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["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

CURRENCY

THE TIDE CHANGES AT LAST FOR THE RENMINBI IN CHINA

By David Murphy

Issue cover-dated May 29, 2003

The renminbi is gaining ground at home, as well as abroad, especially
against the U.S. dollar. It's fast turning into the preferred currency
for locals and foreign companies investing in China. "With confidence
growing in the boom, it is becoming the currency of choice within
China," says Stoyan Tenev, lead economist at the International Finance
Corp. in Washington.

That's a big reversal. In the years after the Asian financial crisis,
foreign companies, unable to borrow renminbi inside China, borrowed
dollars offshore and converted them into renminbi to pay for their local
investments. As the companies earned hard currency for their exports,
their loan repayments were secure against what many feared would be an
inevitable devaluation of the Chinese currency.

Chinese firms, meanwhile, paid off dollar borrowings for the same reason
and many individuals converted savings into dollars to take advantage of
higher interest rates at local banks. A devaluation never came, but the
result was a $75 billion foreign-currency surplus from 1999-2001,
outstripping the $67 billion added to official foreign-exchange
reserves, according to the Bank of International Settlements in the BIS
Quarterly Review last September.

Billions of dollars were hoarded inside China and billions more were
sent abroad, despite the efforts of the State Administration of Foreign
Exchange (Safe) to staunch the haemorrhage. Between 1996 and the end of
2001 about $80 billion was registered under the "errors and omissions"
column in China's balance of payments, according to Safe. The column
exists in the financial statements of many countries, including the
United States, and is where bookkeepers put the loose ends. "It's a
summary of all your misses," explains Robert McCauley, deputy chief
representative of the BIS Representative Office for Asia and the Pacific
based in Hong Kong. "The balance of payments ought to add up to zero,
and when it doesn't, the net of all the unrecorded transactions is
called 'errors and omissions'."

This capital flight despite strict currency controls includes money from
smuggling and frauds. Most of it, however, seems to be controlled by
state companies that shared the widely held lack of confidence in the
renminbi.

But last year in a dramatic U-turn, $7.79 billion flooded back into
China in contrast to the $4.8 billion that left in 2001. Analysts
interpreted the switch as the result of the attractiveness of the
renminbi because of China's ability to pull in investment and export
overseas. In addition, Chinese banks have made it easier for foreign
companies to borrow in renminbi. Tied to U.S. interest-rate changes,
renminbi rates are now cheaper than for dollar loans. In late 2001, U.S.
dollar deposit rates fell below those for renminbi, so people changed
dollars into renminbi, bolstering growing expectations of an eventual
renminbi appreciation. In addition, foreign companies that are now
focused on the domestic market prefer to spend and earn in the local
currency.

Increasing the demand for renminbi, foreign companies are more likely to
buy Chinese-made capital equipment. "China's capability to supply
equipment of the quality we require has improved and of course we need
to pay local suppliers in local currency," says a spokesman for British
Petroleum, which early last year secured a ground-breaking $1.8
billion-equivalent loan from a consortium dominated by domestic banks.
The loan consisted of more than 9 billion renminbi and $708 million with
borrowings in both currencies from Chinese banks.

Adding to the renminbi's increasing allure is a sharp rise in consumer
loans to buy homes and cars. The popularity of the renminbi looks set
only to grow.