doing so, they said, would collapse Asia's other currencies once more and plunge the region into its deepest recession in decades.
Asia is haunted by the specter of a cheapened currency. Pessimists argue that China has no choice, as its exporters lose orders to Thai, Indonesian, and Malaysian rivals who can profit from lower currencies to sell goods to the West at rock-bottom prices. China grabbed business from rivals, they say, by unifying its currency in 1994 at a lower rate. That helped lay the groundwork for today's crisis, critics insist, and proves that China's leaders look out for China, not Asia.
But these arguments ignore the compelling evidence that China, out of self-interest, may not devalue anytime soon. In fact, by acting in its own interest, China may end up stabilizing the region.
ZHU'S VOW. Certainly, China is bracing for tough times, with unemployment expected to rise and foreign investment and exports to dip. Yet top Chinese leaders do not see a devaluation as the best way to keep exports strong and attract foreign investors. ''I can solemnly declare that the Chinese renminbi will not be devalued,'' China's economic czar, Zhu Rongji, promised Singaporean Senior Minister Lee Kuan Yew last month.
A key argument against devaluation is the devastating impact it would have on Hong Kong. Should Beijing engineer a dramatic weakening of the renminbi, pressure would build on Hong Kong to break its dollar's long-standing peg to the U.S. dollar. Hong Kong monetary officials deem that link essential to confidence. ''There's a high probability [devaluation] would crash the peg and damage the Hong Kong economy,'' says Dong Tao, China analyst at Schroder Securities in Hong Kong.
Devaluation also would hinder China's ability to raise hard currency. One of Zhu's priorities this year is to strengthen ailing state enterprises, which hope to use Hong Kong capital markets to raise cash. If the Hong Kong dollar's peg disappeared, international investors would shun new Chinese securities, which would lose their value.
A weaker currency could even destroy confidence inside China. Ordinary Chinese hold around 8 trillion renminbi, worth about $1 trillion, in deposits at local banks, but many would yank their funds and buy black market dollars if the currency tumbled. China ''can't afford a run on the banks,'' says William H. Overholt, managing director of Asia research at Bankers Trust Co. in Hong Kong. A run would destroy Beijing's ability to extend credit to businesses and projects that help keep the economy growing.
China has some strengths that Thailand, South Korea, and Indonesia do not. Its trade surplus, for one, is buoying the currency. In 1997, exports were an impressive $182 billion, $40 billion more than imports. China also boasts $140 billion in foreign currency reserves, which easily cover its $119 billion in foreign debt.
That doesn't mean China can afford to stand still. The Year of the Tiger will see a marked rise in unemployment as Beijing presses reforms on its state sector. As a result, many analysts predict that growth will slow to at best 7.5% in 1998, perhaps even 6%, from nearly 9% in 1997. But it's doubtful that China could export its way out of a slowdown even if it wanted to. Consumer demand in hard-hit Asia is drying up, and demand in the U.S. probably won't strengthen. Beijing is more likely to stimulate domestic demand by spending big on infrastructure, particularly in the power sector, as well as housing.
Some analysts do believe that China will weaken its currency by 5% to 10% in the second half of the year, particularly if its economy slows too dramatically. But at this point, Beijing can afford to hold fast. The longer it holds the line against devaluation, the better off Asia--and the world--will be.
By Joyce Barnathan & Bruce Einhorn

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