Jittery yuan unnerves Hong Kong

HONG KONG companies are starting to hedge against the risk that the Chinese yuan may buckle like other Asian currencies.

For the first time, a Chinese company based in Hong Kong, Shum Yip Investment, said it is moving to insulate itself from a possible depreciation in the yuan, the only currency in the world to strengthen against the dollar in the past year. New World Infrastructure, Cheung Kong Infrastructure and other Hong Kong companies are considering similar steps.

A steady depreciation in the yen is hurting China's trade and, coupled with devaluations of the Thai baht and other Asian currencies, this ultimately may force Peking to try to increase its exports with a cheaper currency. Such a move would probably send currencies reeling right across Asia.

Shum Yip Investment, an investment company controlled by the southern Chinese city of Shenzhen, has increased its borrowing in yuan in case the Chinese currency weakens and makes paying off debts in other currencies more expensive, said Wen Gujian, an executive director. Shum Yip, which invests in property and transportation, earns money in yuan. "It will remove our currency risk," Mr Wen said.

Granted, neither Mr Wen nor Cheung Kong Infrastructure's chairman, Victor Li, said they expect the yuan to be devalued soon. They maintain it is every commercial company's job to reduce currency and other operating risks at all times.

China's central bank governor, Dai Xianglong, warned that the falling yen was having a severe impact on China's trade, and called on Japan to halt the slide. "Pressure is mounting," said Philip Poon, sales manager at MeesPierson Securities (Asia).

The New World Group, one of Hong Kong's biggest investors in China, is also taking out an insurance policy against devaluation. The group, which has invested $3.2bn (pounds 1.9bn) in mainland roads, ports, housing and power plants, plans to borrow in Chinese yuan for the first time to finance new projects. "We want to take renminbi [China's international currency] foreign loans as there's no foreign exchange risk," said a spokesman for the company.

GZI Transport, backed by the government of the southern Chinese city of Guangzhou, has also said it plans to hedge its currency exposure in financing its mainland road projects. "Our revenue is in renminbi, so it makes a lot of sense for us to borrow as much money as possible in that currency," said GZI director, Sophia Yan.

"There's serious concern that China may devalue the yuan," said Andrew Siciliano, global head of interest rates, foreign exchange and precious metals at SBC Warburg Dillon Read in Geneva. "And it's well justified. The only mechanism [China] has to create income is to devalue and export," Mr Siciliano said. "It's something of a death spiral."

But not everyone thinks China will loosen its grip on the currency. Hong Kong's chief exec- utive, Tung Chee-Hwa, said that China does not need to devalue. "I don't see in any way that China would be devaluing its currency," he said. "China's economic management is very good. China continues to be very competitive, and there's no reason for China to devalue."