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. Last Updated: 07/27/2016

China to Try Other Ways Before Yuan Devaluation




BEIJING -- China has backed away from an iron-clad pledge not to devalue the yuan, but will not resort to devaluation unless a package of economic stimulus policies fails to boost growth, analysts said Wednesday.


Devaluation is an issue not just for China but for other Asian countries. They fear their exports would be hard-hit if China's became relatively cheaper thanks to a lower yuan - unless they in turn devalued their own currencies.


"The yuan is unlikely to be devalued this year and early next year, given China's balance of payments, which is still in surplus," Joe Lo, senior economist at Citibank in Hong Kong, said.


"Later on, it will depend on the actual situation," he said.


Key economic and trade questions weighing on the Chinese currency top the busy agenda at the Chinese leadership's annual August retreat at the seaside resort of Beidaihe.


Top leaders now huddled for the secretive Communist Party conclave are expected to mull new policies to revive consumption and boost exports and decide when to renew negotiations on China's entry into the World Trade Organization.


A senior government economist said Beijing would be loath to add currency instability to a catalogue of woes, including its crackdown on the Falun Gong spiritual sect and a bitter war of words with rival Taiwan over cross-strait ties.


"A devaluation is very unlikely to happen before the celebration of the founding of the People's Republic of China," the economist said.


Beijing is expected to pull out all the stops to guarantee smooth sailing ahead of the Oct. 1 anniversary.


Lo said an abrupt Chinese devaluation could trigger similar currency falls around Asia and add pressures on the Hong Kong dollar, which is pegged to the U.S. dollar.


"A devaluation can be an option if exports continue performing poorly and the economy is not improving after exhausting other measures, but a condition is that Asia can endure it," he said.


Talk of a yuan devaluation resurfaced last month after central bank governor Dai Xianglong stopped short of repeating the "no-devaluation" pledge that had been a mantra for close to two years, saying the exchange rate was determined by the market.


The yuan's exchange rate - a managed float rate - is fundamentally determined by China's trade balance because the currency cannot be converted freely on the capital account.


China's trade surplus in the first half of 1999 reached $8 billion, down sharply from $22.55 billion a year earlier. Exports in the first half fell 4.6 percent year-on-year while imports surged 16.6 percent, customs figures showed.


Beijing has decided to expand fiscal spending in the remainder of this year to aid the slowing economy. Tax rebates have been hiked to help struggling exporters.


Any drop in the value of the yuan would be a gradual process rather than a one-step devaluation similar to one in 1994, Wang said.


A 33 percent devaluation of the yuan in January 1994 was implemented by unifying two exchange rates - a government-set rate of 5.8 yuan per dollar and a market-driven rate of 8.69 yuan per dollar.