Hot spots: China.(International Section)

The short-term effects of SARS on the Chinese economy have been considerably less severe than widely feared and the long-term ones will be virtually negligible. This is becoming fairly obvious, now that the World Health Organization has acknowledged Beijing's having conquered the disease, which began in China's Southern Province of Guangdong.

Most economists of note who, at the time of the pandemic's eruption, had lowered their forecasts for real GDP growth this year have since raised them again to 7.5%-8.0%. Indeed, after a few softish months, the People's Republic posted a big foreign trade surplus of USD 2.23 billion for May. Exports for the first five months of the year were an impressive 34 percent higher than in the like 2002 span. Inflows of foreign direct investment show every indication of beating in 2003 the USD 52.7-billion record set in 2002. Official international monetary reserves, most recently reported at a whopping USD 340 billion as of end-June (versus USD 316 billion three months earlier), are continuing to climb.

Against this backdrop, the international clamoring for a revaluation of the yuan, which has gained considerable strength since the U.S. dollar began its cyclical fall against the euro, has been growing in volume as well as intensity. Given the huge trade surplus the PRC is running with the United States, the U.S. Government has made it very clear, through Treasury Secretary John Snow, that it would like to see the Chinese currency be revalued. Beijing has been quick, however, to quash any such notion, saying that it has no intention of changing its policy and that the renminbi's exchange rate will continue to be kept stable.

Objectively viewed there is, indeed, no good argument with which Washington could convince the Chinese government that revaluing the yuan would be in the PRC's national interest. Rather, the authorities will prefer to keep doing what they have been doing, which is to relax exchange controls very gradually on non-current-account transactions, where they are still fairly tight--not by announcing a formal abolition or easing, but de facto, simply by closing their eyes to all but the most blatant violations. For instance, companies are now being allowed to hold onto much greater dollar amounts than they could in the past. To make it easier for local firms to purchase foreign exchange, checklists are now being published on the Internet detailing, precisely, what kinds of approvals are needed for importing services or remitting profits abroad.

The renminbi is already in wide circulation outside China, in countries that Chinese tourists like to visit in Southeast Asia, such as Singapore, Malaysia and Thailand. The currency has also become an accepted trading unit in parts of Laos, Burma, Cambodia and Vietnam. The Chinese government could discourage the use of the yuan outside the PRC's borders, but it has not tried very hard to do so. Confidence in the currency--and in the way in which it is being managed--has grown to the point where last year, according to Chinese data, there were more "illicit inflows" into the country than there were outflows, to the tune of USD 7.79 billion, while in 2001 there had still been net capital flight of USD 4 billion. The influx has gathered momentum this year as more and more Chinese decided, in the expectation of an eventual revaluation of the yuan, to repatriate funds held abroad. Recently, the Central Bank has often had to buy up to USD 500-600 million a day to keep the exchange rate steady.

Some economists argue that China would benefit from a revaluation because it would put a damper on economic activity and prevent the economy from overheating. Right now, though, this is not an issue that the authorities regard as a serious problem. True, a newly formed monetary policy committee has apparently come to the conclusion that money supply is ...