A fairly thoughtful summary, Chris. One fact that you left out is that the growth slowdown in China has already led to a slowdown in the "reform" of the SOEs. Too much of a threat of unemployment. Certainly there are internal political considerations, but the main tradeoff is the fear of rising unemployment due to lost export sales. It is not just the Japanese market but the Southeast Asian and especially the US markets. As the yen falls, so do most of the rest of the East Asian currencies, making them more competitive in the US market for exports. Clearly the Chinese leadership does not want to devalue for many reasons, and may be able to hold off. But the pressures are mounting and a black market has appeared that shows people betting they will. Barkley Rosser On Wed, 12 Aug 1998 08:07:36 +0100 Chris Burford <cburford at gn.apc.org> wrote:
> The International Herald Tribune, marketed as "The World's Daily Newspaper"
> in European cities, had an article yesterday (Tuesday) arguing that
> informed opinion by economists and political analysts is that China will
> not devalue, but markets still suspect it will.
>
> The economists are said to understand "the peculiar characteristics of
> China's half-reformed economic system" but market analysts trying to
> explain the instability for example on stock markets in Tokyo, Singapore,
> Thailand, and South Korea on Monday talk up the fears. They then attribute
> the falls in the European stock exchanges to ripple effects. [Thereby
> looking for an external cause for the financial instability in Asia and
> Europe, rather than an internal cause.]
>
> The article, by Seth Faison, from the New York Times Service, says traders
> and analysts cite worries that the weakening Japanese yen will force China
> to cave in on its promise to remain a "primary" source of stability in the
> region.
>
> "It is a refrain that has echoed around Asia since the end of last year.
> Yet it feeds on an analysis of statistical figures, as faulty then as it is
> now, that fundamentally misunderstands the basic tenets of economic reality
> in China today."
>
> The article then analyses these and says there is much less connection
> between the two economic systems than the worries suggest, but it does not
> provide an alternative explanation for the turbulence on the Asian
> financial markets, than these groundless worries.
>
> The analysis of China argues
>
> 1. If Zhu Rongji devalues his political career is over.
>
> 2. For the Chinese government the political advantages of maintaining the
> currency far outweigh the temporary advantages of devaluing.
>
> 3. In favour of devaluing is the need to spur exports at a time when the
> economy is weakening, foreign investment is falling, and millions of urban
> workers are facing unemployment. Chinese exporters of steel and other
> products are saying it is going to be difficult to pay salaries without
> adequate income.
>
> 4. But China needs economic stability while it is in the middle of trying
> to shift from a state-run to a market-oriented economy by trying to sell
> off the bulk of its government owned industries.
>
> 5. "Many economists" argue that making China's exports cheaper is an
> inefficient way of strengthening the economy.
>
> 6. Exports account for only about 20% of China's gross domestic product.
>
> 7. China's currency is not freely convertible, so there is little immediate
> market pressure on the yuan.
>
> 8. This adds up to saying that China's economy is not fully integrated with
> the rest of the world. [Certainly there seems to be an absence of
> neo-liberal critics of the Chinese government at the moment, who presumably
> are having to bite their tongues if they do not want to lose all credence
> in the relevance of their theory.]
>
> 9. Devaluation would not necessarily help China's export growth, which is
> primarily affected by weakening demand in Southeast Asia, but in any case
> actually grew 5% in the first half of this year.
>
> 10. Besides, China's foreign debt is manageable and even though its foreign
> exchange rserves of $140 billion have begun to slip, they are among the
> most substantial in the world [Does anyone have details of how China
> manages it foreign exchange?]
>
> 11. Especially weak is the argument for a close connection between the yuan
> and the yen: while Japan bought 20% of China's exports last year, the bulk
> of the purchases were in low-end clothing that are not very sensitive to
> price changes.
>
> 12. Beijing's decision-making is weighted heavily towards political
> concerns, not market sensitivity. Although China's leaders face internal
> lobbying from exporters, they seem to stake far greater political capital
> on their promise not to devalue.
>
> 13. Chinese leaders have adeptly used the falling yen to their advantage,
> raising concerns about the Asia-wide [and now world-wide] effect of
> unstable currencies. The markets have interpreted such rumbling -
> inaccurately, economists say - as a sign that China would devalue the yuan.
>
>
>
>
> The article quotes named representatives or associates from Hong Kong
> offices of Goldman Sachs, Credit Suisse, and Merill Lynch, who presumably
> have allowed their names, and their careers to go on the record. They are
> either fools, and the Chinese have more spin doctors advising the financial
> community in Hong Kong than Peter Mandelson could dream off, or China is
> doing something much more complicated than merely privatising its economy
> by stages. I am really counting on Barkley to jump in here, but it sounds
> as if the Chinese may see the town and village cooperative sector of the
> economy as much more lively and capable of relying on the internal market.
> Perhaps also that it may be a source of investment for the state
> enterprises being sold off, and there is going to be less inward investment
> from outside than in the previous decade. Besides Hong Kong is now inside.
>
> This interpretation suggests that the Chinese may not be putting political
> considerations first for reasons of narrow self-interest of the leading
> members of the Communist Party, but may have a deeper underlying analysis
> of the domestic and international economy. Even more the implication is
> that they know they have entered the world stage as significant players in
> the global economy. From the most narrow reasons, it would be better to
> keep a possible devaluation of the yuan (which would presumably precipitate
> the destruction of billions (tens of billions?? - any comment?) off western
> stock markets, in reserve as an interesting concern, than executed as a
> fait accompli.The behind the scenes signals from Beijing may be even more
> important than what they say publically.
>
> My prediction, certainly my hope, is that over the next two decades China's
> role will be bad news for neo-liberalism, and bad news for US hegemony. A
> devaluation of the yuan now, would, after the fall out, be good news for
> neo-liberalism and for US hegemony. That may be one reason why it will not
> happen.
>
> Comments and criticisms appreciated.
>
>
> Chris Burford
>
> London.
>
>
-- Rosser Jr, John Barkley rosserjb at jmu.edu