June 17, 1999	atimes.com

China EDITORIAL: If ever, China should devalue now We are no friends of much government-decreed anything when it comes to economic affairs, certainly not of currency devaluations. By arbitrary government fiat, they cheat foreign and local investors and domestic savers alike of portions of their hard-earned funds and put a damper on those two forms of activity so crucial to any economy's well-being. There are, nonetheless, good reasons why a well-timed and carefully considered degree of currency exchange rate adjustment can be justified. This holds true, in particular, regarding a currency not freely convertible whose fixed-rate value is untested by market forces and out of sync with real economic requirements. Over the past two years, pundits everywhere have time and again predicted yuan devaluation, Chinese officials' denials, their assurances that the country's currency valuation would remain unchanged, notwithstanding. On more than one occasion, we took those pundits to task, pointing out that not much was to be gained for China from a lower yuan and that, in any case, holding the line on the yuan-dollar exchange rate was a strategic Chinese commitment that only extraordinary circumstances not in evidence then (or now) would change. But the times have changed and with them the regional economic environment. Had China devalued, say, late last year or early this year, when its exports were down, when regional economic recovery was still very iffy at best and when global finacial markets were reeling from the fall-out of the Russian debt default, the effects would have been dramatically negative: a second bout of the Asian flu and worldwide consequences that even Alan Greenspan would have been hard put to contain and reverse in the short term. But this is the summer of 1999. Regional currencies have been stable for six months or more; securities markets have staged remarkable (even worrisome) comebacks since last October; economic growth, most notably in South Korea, but also elsewhere, including at long last Japan, has resumed; and China itself just posted export growth of 4.2 percent for May from a year earlier, the first such rise in five months and powered by renewed regional and strong U.S. demand. Hence the strategic reason for China not to devalue - to avoid undermining Asian recovery - has all but disappeared. A yuan devaluation now would certainly put some temporary pressure on the Hong Kong/U.S. dollar peg; but beyond that the immediate regional impact would likely be weathered without much damage. Thus our headline: if ever, then now. There are several reasons why deliberate and orderly rather than panicky and forced devaluation of the yuan in a relatively benign regional economic environment - as last practiced by Beijing in 1994 - makes sense: * We shall not go through the statistical details here, but in trade-weighted terms the yuan is likely overvalued by 20 to 30 percent. (The 20 percent figure cropped up in an early May OECD report evaluation of the potential consequences of a yuan devaluation). * Though Chinese exports are showing signs of recovery just now, a 20 percent devaluation would greatly help sustain that and, according to OECD report estimates, would strengthen the current account by $12 billion. * Resumption of sustainable export growth would take some of the burden for overall GDP growth off domestic deficit spending, which last year was - and, according to a March National People's Congress decision, this year is to be - its principal engine. * In a deflationary domestic environment, fears of devaluation-induced inflation will not arise. * Most importantly, critical financial system rehabilitation tasks will tend to be eased as dollar reserves can be more effectively deployed and, with growing export earnings and production volume, state-owned enterprises can be induced to fend more for themselves and get off the dole. The last point also marks an important political consideration: Last year, Prime Minister Zhu Rongji and his team of reformers had to throw large amounts of government money at the very folk who are their political enemies, the state enterprise lobby, to come in with a respectable GDP growth rate. If exports recover to near-traditional rates realized through 1997, a handle and argument will have been gained to curtail unwarranted subsidies. We shall not say China should devalue. We do say that if devaluation is being contemplated, as an option to put growth on a firmer footing and simultaneously get on again with accelerated reform, then the time to do it is now.

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