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CHINA: BATTERED BY THE YEN (int'l edition)Will China be forced to devalue?For months, as the currency crisis roiled markets across Asia, the Chinese renminbi remained an island of stability. Officials in Beijing brushed off any talk of a devaluation, and their firm stance won much praise from central bankers worldwide. Now, as Tokyo lets the yen slide, the Chinese suddenly are feeling queasy. Chinese exports to Japan and the rest of Asia have fallen, while domestic companies are fighting to stay competitive against a flood of cheaper imports. If Japan's action starts a cascade of competitive devaluations across Asia, Beijing will come under pressure to let the renminbi slip. That would send the region's economies into a free fall. ''Allowing the overdepreciation of the Japanese yen is irresponsible,'' says Sa Qi, head of the Bank of China's research department. China's position is delicate. The economy is clearly getting hit by the new competition. But an about-face on the currency would cost new Premier Zhu Rongji much credibility as he pieces together his reform plans. It also would send the tightly linked Hong Kong economy into another tailspin. But most frightening for Beijing is the loss of confidence in the banking system a currency devaluation would cause. The devaluation worries come when unemployment is also a big concern. Economic growth could fall below 6.5% by yearend, nowhere near the official 8% target. China needs high growth to absorb the more than 5 million workers expected to lose jobs this year as its companies restructure. The biggest threat to China's mid- and low-tech companies isn't Japan itself, which exports high-end goods. What the Chinese are worried about is how a Japanese devaluation could affect Korea. If the yen weakens to 150 to the dollar, the Korean won is likely to be devalued in an effort to make Korean industry competitive. That would mean increased competition for Chinese companies already struggling to fend off the Koreans at home and in other markets. In China's steel industry, for example, profits are down, in part because of new competition from the Koreans. That's also true in the petrochemical industry, a sector in which prices have dropped 20% since October. ''There will be further pressure on domestic corporations,'' says Andy Xie, an economist with Morgan Stanley Asia Ltd. in Hong Kong. Feeling the heat, the Chinese have upped export tax credits for textiles and are considering fatter rebates for machinery and electronics. Officials are also revving up cheap loans to spur exports in a variety of industries. FINANCING IS SCARCE. The best Chinese officials can hope for is that its struggling Asian competitors won't be able to launch the full export assault that has been expected. So far, their weak economies have made export financing difficult to come by. And depressed currencies have hurt purchases of imported components, which represent half the value of exported goods. So the negative effects of Beijing's strong currency have been diminished somewhat. Meanwhile, China has managed to crank up sales to the West, as its Asian exports have faltered. Many Chinese officials doubt that trend can be sustained as other Asian economies begin dumping just to clear inventories. China will be in a stronger position to withstand currency shocks if it can step up domestic growth. A lot depends on Zhu's ambitious plans to increase public spending and open up the economy. Beijing just announced 117 huge state construction projects in telecommunications, agriculture, and transportation to begin this year. And policymakers are discussing plans to further open China's service sector to foreign competition, starting with the tourism and wholesale distribution industries. ''Some would argue that China is going to step into the breach during this period and actually come out stronger,'' says a Beijing-based Western economist. That would go a long way toward helping Beijing's monetary authorities preserve the luster of the nation's hard currency. But China's success ultimately may depend as much on events in Tokyo as on those in Beijing.
By Dexter Roberts in Beijing and Joyce Barnathan in Hong Kong RELATED ITEMS
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Updated May 21, 1998 by bwwebmaster
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