Renewed talk of yuan devaluation has returned to the agenda as Beijing searches for ways to boost the flagging mainland economy. Regional economists have suggested the People's Bank of China (PBOC) may ditch its stubborn commitment to a stable exchange rate by early next year. Barclays Capital head of regional research Desmond Supple suggested in a report that the central bank could lower the yuan rate to the US dollar by up to 20 per cent. The degree of devaluation is a matter for debate among economists, but what is significant is the groundswell of opinion supporting such a move. 'I think the market has started to form a consensus that the yuan will depreciate, but it is now a matter of timing,' said HSBC economic adviser George Leung Siu-kay. 'Most people are thinking next year though, rather than this year.' For the past year, the suggestion has been howled down by everyone from PBOC chief Dai Xianglong to regional economists, who have in the past pointed out the overwhelming case against such a move in the interests of Asian economic stability. However, in recent weeks, mainland think-tanks and media sources have been calling for a more flexible exchange rate, latching on to broad hints from the PBOC that the yuan rate should be determined by markets. They have been joined by a smattering of regional economists, who have pointed to recent economic data, suggesting Beijing policy-makers must take action to stem the decline in mainland external accounts exports and rejuvenate domestic spending. In a report to clients last week, Morgan Stanley said that if Beijing devalued the yuan it would do so by at least 20 per cent. Mr Supple said: 'The data paints the picture of an economy which is showing an increasingly unbalanced pattern of growth and highlights how current monetary policy settings are inconsistent with a broad-based and sustainable economic recovery in China.' Gross domestic product growth of about 7 per cent - the envy of most other developed economies in the world - is not sufficient for the mainland, which underwent a change in direction last year as the government strove to make state-owned firms more efficient. The spectre of unemployment and its dire social implications also plays heavily on the government and economists say it must look at new ways of bolstering growth. Mr Supple said that Beijing, faced with declining exports and rising imports, must review the exchange rate. Lowering it, he said, would have a beneficial effect on exports, while at the same time stemming the influx of cheap imported goods, thus redressing the trade imbalance. The impact on the region has always been seen as a factor against devaluation, with fears that it would set off another damaging round of currency plunges. However, Dresdner RCM Global Investors director Mark Konyn said that, as Asian economies hauled themselves out of recession with strengthened markets and currencies, the negative effect of a lower yuan was diminishing. Therefore, Beijing, which won applause during the crisis during and after 1997 for its restraint on the exchange rate in the interests of Asian economic stability, would feel less inhibited by external factors in deciding whether to make the move. The level of impact on the region, said Hong Kong General Chamber of Commerce chief economist Ian Perkin, would depend on the degree of devaluation. A 10 per cent reduction would not dramatically affect markets, but anything beyond 15 per cent would, he said. Whatever rate the mainland decides on, Mr Perkin and others agreed it would be a political move rather than a purely economic one. The mainland is still far from being on its knees economically. Furthermore, simply fine tuning the exchange rate is by itself not the cure for sluggish growth or for stemming deflation. But as the situation becomes more urgent, as the threat of massive unemployment rises and the government examines every avenue to stimulate growth, devaluation might yet prove a viable option. ECONOMY
