>He ruled out a fresh global financial crisis arising from a possible
>devaluation of the yuan, in response to the severe deflationary trend and
>faltering exports being experienced by the Chinese economy, of late.
>``Although China has itself denied this possibility, I do not think the
>devaluation of the yuan will lead to a repeat of the 1997 Asian crisis. At
>best, it may force other countries, including India, to adjust their
>exchange rates accordingly,'' he felt.
>A major difference here, Prof. Sachs noted, was that China as well as
India
>had not accumulated any excess short-term liabilities, prone to sudden
panic
>withdrawals. ``They have been sensible in this regard, unlike the East
Asian
>economies. So a devaluation of the yuan, I feel, would not cause too many
>problems,'' he added.
Disclaimer: In our rather ghoulish "guess the cause of the crash" competition, I have chosen to stake my tenner on yuan devaluation as the trigger.
Sachs' ideas are interesting, but I think he's overlooked a couple of things:
1) You can only say "China [...] had not accumulated any excess short-term liabilities, prone to sudden panic withdrawals." with a straight face if you ignore Hong Kong. Any yuan devaluation would severely test the HK$ peg, and in the right conditions could trigger a run on the HK banking system. In the absolutely worst case conditions, it could potentially lead to uncertainty about the position of HSBC, which would certainly have knock on effects.
2) China does not really need to devalue the yuan -- it has capital controls, and seems to have no problem in attracting FDI inflows. But it might do so as a purely political gesture -- to put things melodramatically, an act of economic warfare. The Chinese have already extracted significant concessions out of the US by threatening yuan devaluation, and may decide that, when the time is right, it is in their interests to press the detonate button.
3) Sachs still doesn't seem to have learned the lesson of 1994/5 and 1998 -- that the fundamental strength of economies does not necessarily protect them against organised attack. The lack of short-term debt at the sovereign level is certainly encouraging, but the strategy of attacking the local banking system to cause a currency collapse is still entirely exploitable. At the risk of being permanently exiled from the list, I'll point out that during 1998, a small group of powerful men met in secret in order to conspire to break the economies of SouthEast Asia, and could do so again. And since it's a pretty well-known fact that I'm a bourgeois apologist, I'll even venture the suggestion that the world would be a better place if these particular individuals were stopped from acting in this way.
cheers
dd
PS: Schroders, the last-but-one independent British merchant bank, just sold out to Citigroup. I'm now a member of the last gang in town (for the moment!)
___________________________________________________________________________ _____
---------------------------------------------------------
This email is confidential to the ordinary user of the
e-mail address to which it was addressed. If you are not
the intended recipient, please notify the sender
immediately on (44) 171 638 5858 and delete the message
from all locations in your computer. You should not copy
this email or use it for any purpose, or disclose its
contents to any person : to do so may be unlawful.
Email is an informal method of communication and is
subject to possible data corruption, either accidentally
or on purpose. Flemings is unable to exercise control
over the content of information contained in
transmissions made via the Internet. For these reasons
it will normally be inappropriate to rely on information
contained on email without obtaining written confirmation
of it.
----------------------------------------------------------