China insists yuan will not devalue

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The Independent Online
CHINA'S CENTRAL banker yesterday gave his strongest pledge yet that the mainland currency would not be devalued.

But Dai Xianglong, governor of the People's Bank of China, offered no cheer to foreign bankers who are smarting after being told they will not receive priority treatment following the collapse of Guangdong International and Investment Corporation (GITIC), China's biggest ever bankruptcy.

"[President] Jiang Zemin and prime minister Zhu Rongji have both said that the renminbi will not devalue. And as the person in charge, I reassure you that the renminbi will not devalue," said Mr Dai at a rare press conference. The renminbi currency is also known as the yuan.

Asian stock markets have regularly tumbled over the past year on fears that China was about to devalue its currency and spark a wave of competitive devaluations in the crisis-ridden region.

"There is no reason for the renminbi to devalue. The current foreign exchange reserves of China of US$145bn exceed one year's imports for China, and the costs of exports are quite stable," Mr Dai said.

China's currency is convertible only on the current account, for trade in goods and services, and not on the capital account, so it has been insulated from speculative trading. Nevertheless, regional markets have been extremely jittery about the yuan since the Brazilian real was floated this month.

Pressed on what factors might prompt a devaluation, Mr Dai said: "If you insist, I will say that the renminbi will only devalue when there is a great imbalance in the balance of payments of China, and there is a great increase in the cost of exports. But I do not think these conditions exist this year."

In 1998, China struck a record trade surplus of US$43.59bn, while the retail price index fell 2.6 per cent. Mr Dai reiterated forecasts that China's GDP growth could reach 7 per cent this year, compared with 7.8 per cent in 1998, and announced that foreign banks would be allowed to extend their restricted operations from the current 23 cities to all major centres.

But this upbeat view will do little to ease worries about insolvent state banks or reduce the shock from the GITIC failure.

GITIC, which is wholly-owned by the provincial government of Guangdong, collapsed in October, but it was only this month that it was revealed to have massive debts of US$4.35bn against US$2.58bn assets. Foreign creditors reportedly have around US$1.2bn at stake.

These investment corporations mushroomed in the early 1990s as a vehicle for state units to raise foreign capital.

GITIC's foreign lenders had widely believed that their registered loans were implicitly guaranteed by the Guangdong government, but have now been informed they must take their place in the queue as the Guangdong Supreme Court handles the bankruptcy.

Mr Dai seemed to dismiss the notion that there had been any guarantees for the "legitimate registered" foreign debt. "The registration of foreign debt means that those capital inflows were allowed or permitted by the Chinese authority... It does not mean a guarantee from the Chinese authority of the registered foreign debt," he said.

Creditors would be protected "in accordance with the law", he said. "If all the registered legitimate debts of GITIC were repaid, most of the domestic creditors, including foreign financial institutions, joint ventures, and state-owned enterprises, would not be repaid at all," said Mr Dai.

The problem of the so-called "ITICS" is widespread in China, though not on the same scale as GITIC. After peaking at about 1,000, Mr Dai said there were now 239 other ITICS, which between them had foreign borrowings of a further US$8.1bn.