Yen bail-out boosts China's status

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The Independent Online
CHINA'S deputy foreign trade minister phoned the editor of the state-run China Daily late on Wednesday with an odd request: dispute a news report that quoted him as saying Peking might devalue its currency.

On Friday, the newspaper dutifully printed a front-page story in which Sun Zhenyu said he was misquoted as saying China would devalue if the yen continued to slide. The initial report had contradicted numerous official statements that a devaluation was not on the cards.

By then, the Federal Reserve Bank of New York and the Bank of Japan had sold as much as $6bn (pounds 3.6bn) to bolster the yen, and the pressure was off China to follow its Asian neighbours in a devaluation.

"Basically, China has forced the hand of Washington on this one," said Ken Courtis, chief Asia economist at Deutsche Bank, who met China's Premier Zhu Rongji and other senior Chinese officials last week. "China has in fact positioned itself for the first time as a front-rank player in world economics and finance," he said.

The yen rose almost 6 per cent since hitting an eight-year low on Tuesday, and China's standing as a regional leader soared.

"China has been an island of stability in Asia," said US Treasury Secretary Robert Rubin, who ordered the currency market intervention and is on his way to Peking this week.

To be sure, a devaluation aimed at stimulating exports could have hurt China just as much as it might have helped, forcing Hong Kong to remove its 15-year-old peg to the US dollar and sparking a ruinous round of currency devaluations in Asia.

Moreover, Chinese Communist Party officials have said repeatedly in recent weeks that there was no need to devalue the yuan. A turnabout would have shattered the government's credibility.

The desire to usurp Japan as Asia's financial leader is tempered by political considerations. China's leaders fear that a further economic slowdown would throw tens of millions of people out of work, undermining their hold on power.

The yen's earlier fall certainly put pressure on China. Its exports fell last month for the first time in two years, putting this year's 8 per cent economic growth target at risk.

China is likely to boost its leadership role still further next week, when President Clinton and 3,000 officials, staff and journalists visit the country.

China's clout is not just financial. The Clinton visit comes after two of China's neighbours, India and Pakistan, conducted nuclear tests, potentially triggering a nuclear arms race.

For the first time, Mr Clinton and China's President Jiang Zemin used a new "hot-line" telephone link to talk about how to defuse the crisis. India's taunts that it had exploded the devices because of the threat from an overt nuclear power, China, drew only measured denials from Peking.

"The Chinese have a public relations opportunity here of a very significant sort if they play their cards right," said Jonathan Pollack, a senior analyst of China's military at the Rand Corp. "They can be seen as a source of moderation, stability and restraint."

US officials also know that American efforts to curb the spread of military technology will rely on nations such as China restricting their exports. That gives Peking a bargaining chip and increases the importance to Washington of friendly US-China relations.

"China's essentially getting credit for not collapsing," said Gerald Segal, senior researcher at London's International Institute for Strategic Studies.

The Chinese press is already playing up the potential for China and the US to work together.

The China Economic Times commented on Friday: "For the basic problems of the world, China and the US should work together."

The newspaper also said the region should recognise China's rise. "The [yuan] is going to replace the Japanese yen as the key currency in Asia. China replaces Japan as the leading economic force in Asia."

Such talk is still premature. China's economy is barely a fifth the size of Japan's. Growing at its slowest pace in eight years, it still needs plenty of fixing.

Copyright: IOS & Bloomberg