Chinese President, Mr Jiang Zemin has ended intense speculation about the future of the Chinese currency by saying that, in order to stabilise Asian financial markets, Beijing would not devalue the yuan.
He made the commitment at a meeting with leaders of the Association of South East Asian Nations (ASEAN) in the Malaysian capital Kuala Lumpur, according to Chinese Foreign Ministry spokesman, Mr Shen Guofang. The Chinese leader stopped short however of offering emergency aid to the region's economies.
The meeting was held on another day of wild fluctuations in Asian currencies. Most currencies fell because of persistent dollar demand and dwindling trading volumes, but the battered South Korean won surged nearly 16 per cent to highs of 1,350 against the dollar after the central bank decided to scrap its trading band and allow it to float. It ended at 1,425.0.
But the decision by the Chinese not to devalue and today's announcement of a $77 billion (£53 billion) rescue package for the Japanese financial sector boosted stock markets around the world. The modest November inflation figures in the US also boosted sentiment on stock markets and, in London, the FTSE 100 Index gained around 1.6 per cent, while in New York the Dow Jones closed up XXX on YYY. The South Korean won benefited from expectations of heavy dollar inflows under the IMF's $57 billion package, and also its decision to follow IMF advice and allow the currency to find its own level after being tied to a 10 per cent fluctuation band.
Seoul also proceeded with a $10 billion sovereign bond issue which boosted its financial markets yesterday. The Korean situation has also improved following weekend promises from the three leading candidates in tomorrow's presidential election to carry out commitments made to the IMF on financial reforms.
Devaluation of the Chinese yuan, which could have plunged the region into a new round of competitive devaluation, was widely predicted by some Hong Kong economists, who argued that, to maintain its competitiveness, Beijing would have to reduce its rate of just over eight yuan to the US dollar.
However, foreign investment into China is mainly from Hong Kong and Taiwan, the least-affected economies in the region, and China continues to run a huge balance of payments surplus.
"There are so many US dollars sloshing around in China that the pressure is to revalue upwards," said a representative of a western financial institution in Beijing. Also in some major items like footwear, China exports 22 times as much as its south-east Asian competitors combined so devaluing the currency would not make a big difference.
However, weaker currencies in south-east Asia are likely to reduce China's exports in 1998, Chinese Trade Minister, Mr Wu Yi said in Beijing. "Compared with 1997, China's imports, exports and the use of foreign capital will face greater challenges next year," she told the official People's Daily.
"The composition and the markets of goods exported by China and south-east Asian nations are identical, so the financial disturbance will reduce the competitiveness of our exports."
China had a trade surplus of $40.23 billion in the first 11 months of 1997, compared to $13.93 billion in the same period last year. Its trade surplus with the United States is expected to hit $50 billion this year. Devaluation of the yuan would further aggravate trade friction with the United States.
One of the intriguing questions debated by Asian economists is whether China, with its huge dollar reserves, would intervene directly in any further regional financial bail-outs. The issue is, however, politically very sensitive. South Korea turned to Japan and the United States for help, rather than to China, its former ideological enemy.
Two of the ASEAN nations, Thailand and Indonesia, have received International Monetary Fund aid in recent months. The organisation also includes Brunei, Burma, Laos, Malaysia, the Philippines, Singapore and Vietnam.
