The spectre of devaluation is haunting Asia once again, but this time it is China that the experts are concerned about, not the Asian tigers.
If the mainland were to devalue, it is claimed, there could well beanother round of competitive devaluations two years after the onset of theAsian financial crisis and nip the recovery in the bud.
But Beijing is not about to devalue the yuan. Massive US dollar holdingsat the People's Bank of China and an appreciating yen should forestall anyimmediate devaluation.
Moreover, tight capital controls lock the door on speculation against theyuan.
If anything, the yuan should be appreciating against the US dollar, givenChina's large and persistent trade surplus with the United States.
The immediate concern with whether or not the mainland will devalue shouldnot divert attention from a more fundamental issue - namely, the need forthe mainland to move towards full convertibility of its currency andcreate a competitive, private capital market.
If the mainland is to become a major player in the global economy, itneeds real, not pseudo, financial markets - and private, not state,ownership.
The non-state sector is crowding out state-owned enterprises (SOEs) on themainland, but the future of the non-state sector (which now accounts formore than 70 per cent of industrial output value) depends on its abilityto attract domestic and foreign capital.
The problem is that even though non-state enterprises are more productiveand more profitable than SOEs, the central Government has channelled mostinvestment funds into the state sector and continues to restrict foreignbanks and non-bank financial institutions from entering the domesticmarket.
The mirror image of the dismal performance of the SOEs is thedeteriorating condition of state-owned banks (SOBs). Capital adequacyratios are far below international norms, and non-performing loans nowaccount for as much as 40 per cent of all loans.
According to Nicholas Lardy, author of China's Unfinished EconomicRevolution, "China's major banks are even weaker than most official datasuggest". When proper accounting methods are used, he finds that "thesebanks' capital adequacy is negative, and they are insolvent".
Pumping more money into loss-making SOEs by insolvent SOBs is a recipe fordisaster. It is time for Beijing to let go of the last vestige ofSoviet-style central planning and allow a private capital market todevelop that can put the nearly 40 per cent of money the mainland peoplesave into productive investments.
It is time to take away the financial morphine that has kept SOEs and SOBsalive and let new domestic and foreign firms supply the capital necessaryfor a prosperous and stable economy.
Ultimately, there is no third way - Beijing must decide between stateownership and private ownership, between coercion and freedom. Clinging toan artificial exchange rate is merely a symptom of the real problem facingthe mainland - the lack of private property rights and freedom ofcontract.
Denying people the right to freely convert the yuan into whatever currencyor investment they prefer - at a freely determined exchange rate - is aninfringement of a basic human right.
What the mainland needs is an institutional infrastructure that protects,not destroys, private property rights.
As long as market socialism prevails, rather than market liberalism, Chinawill remain less wealthy and less free than it could be.
The lesson of the Asian financial crisis is that pegged exchange rateswill fail. The mainland has been able to withstand that crisis by imposingcapital controls - that is, denying its citizens the right to freeconvertibility.
Sooner or later, however, it will have to make a choice between a rigidlyfixed exchange rate and a market-determined rate that allows monetaryautonomy.
If the latter route is taken, the People's Bank of China must be bound bya monetary rule that safeguards the long-run value of the yuan.
In either case, the mainland eventually will have to allow fullconvertibility of its currency and a free capital market.
The sooner Beijing moves in that direction, the faster it will put theeconomy on a track of long-run prosperity and stability.