Fears of second Asian shock

Business Asia, August 17, 1998 by Sarah Davison

The falling yen has prompted renewed fears of a Chinese devaluation, but analysts say the weak yen poses a much more immediate and far-reaching threat to the region.

If the US dollar/yen breaches 150, it threatens Asia with a second financial shock that will hurt China badly, said Mr Dong Tao, an economist at Credit Suisse First Boston.

"The real risk is that the Asian economies collapse again," he said. "Given the integration between China and the rest of Asia, it will be much more meaningful and cause much more damage to China if the other Asian economies collapse again."

Many analysts are forecasting a more gradual decline in the yen than the rapid plunge seen in June. The yen was recently trading at 144.70 to the dollar.

As the Asian currencies decline, the implications for China, which has so far resisted the Asian currency contagion, would be for a further collapse in demand in its most important export market.

Asia takes 60 per cent of China's exports. Japan alone takes 17 per cent of China's total exports. Exports account for about 20 per cent of China's gross domestic product.

But the links between the yen and the yuan are mostly indirect, and few Asian analysts were prepared to be pinned down on the likelihood of a yuan devaluation if the yen reached beyond 150.

Japan's beleaguered new government, under Prime Minister Keizo Obuchi, has gone on the offensive to protect the sagging yen, warning world financial markets to beware of central bank currency intervention. However, most markets remained sceptical over whether Japanese officials would back words with action.

--Reuters