Markets hit by China fears

Click to follow
RUMOURS OF a Chinese devaluation unsettled Asian and Latin American markets yesterday, writes Diane Coyle.

China's central bank was forced to deny the possibility after a state- owned newspaper, the China Daily's Business Weekly, said floating the renminbi might be a good idea.

Most analysts think China will not devalue just yet. Ravi Bulchandani, head of foreign exchange at Morgan Stanley Dean Witter, said: "There is obviously a debate going on in official circles. But it would not suit China to devalue at a time of such financial turbulence."

China has ample foreign exchange reserves, and has safeguarded the renminbi - the yuan's convertible twin - from Asia's financial woes. The Hong Kong dollar's peg to the US dollar is felt to be reasonably secure.

However, Asian markets fell sharply yesterday. Hong Kong's Hang Seng index ended 2.45 per cent lower at 9,499.5 after plunging 4 per cent. Share prices also fell in Bangkok, Singapore, Jakarta and Seoul.

Interbank rates rose in Hong Kong on fears that the authorities might raise interest rates to defend the currency peg.

The tremors spread to Latin America, where Brazil's currency, the real, fell to 1.78 to the dollar from 1.74 the day before.

The flood of capital out of Brazil has passed $7.4bn so far in January, and nearly $50bn in six months. Reports say the central bank has spent $300m propping up the real since its devaluation earlier this month.