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SCMP Reporter

Strong demand for US dollars pushed the yuan to a five-year low on Shanghai's black market yesterday, as the People's Bank of China (PBOC) stepped in to support the official rate amid mounting worries of a devaluation.

 Black-marketeers said the dollar fetched 9.0/9.1 yuan on the black market, against 8.2795 on the Shanghai-based China Foreign Exchange Trade System, up from 8.2800 on Wednesday.

 'We continue to see very strong demand for US dollars, which we are quoting at 9.0/9.1 yuan, the highest since 1993,' a black-marketeer said.

 Devaluation fears are forcing international investors to redeem foreign-currency loans as fast as they can to obtain yuan borrowings from domestic banks to hedge against the risks.

 Foreign banks reported a sharp rise in demand for stand-by letters of credit by foreign-funded enterprises to enable them to borrow in yuan from mainland banks.

 Overseas investors will then convert the yuan into US dollars to repay the hard-currency loans from foreign banks. This will save them from having to pay more for the loans if the yuan is eventually devalued.

 'This is a trend which has caught the central bank's attention, and we hear it will soon act to disallow the practice,' said the general manager of a Japanese bank, which has issued more than US$150 million in stand-by credit for its clients.

 'I don't want to do so much of this stand-by credit business,' he said.

 Existing rules allow foreign enterprises to borrow in yuan to meet their working-capital needs but are vague about whether they can convert the local-currency borrowings into hard currencies for loan repayments.

 The deputy general manager of a European bank said: 'Most of our clients who walk into our bank these days want to get a stand-by letter of credit so that they may borrow in yuan.'  The US-dollar value of the bank's stand-by credit for foreign investors to borrow in yuan had risen by 150 per cent since the beginning of the year.

 'Investors think there may be a devaluation - not this year, maybe next year - so they want to hedge against the risks by borrowing in yuan, which is also cheaper,' a French banker said.

 Beijing has repeatedly vowed not to devalue the yuan, to prevent another round of competitive devaluations that could spark an attack on the Hong Kong dollar and threaten its 15-year peg to the greenback.

 Foreign financial markets fear the sagging Japanese yen will put pressure on the country to lower the value of its currency to maintain export competitiveness.

 The yen was weaker at the close in Tokyo yesterday and was quoted at 144.49 in early European trading.

 Mainland exports to the Japan, a leading export market, have fallen sharply in the first six months.

 A survey of more than 65 companies with operations in the region, by strategic consultancy Renaissance Technomic, showed an increasing number of multinational companies believed Beijing would devalue the yuan in the next six months to offset the effects of the Asian crisis.

  'The merits of a yuan devaluation are weaker than the demerits,' said Dresdner Kleinwort Benson economist Qu Hongbin, but expectations of such a move could add to pressure to devalue.

 Mr Qu said a devaluation would destroy mainlanders' trust in the banking system, something that Beijing could ill afford.

 Figures show Shanghai residents saved more in foreign currencies during the first six months, representing one of the fastest growth rates in recent years.

 Total hard-currency savings, mostly in US dollars, rose 13.2 per cent to $5.3 billion at the end of June.

 Beijing last week introduced new curbs for banks, to control demand for US dollars and prevent an illegal leakage of capital.



PBOC steps in as dollar demand on black market challenges official currency