After China's Party

BEIJING: China has now finished celebrating the 50th anniversary of Mao's revolution, but the hangover cure that so many people in the West have been urging upon the country -- a healthy dose of devaluation -- is unlikely to be swallowed. Instead, the government has put forward a fresh round of fiscal stimulation, including a RMB60 billion new bond issue and the introduction of a new 20% tax on the interest on savings. Devaluation, indeed, remains a taboo.

Why are China's leaders so adamant against devaluing the RMB? First, Prime Minister Zhu Rongi and his advisors are very uncertain about the short-run benefits to be gained from any devaluation. Any boost to competitiveness, for example, is likely to be small and brief, as over 50% of China's exports are part of re-export industries using a great deal of imported materials or semi-finished goods. For these sectors, devaluation means an increase in costs, rather than a gain in competitiveness.

Secondly, devaluation of the RMB may incite tit-for-tat retaliation by other Asian economies. The decline of China's exports have been mainly caused by a 20% decrease in exports to other Asian markets since 1998. But as these regional economies are now starting to recover, China's exports to them are starting to grow. Although a devaluation of the RMB may not have as much impact on the regional markets as before, it is impossible to calculate what way may deliver higher export growth: devaluation or not disturbing the region's increasing stabilization. Doing nothing seems the safer bet.

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