China appeals to Japan for stability

China appealed to Japan yesterday to stabilise the yen as it gave its most gloomy assessment yet of the impact of Asia's financial crisis on Chinese exports and inward investment.

Mr Dai Xianglong, governor of the People's Bank of China, the central bank, said the influence of east Asia's crisis on China was "getting bigger and bigger".

"The economic adjustments in east Asia and the sluggish Japanese economy, in particular the depreciation of the yen, are having a very unfavourable effect on China's exports and ability to attract foreign investment," said Mr Dai. "We hope the Japanese government will take effective measures to stabilise the yen."

He said the renminbi, China's currency, would be kept stable but did not repeat the previous official promise of no devaluation. Some analysts discerned in this subtle distinction a hint Beijing may be preparing to guide the renminbi gradually lower.

Shares in mainland-controlled companies plunged on the Hong Kong stock market, underlining fears that the fall in the Japanese yen could force China to devalue.

The index for red-chips, Hong Kong-based subsidiaries of mainland enterprises, fell 8.6 per cent. H-shares, the Hong Kong-listings of mainland state-controlled enterprises, fell 6.8 per cent.

The benchmark Hang Seng index also fell sharply, losing 2.2 per cent amid concerns that the weak yen would add to pressures on the territory's battered economy.

"Sentiment has been turning against China, but the pressures came to a head today," said Mr Steven Thompson, senior analyst at Nikko Research Centre in Hong Kong. "Investors were spooked by concerns over the renminbi."

During the day's trading in Tokyo, the Japanese currency touched 141.11 yen against the dollar, its weakest level for seven years. However, it later strengthened to 140.2 yen in New York.

A senior Chinese official, who declined to be identified, said the outlook for the yen and the Japanese economy had been the subject of a flurry of policy meetings in Beijing. Scenarios on how China would be affected by the yen at 160, 170 and even 200 to the US dollar were being drawn up.

A multilateral effort led by the US to stabilise the yen may be needed at some time in the future, said the official.

"So far, devaluation of the renminbi is not being considered," the official said. "The biggest worry is that the Hong Kong dollar peg may be threatened if the yen falls even more sharply."