| BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- INT'L COVER STORY
Commentary: Don't Look Now, but China May Devalue After All (int'l edition) Whenever Asian currency markets have trembled, China has won plaudits by insisting that it wouldn't devalue the yuan. But in mid-July, central bank Governor Dai Xianglong started laying the groundwork for reneging on this promise. Answering reporters' questions in Shanghai, he opened the door to an eventual devaluation. Remarkably, investors at home and abroad were not spooked. Indeed, financial markets are assuming that the yuan will be devalued, even if they don't know exactly when and by how much. And the calm on global markets is a testament to the newly acquired skills of China's monetary authorities in managing expectations. Their moves are sound: The last thing that China and Asia need is another currency shock. The risks of letting the market feed upon its own fears were great. Social tensions inside China are running high: A further 15 million people are expected to lose their jobs this year because of Prime Minister Zhu Rongji's reforms of the inefficient state sector of the economy. A poorly handled devaluation could spark a run on local banks by edgy citizens and wipe billions off the value of red-chip Chinese stocks listed in Hong Kong. That would force Hong Kong's government to decide whether or not to maintain its own dollar's peg against the greenback. Risky as a devaluation might be, however, China's leaders need to keep the option open as they mull over economic strategy at their annual retreat that began at the Beidaihe seaside resort in late July. GETTING BOLDER. They have worries aplenty. The government's massive crackdown on the Falun Gong sect in late July, for example, is a reaction to an earlier breakdown in internal security, when thousands of that sect's members took authorities by surprise and assembled in central Beijing in April. Meanwhile, Taiwan President Lee Teng-Hui is angering Beijing with increasingly bold statements about eventual Taiwanese independence. Beijing faces enormous economic risks, too. Premier Zhu's reforms have created rifts inside China's huge bureaucracy. Meanwhile, in June, consumer prices fell for the 21st straight month, while in the first half of the year exports tumbled by 4.6%, and the country's trade surplus dropped a precipitous 64.5%, to $8 billion. Beijing says that the economy grew 7.6% in the first half. But that was due mainly to billions in government spending, which isn't producing a sustained recovery: When the cash reaches consumers' pockets, it just sticks there. ''People still aren't spending,'' says a Western diplomat in Beijing. Theoretically, Beijing could keep pump-priming for months and stave off devaluation. Foreign currency reserves are close to $150 billion, and government debt is just 10% of gross domestic product. ''Even with a larger deficit, we still would be able to control our debt easily,'' says a Finance Ministry official. All the same, the country's leaders are groping for new ways to get the economy moving again. Policies under consideration include a novel tax on bank deposits--to get consumers to spend some of their savings--and a possible salary increase for low-paid state workers. Recently, Beijing implemented a de facto devaluation for some types of trade. Effective July 1, it raised rebates paid by the government on exports of coal, textiles, and clothing--all of them hit hard in the aftermath of Asia's meltdown two years ago--to between 10% and 20%. SAVING FACE. That maneuver won't be allowed if and when China joins the World Trade Organization. Yet it involves less loss of face than a devaluation shortly before the 50th anniversary of the People's Republic on Oct. 1. In the runup to the October celebrations, China is intent on avoiding any ''action that could be construed as a sign of weakness,'' says Arup Raha, economist at Salomon Smith Barney in Singapore. But after October, devaluation is back on the agenda. And if Beijing has played its cards right, markets will hardly miss a beat. By Dexter Roberts _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Asia: Recovery without Reform (int'l edition) INT'L COVER IMAGE: Recovery without Reform CHART: Asia's Jumpy Markets TABLE: Reform at Risk Commentary: Don't Look Now, but China May Devalue After All (int'l edition) INTERACT E-Mail to Business Week Online | |||
