Yuan crisis poses Sino-US threat

CHINA, faced with the pressing need to devalue its currency because of a plunge in swap market rates, could find itself in renewed trade conflict with the United States if it does so, analysts warn.

''If China wants to get off to a good start with the Clinton administration, it should not fulfil expectations by devaluing the renminbi,'' said Mr Jeff Lewis, regional economist at Smith New Court (Asia) brokerage.

Rumours of devaluation have been filtering out of China because its swap centre prices have dropped eight per cent since December.

This week the National Foreign Exchange Swap Market in Beijing was trading 8.5 yuan to the dollar, a 32 per cent premium over China's official rate.

Most analysts believe companies doing business in China today have contingency plans if the currency suddenly should sink through the floor.

Those companies which are exporting from China stand to gain from the drop since their proceeds are in hard currency. But those selling to the domestic market will lose a large slice of their profits when they convert them.


''Retail only started in earnest last year and most companies selling to the domestic market are required to balance those sales with exports anyway, so they can ride this out,'' said Ms Elizabeth Cheng, head of China research at Wardley James Capel brokerage.

This may only be the beginning of China's currency woes, however. Mr Robin Hammond, senior research analyst at Wardley James Capel, reckoned that the yuan would drop another 20 to 25 per cent this year. He expected another 10 per cent fall next year.

That would be bad news for Sino-US trade relations. China is now running a US$17 billion trade deficit with the US. If it were to devalue its currency, it would suddenly be twice as competitive in the US market, analysts said.

China's Most Favoured Nation (MFN) trade status, up for renewal in June, is severely jeopardised by this trade imbalance.


The National People's Congress in March is likely to put China's latest currency problems on the agenda.

''I don't think that the US will focus on China's currency trading quite yet,'' said Mr Barry Yates, director of international research at Asia Equity brokerage.


''The US forced Taiwan and Japan to revalue their currency when they had trade problems, but China can't. It isn't developed enough to withstand that,'' he added.

Devaluation might not be the answer to the current slump in the swap centres anyway, analysts said.

Chinese authorities were merely talking about closing the gap between the swap market rate and the official rate and the swap centres anticipated the depreciation.


''It would be risky for China to devalue their currency now,'' said Smith New Court's Mr Lewis. ''Every time they have brought down the official rate in the past the swap rate has moved down with it.'' He added that the move would anger Washington too much and China did not want to risk that, particularly now. A US trade delegation is scheduled to visit Beijing in early March.

The trip will mark a formal restoration of bilateral consultations between China and the US on China's re-entry into the General Agreement on Tariffs and Trade (GATT).

''China seems to think that once they are in GATT their problems will go away. But GATT isn't a panacea,'' said Mr Lewis. ''Actually the problems will be only beginning.''