Given the course of financial events over the past year, it is not surprising if no currency is able to escape speculation about a devaluation. The disclosure by the Beijing authorities this week that mainland companies and residents had tripled their foreign currency holdings to US$80 billion in the year to August underlines the extent to which fear of a devaluation haunts the yuan despite the repeated statements by leading officials that the value will be maintained.
The measures now being implemented to reverse the outflow of funds should reinforce the existing currency controls, but the central government has to resign itself to the prospect of continuing international debate about the currency.
Its best answer to such speculation is simply to point out that, as things stand, a devaluation would do more harm than good, and that the limits on the convertibility of the yuan give it a powerful weapon lacking in other Asian countries which have seen the value of their currencies slashed since the summer of 1997. This may not be music to the ears of proponents of an open global system, but, in the current circumstances, it is an advantage which Beijing is bound to want to use to the maximum, as shown by this week's measures to reverse the tide of capital flight.
Internationally, it is plain that a devaluation by Beijing would set off another round of currency declines throughout the region, thus robbing mainland exports of any competitive advantage they might have gained. Despite the currency competitiveness which devaluation has brought to other regional economies, China still enjoys a huge trading surplus, and the infrastructure programme proposed looks a much better tool to stimulate the domestic economy than any attempt to push growth through cut-price exports.
The infrastructure programme will, inevitably, involve increasing the volume of imports. Devaluation would increase the costs of these imports, and thereby either put additional pressure on the budget or diminish the scale of the infrastructure spending.
Given the volume of imported goods which go into China's exports, increasing their costs through devaluation would also have a significant counter-productive effect. More generally, the political and psychological impact of such a step would inevitably undermine the prestige Beijing has won from its policy stance during the Asian economic crisis.
