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Sunday, August 29, 1999 Published at 11:50 GMT 12:50 UK

Business: The Economy

Chinese puzzle on devaluation

Beijing may be rethinking its strong yuan policy

China is moving away from its policy of maintaining a fixed value for its currency, the yuan.

China gained praise for its firmness during the Asian crisis in refusing to devalue the yuan, but the move hurt its exports.

[ image: China's exports are beginning to flag]
China's exports are beginning to flag
In the first seven months of 1999, China had a trade surplus of $11.3bn, compared to $26.7bn one year earlier.

Now Chinese deputy finance minister Jin Liqun says that the rate of the yuan "will be decided by economic fundamentals."

He said that predictions that China would not devalue its currency by the end of the year could be misleading.

"For any country, what is important is to prevent the currency rising or falling too sharply .. to achieve this, a prerequisite is to keep the currency at a sustainable level," he said.

Jin did not specify what a sustainable level for the currency would be. And he warned that competitive currency devaluations could be counter-productive.

"If every country devalues its currency, it would not work," he warned.

He said that China would try to boost its exports by giving tax rebates to exporters.

"The key to boost exports is to beef up exporters' competitive edge by marketing products in great demand," he said.

Meanwhile, Li Ruogu, director general of the international department of China's central bank, said that China's large foreign currency reserves, its trade surplus, and the continued influx of foreign capital would help boost the yuan.

"The fundamentals are strong enough to sustain the yuan," he said.

Economic difficulties

China faces huge problems in converting its state-run factories into modern, efficient producers.

It needs a high rate of economic growth to absorb those who will lose their jobs in the process, and an export-led boom has been crucial to generating the additional expansion needed.

But with exports and foreign investment slowing down, and domestic growth weak, China is struggling to find measures to boost its economy.

Experts believe that for prestige reasons, China would be unlikely to devalue ahead of the celebrations of the 50th anniversary of Communist Party's takeover of power in October.

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