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SCMP Reporter

The yuan will depreciate by up to 10 per cent next year as a result of intensifying competition for exports from regional neighbours and falling foreign direct investment, UBS Securities (East Asia) said.

 The brokerage's deputy head of Hong Kong and China research, Vincent Chan, said in a report the yuan's exchange rate would be stable this year on the back of a bumper trade surplus and large foreign exchange reserves.

 'There is a strong likelihood that export growth will slow, if not decline, in 1998,' Mr Chan said.

 UBS figures - based on the exchange rate on October 30 - show the mainland enjoyed a strong regional competitive edge in terms of labour costs - the lowest among all emerging markets such as Indonesia, India, Thailand and the Philippines.

 However, in Guangdong province, where most export-oriented Sino-foreign joint ventures are located, the cost of labour was on par with India, and was higher than Indonesia after the rupiah's recent devaluation.

 He expected the factors that had bolstered the yuan's exchange rate this year to fade next year, putting downward pressure on the currency.

 Import growth was expected to accelerate next year compared to a low base this year, while export growth should slow, he said.

 Utilised foreign direct investment, set to fall next year on the back of a 40 per cent drop in contracted foreign direct investment this year, will reduce the value of the yuan.

 The pressure would also come from the accelerating money supply growth after the interest rate cut last month, UBS said.

 Foreign currency supply would be slashed with Beijing's relaxation to allow certain trading companies and manufacturing enterprises to keep a foreign exchange account, he said.

 Despite calls for a devalued yuan to keep exports competitive, Beijing has refused to let the currency depreciate.

 The yuan hit historic highs against the US dollar recently, as demand increased at the end of a year, as enterprises needed the local currency to settle accounts.



Yuan to dip 10pc in value next year, UBS Securities report says