The Chinese authorities have so far remained true to their word by not devaluing the yuan, but their commitment has weakened over recent months. Official policy now appears to be one of maintaining the value unless there is a marked deterioration in the country's trade and general economic performance.
Since the onset of the Asian crisis in July 1997, exporters have put pressure on the government as they have struggled to maintain market share in a more competitive international environment. Regional competitors whose currencies have fallen include Indonesia, the Philippines, Malaysia and Thailand.
China's large trade surplus is certainly under pressure. In the first quarter of this year, exports fell 7.9 percent compared with the same period in 1998 and the surplus was down 40 percent. The Asian Development Bank predicts China's exports will fall five percent this year before recovering by a modest 1.9 percent in 2000.
The bank says the substantial deprecation of other Asian currencies may ‘eventually' erode China's competitiveness. Yet, while the ADB itself says a devaluation would have only negligible results, there are many analysts and economists who calculate that Beijing could still sanction a devaluation to boost exports and GDP.
While China has hardly benefited from the Asian crisis – the ADB estimates 60 percent of China's exports go to the region – the government has handled matters to its own advantage. Internationally, it has been seen to have taken a responsible policy of maintaining the value of the yuan and thereby helping to preserve regional stability.
Domestically, it has used the crisis to reshape China's industrial structure by granting tax rebates and subsidies to certain sectors to help them retain competitiveness. Since the onset of the Asian crisis, these breaks have insulated important sectors of the economy – including food and coal – while leaving less powerful sectors, such as low-technology electrical products manufacturers, fully exposed to international competition.
For example, in April the government announced a list of 33 brands which it would support in the export market though preferential policies. Export funds, looser export quota controls and low-interest loans are to be granted to various important manufacturers, including Haier and Haixin in home appliances, motorcycle maker Jialing, cashmere producer Erdos and pen maker Hero.
It could be argued that this policy amounts to a selective devaluation, yet there are still calls for a drop in the yuan. Within a year of the Thai baht float in July 1997, Dalian New Shipyard argued that a 20 percent drop in the yuan would be necessary to put it back in contention in overseas markets.
China has a wide industrial export base. Its key export product groups are machinery and electrical machinery (23.8 percent of all exports in 1998), and textiles, garments, silk, cotton, yarns and fabrics (18.2 percent). Footwear contributes 4.5 percent, and toys and sports equipment four percent. Natural resources, chemicals, iron and steel items, transportation equipment, foodstuffs, and a host of low value-added items make up a high proportion of the remainder.
Loss of orders
Shipbuilders are especially vulnerable to a slide in the Japanese yen and Korean won. Six months into 1998, Dalian New Ship-yard's orders were down to one-tenth of the total that it had achieved during the whole of 1996. China believes it lost an estimated 1.8m deadweight tons (dwt) in orders to competitors in the January-to-September period of 1998. This compares with the 1.96m dwt exported in 1997 by the China State Shipbuilding Corporation, the premier company which owns Dalian New Shipyard.
On the evidence of official customs measures of Chinese ship exports, a relatively stable won and weakening yen did little to interrupt consistent export growth in the five years to 1998. Despite the depreciations in rival currencies, there was only a marginal deceleration in growth last year.
If Dalian New Shipyard serves as a bell-weather for the industry, however, the sector may yet show delayed sensitivity to changes in terms of trade as falling orders puncture exports around 2000. First there is the time-lag issue for large orders – China's January 1994 devaluation fed into export growth statistics two years later. There, is also the fact that China's shipbuilders are selling into tightening markets, which could have accounted for last year's slowdown in growth.
Outside shipping, there is little hard evidence to suggest that China's major export earners would benefit greatly from a depreciation. For example, processing industries are heavily dependent on imported materials and parts, so limiting the impact on production costs of any exchange rate cut.
Overseas sales of machinery and electronics products did show a rise after the 1994 yuan devaluation. However, sales to America and the EU continued to climb last year, despite China's policy of holding the level of the yuan. The strength of export market currencies has helped to maintain growth, but the sector also appears to be quite inelastic to the exchange rate.
Slump in Asian textile demand
In the textiles sector, excess capacity and a bloated workforce prompted a nationwide rationalisation the 1990s. Yet Chinese mills remain over-manned and thereby relatively expensive, even though average wage levels are lower than in other low-cost labour economies. Freeing the price of cotton is set to make domestic inputs more costly and encourage rising imports – devaluation would actually raise. costs.
During the recent period of volatile Asian currency movements, China's textile exports shrunk in US dollar terms. Woven apparel exports lost 7.9 percent in 1998 over 1997. In knitwear, export growth of 53.7 percent was transformed into a decline of 1.5 percent over the same period. The deterioration in cotton yam and fabrics accelerated from -1.3 percent to -9.8 percent. For the sector as a whole, textile exports contracted by 5.8 percent, having expanded 22.6 percent in 1997.
Arguably, it is a slump in Asian demand that is more to blame for these falls than the pricing impact of competitive devaluations. Indeed, ex-factory textile prices in China fell in 1998 and tax rebates were raised, allowing the sector to adjust export prices if it so chose.
It was clear throughout last year that Hong Kong, Japan and South Korea were the most severely affected textile markets. At the 10-month stage in 1998, Chinese exports to the US and EU had risen compared with a year earlier. The strongest markets were those without quotas in the Middle East, Africa and Latin America, a vindication of China's policy of market diversification.
Overall, textile exports seem to exhibit little correlation with exchange rate movements in east and Southeast Asia. Therefore Chinese textiles could not expect to gain much by a competitive devaluation.
China and its regional rivals have all benefited from the strength of the US dollar in the second half of the 1990s. The US is China's principal overseas market (taking 20.6 percent of China's exports in 1998), followed by Japan (16.2 percent) and the EU (15.3 percent). Chinese exports to Asia have certainly been suffering but the resilience of the EU and US markets has helped to compensate.
However, other internal factors have also been evident. Productivity gains in China have helped to maintain competitiveness. Average labour costs are an estimated one-third of levels in Thailand or Malaysia, although there are, of course, big regional differences within China. Comparative advantage has also been helped by the fact that China's recent inflationary record is considerably better than that of most other countries in the region.
Costs of a revaluation
Given these factors, China does not appear to be highly sensitive to regional terms of trade. Fundamentals have driven China's export performance in the 1990s, and exchange rate movements offer no dramatic prospect for export management. The nation's continued strong export showing in Europe and the US indicates that shrinking exports to Asia are more a result of lost markets than any erosion of its international competitiveness.
Only a large yuan devaluation could enable China to recoup a comparatively small proportion of `lost trade' during the currency crisis since mid-1997. Even so, there are strong countervailing arguments to deter a heavy devaluation. Manufacturers would have to bear steep import cost rises. More worrying is the prospect of successive rounds of competitive devaluations in the region, which would disadvantage all parties.