View from City Road: Tense times in China

Ask any Western business what the biggest drawback is to doing business in China and the chances are it will nominate the lack of a freely convertible currency. While the burgeoning free market sector in one of the world's fastest-growing regions is an enticing prospect for profit-starved Western companies, the palaver involved in balancing foreign exchange requirements for local subsidiaries is a significant deterrent to setting up in the country.

This has not gone unnoticed in Beijing, which has been gradually letting the yuan, the Chinese currency, float down towards its black market level. Many have seen a hidden agenda to allow convertibility when it finds a floor, especially since this is a prerequisite for China's re- entry to the General Agreement on Tariffs and Trade, on which a decision will be made in September.

But things may be getting out of hand. Three days ago, the government took the radical step of removing the 8 yuan to the dollar ceiling on dealings in the yuan in the swap markets - the 15 foreign exchange markets used by businessmen to balance their foreign exchange requirements. The result was that by yesterday the currency had lost more than 25 per cent of its value, and there was a whiff of panic in the air.

The other name for the yuan is renminbi - the people's money. But the people are losing faith as their currency's value slips, further fuellling inflation, already around 15 per cent. Consumers are increasingly turning to gold jewellery, as a hedge against depreciation, and fledgling Chinese shares on the Hong Kong stock market have suffered too.

Optimists say the worst is over and that the currency, now within a whisker of its black market level, has stabilised. The Chinese government, watching the political turmoil sparked in Russia by the rouble's collapse, must pray they are right.