China won't devalue yuan

BEIJING, Jan 26: China's central bank yesterday reaffirmed its resolve to maintain the stability of the yuan and distanced itself from an article in the official press that for the first time floated the possibility of a devaluation, reports AFP.

A People's Bank of China (PBOC) spokesman told AFP that the China Daily article published Sunday "is a private opinion that does not represent the opinion of the government and the central bank."

Since the Asian financial crisis, there were a lot of such kind of articles published. That the article said devaluation is a good thing is not a signal, he said.

"It does not stand for the government's view and PBOC will not use this channel to create the impression that the yuan will be devalued," he said. "There is no pressure for the renminbi (yuan) to be devalued."

The spokesman said the central government and the PBOC had "always said they want to maintain the stability of the renminbi."

Chinese premier Zhu Rongji also gave the same assurances during a meeting with the Lao Premier Sisavat Keobounphan, state-run China Central Television (CCTV) reported.

The China Daily article said some analysts said "the devaluation or floating of the renminbi would not definitely be a bad thing and may not trigger a fresh round of currency devaluation that has been feared by most people."

In its front-page report devoted to the devaluation of the Brazilian real, the English-language daily said financial markets across the world had responded positively last week to the move, proving that a drop in exchange rates was not always badly received.

Beijing has held its currency steady at about 8.3 to the dollar since the outbreak of the Asian financial crisis in July 1997 and has repeatedly pledged to keep the currency stable in the interest of regional stability.

Reuter adds from London: A devaluation of the Chinese yuan may not be imminent but contingency trading strategies are already in place dealers said yesterday.

Allowing the yuan to weaken, as a local newspaper suggested at the weekend, would mark a significant break with China's policy in the past year of keeping the currency pinned near 8.3 to the dollar, despite devaluations across the region.

Such a breach in Asia's firewall risks triggering a fresh round of competitive devaluations around the region and would put enormous, if not unresistable, pressure on the Hong Kong dollar's peg with the US dollar, traders said.

Against this backdrop, they expect a flight out of yen and emerging market currencies not the dollar, into the traditional safe haven of the Swiss franc, and even into the infant euro.

"I do not think the yuan is going to devalue in the next 12 months but if the worst case did happen, we would see dollar/yen move sharply higher, with 120 only a first stop, said Adrian Cunningham, head of economics at Scottish Mutual Assurance in Glasgow.

Japan would be hard hit given how heavily it is relying on exports and this would increase pressure for a domestic policy response. Given a monetary policy response is the most obvious, it would be negative for the yen even into the medium term."

A report released overnight showed nearly 40 per cent of Japanese exports were sold to other Asian countries in December 1998.

Such close trade ties mean a yuan devaluation, which sparks weakness in other regional currencies, would put the yen under the sort of pressure seen in 1998 when other Asian currencies were spiralling lower and eroding Japanese competitiveness.

The yen slumped as much as 17 per cent against the dollar in the first eight months of 1998 to hit eight-year lows in the wake of massive markdowns in the value of currencies like the Malaysian ringgit, the Thai baht and the Indonesian rupiah.

That said, traders expect the dollar's allure as a safe haven from Asian turmoil to be tempered this time around by concern about how Latin America, a key trading region for the US, will be affected by a flight out of emerging markets.

We will probably seed the yen and other Asian currencies under downward pressure against the dollar but if China goes, the pressure will be back on South American currencies and that means the dollar will be affected," said Juergen Lindemann senior trader at IBJ in London.

"In this case, the euro could end up a little stronger."

Another factor seen hindering a dollar/yen rally is the flow of Japanese capital expected to return home to take advantage of rising domestic government bond yields.

"We will see a spike higher in dollar/yen if the yuan is devalued but I don't expect to see it at 130 or 140," said Martin De Blocq, Sales Manager at Nomura Bank in London.

The yield curve is going up, so spreads are not interesting enough for Japanese investors to shift money abroad, and also European investors are underweight Japan, so my underlying feeling is that this would probably be a temporary phenomenon.