The mainland stands alone among Asia's leading economies as sole survivor of the crisis which has ravaged regional currencies. Undaunted by one Asian tiger after another falling into a financial morass, Beijing's leaders are adamant the yuan will not be devalued to make allowance for the carnage wreaked around it. No doubt Beijing will keep its word, at least for the time being, because much is at stake. A yuan devaluation could trigger another round of regional currency depreciation and inflate the country's ballooning trade surplus with the United States, with Washington already complaining about the present state of affairs. Economists in Hong Hong rule out a decline in the yuan similar in scale to other Asian countries. However, they are divided on whether it will fall. Schroder Securities Asia senior regional economist Tao Dong said: 'Depreciation of the yuan is nonsense.' He said the yuan would be stable at 8.3 to the US dollar this year, despite long-term depreciation risk as Beijing would pre-empt any inflationary pressure with its robust economic growth. Mr Tao shrugged off worries that mainland exports would be hurt by increased price competitiveness of Southeast Asia countries in light of their currency falls. The export overlap - estimated between US$30 billion to $40 billion - was small compared with China's trade surplus of almost $40 billion this year. He estimated that China would lose only 10 per cent of orders. Mainland exports focus on textiles, shoes and toys, while its Southeast Asian rivals concentrate on electronics, machinery and transport equipment. The biggest overlap comes from Indonesia's garment industry, but only a limited range of products is in direct competition. 'Losing $3 billion to $4 billion is not going to force China to devalue the yuan.' He said China enjoyed a production edge over its neighbours due to its low labour cost - the region's lowest - which despite the baht's 40 per cent depreciation is still half of Thailand's labour costs. The country's low inflation also made yuan depreciation unnecessary as a release for inflationary tension accrued during periods of fast growth. Its strong balance of payments position - including current and capital account surpluses - would bolster, not depress, the yuan if it was allowed to trade freely. Mr Tao doubted the effectiveness of adding impetus to the mainland economy by boosting exports through a devaluation because of an Asian slowdown which is likely to be mirrored in the US this year. There are other problems in a devaluation. It could pose a danger to healthy domestic firms which might be dragged into a severe debt crisis, and shake confidence in the Hong Kong dollar peg. However, Morgan Stanley Dean Witter economist Andy Xie believes a yuan devaluation is needed to adjust for falling US dollar export prices, after the financial turmoil in South Korea and Taiwan. 'China could maintain economic growth of 8 per cent to 9 per cent next year, even with the devaluation in Asean countries. But what happens in Taiwan and South Korea is a different animal,' he said. The negative impact on exports, triggered by Taiwan and South Korea's currency falls, would exceed its capacity to stimulate additional domestic demand to maintain the existing level of economic growth. Mr Xie said the mainland had to sell more to the rest of the world to maintain 10 per cent export growth next year, assuming that intra-non-Japan East Asia posted zero trade growth due to the regional recession. The growth figure was Mr Xie's forecast before the currency devaluation in Taiwan and South Korea, which are vying with the mainland, especially in developed countries, in machinery, synthetic fibres and electronics. Their companies are competing with China's large state-owned enterprises whose balance sheets could deteriorate. Mr Xie expected the US dollar export price would skid 10 per cent. 'When the companies do not make money, they won't invest,' he said, adding that investment from the manufacturing sector contributed 16 per cent to 18 per cent of total mainland domestic demand. He said the exchange rate had to be adjusted to protect the balance sheets of the manufacturers who would continue to expand capacity. 'The government does have a choice . . . slower economic growth or a strong currency,' Mr Xie said. 'From past experience, when an economy slows, a strong currency will go.' He expects the fall to come at the end of the second quarter when the full impact of the currency devaluation in Taiwan and South Korea is felt, but he refused to be pinned down on how much the yuan will drop. Salomon Smith Barney's Asia Pacific region co-head of economic research Ma Guonan said depreciation pressure on the yuan was mounting because Beijing was left with little option but to reflate the economy if it wanted to continue state sector and banking reform. 'China is facing a double squeeze because of weak domestic demand and a worsening external trade environment,' he said. Mr Ma said economic growth would have risen only 7 per cent last year, not 9 per cent, if strong export growth had not been present. This year, the economy would slow further on weaker external demand which would pressure Beijing when unemployment rose. He said Beijing was likely to adopt a mild reflationary policy, eventually leading to a 5 per cent to 10 per cent fall in the yuan's exchange rate. This would allow some credit easing, with loan growth rising 10 per cent to 20 per cent, a cut in interest rates, a reduction in banks' reserve requirement and an acceleration of infrastructure investment. 'This option is milder and the economy will slow down to 8 per cent,' Mr Ma said. However, massive reflationary measures that would maintain economic growth at 9 per cent were not preferable. This would see significant loan growth of 20 to 30 per cent, prompting a 10 per cent to 20 per cent drop in the yuan. Mr Ma said this was risky because inflation would rise, external balance of payments would deteriorate due to an increase in imports as exports were discouraged because of higher domestic price. 'When inflation builds up, the yuan drops and external payments deteriorate, the government may then have to impose an austerity programme in two years' time which will threaten state enterprise reform and banking reform,' he said. Mr Ma expects the yuan to depreciate in the second half gradually as it is cushioned from hefty foreign exchange reserves. 'China can afford to pay a long-term game. It has enough room to manoeuvre the timing and pace of the weakening of the yuan,' he said.