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China acts to support yuan

DEALERS IN Shanghai reported yesterday that the People's Bank of China made its third foray into the market since 31 July to hold the yuan at 8.28 to the US dollar.

Last week the black market exchange rate rose well above this level as investors bet on a devaluation.

While the Japanese yen struggled to keep just above its lowest rate against the US dollar this year, increasing nerves about the yuan forced the People's Bank to make a foray into the foreign exchange markets to support its currency.

Characteristically, the People's Bank declined to comment on these reports, but Peking's commitment not to devalue was reiterated at the weekend.

On Sunday President Jiang Zemin told the Japanese Foreign Minister Masahiko Komura that China was determined to avoid a devaluation in spite of pressure from a weak yen. However, reports in Hong Kong yesterday said that Zhu Rongji, the premier, was coming under increasing pressure from exporters to make them more competitive by devaluing.

Peking has managed to hold the value of the yuan during the year-long Asian financial crisis. Devaluation would threaten a chain throughout the region, and possibly deal a death-blow to the Hong Kong dollar's fixed rate of exchange with the US dollar.

Expectations of a yuan devaluation provoked a wave of speculative pressure on the Hong Kong dollar late last week, allegedly led by a small number of American banks and hedge funds.

Last Friday the Hong Kong authorities started buying US dollars in the market, thus undermining the currency board system under which the peg to the US dollar is protected, largely by means of raising interest rates and draining liquidity out of the market.

The government maintained that it was not trying to support the currency, but taking an opportunity to buy the Hong Kong dollar cheaply to meet some seasonal requirements.

Pressure on the Hong Kong dollar eased yesterday, allowing three-month interbank rates to fall back to 11 per cent from a 13 per cent level on Friday. This allowed the Hong Kong stock market to stage a minor recovery, bucking the trend in all other Asian markets where currency worries depressedshare prices.