The mainland could see its share markets languish for years if it resists a yuan devaluation while the region's financial crisis drags on, Morgan Stanley Dean Witter says. Analyst Chong Leong said the US investment bank believed that Beijing would honour its oft-stated pledges to hold the value of its currency against the US dollar, but the costs of the no-change policy could be high. 'Ironically, if the fixed renminbi-US dollar exchange rate were to be maintained, the consequence could be a bear market lasting several years, as the strong renminbi squeezed profit margins, weakened demand, created more unemployment and contracted the economy,' Mr Chong said in a report to clients yesterday. Mainland-related share prices have already been hard hit as Beijing starts to feel the impact of the recessionary wave sweeping much of Asia. In Hong Kong, the red-chip index has fallen 61.59 per cent this year and is off 83.69 per cent since hitting a record high of 4,110.55 points last August. H shares have dropped 54.31 per cent in 1998, taking their tumble since last year's high to 80.88 per cent. By comparison, the Hang Seng Index has slipped 29.3 per cent this year and has backtracked 54.53 per cent since the bull market peaked at 16,673.22 points last year. The issue of yuan stability has been brought to the fore by the dramatic weakening of Asian currencies, especially the yen. Mainland export growth has started to slow as its goods have become less competitive and Asian demand wanes. Beijing officials have warned that further yen weakness could induce the mainland to revalue the yuan downwards, although many economists argue that such a move is unlikely and, if taken, would be counter-productive. Markets in Shanghai and Shenzhen have also been under severe pressure, with the Shanghai B-share Index among the world's worst-performers this year. It has spiralled downwards and has been trading at record lows. Morgan Stanley sees the mainland economy growing at 7 per cent this year, before rebounding to an 8.5 per cent clip next year. Last year, it grew at 8.8 per cent and mainland officials hope it will grow at an 8 per cent rate this year, although investor doubts are growing that the target will be met. Morgan Stanley said should Beijing devalue, it might be a signal to buy. 'An adjustment in the exchange rate would help the export sectors clear their goods profitably in renminbi terms. This should encourage more investment in production facilities, more employment and more demand for goods and services. As a result, the economy should reflate,' it said. Many other houses argue that should Beijing devalue, it would trigger fresh currency depreciations and mayhem in global markets.