May 11 (Bloomberg) -- Watch what they do, not what they say.

It's the first commandment of watching economic policy makers. Yet China, a place with a knack for testing the rules of economics, is breaking it. In the case of Asia's No. 2 economy, it's equally important to follow what's said as what's done.

That said, here's what Li Yong, China's deputy finance minister, had to say last week to currency traders pressuring China to let the yuan rise: ``I urge them not to do such speculation -- they need patience.''

For anyone looking for a sign that China won't alter its 8.3 peg to the dollar anytime soon, Li's comments in Istanbul could be it.

Currency markets are a world of winks, nods and secret handshakes. Key policy makers rarely, if ever, say exactly what's on their mind. Yet Li's comments are a reminder that any chance China might re-peg the yuan at a higher level is being dashed by the very people hoping for it: Traders and leaders of governments in the U.S., Japan and Europe.

The more foreigners try to bully China, the more investment banks churn out reports predicting a yuan shift and the more speculators react to them, the longer the process may play out. All this could leave investors with the economic equivalent of Samuel Beckett's ``Waiting for Godot.''

You know the play, the one in which ``nothing happens, twice'' as Vladimir and Estragon stand around waiting. It's really an existentialist story about hope. Its characters wait for hope to arrive. It's not unlike currency traders and governments hoping -- and waiting, of course -- for China to free the yuan.

Five Reasons

Here are five reasons to think nothing will happen in the near term.

First, China is far less moved by outside pressure than many seem to appreciate. It may only move when there's a pressing domestic need to do so. China's largest state-run banks are shackled with hundreds of billions of dollars of bad loans and the economy doesn't have much of a bond market to speak of.

``China has made it very clear that it sees no reason to change the value of its currency,'' says Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, New York.

Second, it's important China gets it right. While China should reduce its currency advantage to restore a bit of equilibrium in global trade trends -- and placate the U.S., Japan and increasingly, Europe -- it would be in no one's interest to see China act haphazardly, threatening global stability.

Saving Face

Third, there's a little matter of saving face. China is a rising superpower and being seen bowing to the demand of the U.S. or Japan wouldn't play well with the nation's 1.3 billion people. Yet the bigger issue is stability. The last thing China wants is currency instability for the first time since 1995, when it pegged the yuan.

Fourth, China may actually benefit from expectations of a shift more so than the reality of one. A significant currency appreciation at a time when China is rolling out initial public offerings of major banks could complicate efforts to reduce bad loans and make bank shares less attractive to overseas investors, says Andy Xie, Hong Kong-based chief Asia economist at Morgan Stanley.

And revaluation expectations may actually help China cool inflation and asset imbalances. Many analysts argue that China's property market has risen to bubble proportions. That it's experienced some ``turbulence'' of late, Xie says, isn't such a bad thing.

``The revaluation expectation is keeping many speculators from selling,'' Xie says. ``When the prices are down, these people will be stuck, which should help China achieve a soft landing in this important sector.''

Avoiding Precedent

Fifth, China might set a precedent for speculators. If China does give into pressure and raises the yuan 3 percent or 5 percent, markets would immediately start pushing for more. So would U.S. lawmakers threatening trade sanctions. Having set a precedent, Chinese officials would be distracted from vital economic reforms.

Which brings us back to ``Waiting for Godot.'' Beckett wrote it in part to challenge audiences expecting a conventional story with a beginning and climax that unfold in a logical manner. That's certainly what happened in 1997, when markets were betting China would devalue the yuan. The same could be true of China's transition from a fixed currency regime.

As Columbia University Professor Jeffrey Sachs often says, China faces the greatest development challenge in history. Yes, it's growing 9 percent, yet efforts to liberalize the economy mean the government has to create hundreds of millions of jobs to maintain social stability. It's a big enough feat without having to worry about currency traders attacking you.

Revaluing the yuan also could hurt foreign retailers like Wal- Mart Stores Inc. in adding jobs to the world's most dynamic economy, at least in the short run. It's not about Wal-Mart; it's about employing more Chinese.

The dollar peg is the second Great Wall of China. The first one was built in the third century B.C. to keep out invaders. The second one, the currency, was put up a decade ago to keep out speculators and protect the economy. Moving it will be a major undertaking that's as much about politics as economics.

It means China may very well keep those betting on a currency move waiting.

To contact the writer of this column: William Pesek Jr. in Tokyo at wpesek@bloomberg.net.

Last Updated: May 11, 2005 02:23 EDT