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South China Morning Post www.scmp.com
Wednesday September 30 1998
Doubts on yuan spark stampede into US dollars
MARK O'NEILL in Beijing
Fears of a possible yuan devaluation has caused mainland residents and
companies to accumulate massive amounts of US dollars, with their foreign
currency holdings more than tripling to about US$80 billion for the year to
August.
The figure, which caught many analysts by surprise, compares with Hong Kong's
foreign exchange reserves of $92.1 billion at the end of August and Beijing's
holdings of $140 billion.
This is the first time Beijing has quantified the magnitude of the hoarding of
foreign exchange and illegal evasion of hard currency controls due to fears of
a yuan devaluation.
Wu Xiaoling, director-general of the State Administration of Foreign Exchange
(Safe), yesterday said a series of tough measures released in the past few
weeks would stem the capital flight and ensure currency stability.
However, she said the measures did not mean Beijing would go back to the old
days of complete foreign exchange control, adding that convertibility under
the current account would remain.
She also ruled out a yuan devaluation, saying it would do more harm than good.
She confirmed Safe had ordered companies to repatriate forex they hold abroad
by tomorrow or face punishment.
"This is nothing new. All Chinese legal persons are required to keep their
foreign exchange within China. This has always been the rule but some
companies have failed to comply," she said.
"If they comply by October 1, they will not be punished. If not, they will be
punished."
She declined to say how much illegal foreign currency mainlanders hold abroad,
although foreign estimates say about $16 billion has left the country annually
in the past three years.
Ms Wu said Beijing had no need or intention to devalue.
"The level of the renminbi [yuan] is decided not by the market but by economic
fundamentals. We have a surplus in the current and capital accounts. We have
US$140 billion in foreign exchange reserves . . . individuals hold [an
additional] US$80 billion in foreign currency . . . why should we devalue?"
Asked if Beijing would devalue the yuan next year, she said: "No one can
guarantee that a currency will or will not be devalued. We should look at the
reasons . . . if we devalued, it would put more pressure on our foreign debt
and investors would remit their profits.
"It would dampen confidence in the currency and the economy. A big country
cannot rely on a devaluation to revitalise its economy but must increase
domestic demand."
Beijing seems to have been surprised by the extent of fraud among companies.
Since the start of the year, officials have been promising no devaluation of
the yuan.
Nevertheless, thousands of citizens searched for ways to obtain foreign
exchange.
She also said Beijing lost "several billion US dollars" through fake customs
documents so far this year.
By mid-year, the discrepancy between a large trade surplus and almost no
increase in forex reserves made it clear to the authorities that billions of
dollars had gone missing.
Ms Wu blamed this discrepancy on the customs frauds, US$4 billion in loans to
Thailand and Indonesia and trading firms retaining 15 per cent of export
earnings as they have been entitled to since last October as well as more
money going into forex accounts.
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