The threat of mass labor unrest apparently has leaders laying the groundwork for a major devaluation. GREG GIRARD--CONTACT PRESS IMAGES FOR TIME

They stand outside banks in China's big cities, mobile phones clipped to their belts, electronic calculators in their hands, eyes shifting constantly in search of potential customers. They are the black-market currency traders. Their dealings are illegal, but business, after all, is business. Having been vanquished four years ago when the last renminbi devaluation wiped out the parallel market, they have begun to regroup as pressure grows for another currency adjustment. One such trader, a heavily built man in a blue T shirt who calls himself "Wang," plies Beijing's busy Sanlitun street. He is offering to buy dollars for 8.885 renminbi apiece--about 7% above the official rate. "People believe it will go to 9 soon," he says, shying from the summer heat under a large yellow parasol. "Who knows what the bottom will be? We're not economists, we're not officials."

But they are leading indicators of change. Although the Chinese government has invested considerable political capital--and won plaudits from around the world--with repeated pledges not to devalue the renminbi, there are strong pressures to do so. Beijing knows the dangers: it has watched as devaluations in Thailand, South Korea, Indonesia and, most recently, neighboring Russia have gutted those countries' economies. But signs are growing that Beijing has reached its pain threshold and, according to a private economist with sources close to the leadership, the government is considering a devaluation of the renminbi early next year to stop further erosion of exports. The devaluation could amount to as much as 30%, depending on external factors, in particular the value of the Japanese yen.

Beijing's strategy is similar to the one adopted when the renminbi was quietly devalued in 1994, according to the economist. The authorities will allow an effective depreciation through the black market, followed by an official devaluation--presented almost as a post facto recognition of something that has already taken place. And since the government can keep tight reins on the black market precisely because it is illegal, it can prevent a currency meltdown like those experienced in Indonesia or Russia. The convenient whipping boy for the policy change will likely be Japan, where a domestic banking crisis is expected to weaken the yen further against the dollar. China's leaders would thus be able to argue that Tokyo's mismanagement of its currency forced their hand.

The political semaphore has already started. Two weeks ago President Jiang Zemin took the opportunity of a visit to China by former Japanese Prime Minister Toshiki Kaifu to reiterate that China is already "paying a great price and taking a risk" by not devaluing. "I cannot be 100% certain of how things will go in this world," he added, giving the first official hint that a devaluation was no longer ruled out.

For the moment, the case against devaluation is still argued forcefully in Beijing. As recently as two weeks ago Premier Zhu Rongji told former U.S. Trade Representative Carla Hills over dinner in Beijing that China would not devalue for at least another two years. Beijing's leaders know devaluation would itself be painful, particularly for companies importing raw materials and machinery from overseas. Conventional wisdom among seasoned China-watchers in Hong Kong--leavened, no doubt, with a large dose of self-interest--is that devaluation isn't necessary. The mainland's large domestic market, the renminbi's lack of total convertibility and Beijing's tight control of the financial system will enable China to escape most of the fallout from the crisis ravaging the rest of Asia, or at least so goes the argument. But the reality is that China can no longer isolate itself from global economic forces, as it relies heavily on exports to propel growth. Last year exports accounted for more than 20% of China's gdp, compared with just 12% in the U.S., for example. And after growing by an annual average of 11% between 1993 and 1997, China's economy is slowing at an alarming rate. Officially China is still sticking to its target of 8% gdp growth this year, but some independent analysts expect it will be only about half that.

Hard macroeconomic statistics suggest that Jiang's new-found "uncertainty" is more than a passing attack of nerves. Export growth in the first half of this year was just 7.6%, compared with 21% for all of last year. Some exporters now are pleading with the government for a devaluation, saying the alternative is a mass layoff of workers. Domestic demand is also shrinking: the retail price index fell 3.3% in August, the 11th straight monthly drop. Utilized foreign investment fell 1.7% in July from a year ago. And despite continuing trade surpluses, China's $140 billion in foreign-currency reserves aren't growing, despite expanding 33% in 1997. That's evidence that companies are hanging onto their dollars in anticipation of a depreciation, according to Schroders Asia strategist Andrew Ballingal. Many multinationals operating in China are allowing for a devaluation in their 1999 budget forecasts, says Melvin Chua, general manager of advertising agency McCann-Erickson's Shanghai office. "All my clients are expecting it to happen. The signs are already coming from the government: 'Be prepared.'"

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