China's Economy: The Year of the Living Dead
Summary
China's tentative steps at financial reform illustrate a dilemma
for the government. Foreign investors urge Beijing to let the
market run the economy, yet they flinch when firms go under. As a
result, China winds up supporting companies that should be dead and
buried.
Analysis
The Chinese government has announced it will overhaul a troubled
portion of its financial sector, the government controlled
international trust and investment corporations (ITICs), according
to China Securities Daily. But few specifics have emerged about the
government's plan; it is still unclear how many ITICs will be
closed, or restructured, or left alone. This uncertainty reflects
the ambiguous attitudes of the world's financial community, which
in turn produce an inconsistent economic policy from China.
Once the centerpieces of China's efforts to attract foreign
investment, the ITICs are vehicles through which Chinese government
agencies and local authorities raised money abroad for investments
at home. But the 240 ITICs have fallen upon hard times. In 1998,
Prime Minister Zhu Rongji allowed the Guangdong ITIC to declare
bankruptcy, in the hopes of attracting further foreign capital by
demonstrating China's commitment to market-based economic reform.
But the move backfired, investors were scared off, and the ITICs
have struggled ever since.
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Since the Guangdong ITIC crashed the Chinese government has hinted
that other non-performing ITICs would be reformed, restructured, or
simply shut down. This made sense, as many of the banks were in
deep financial trouble. For example, Saige ITIC has failed to pay
its staff for a year, according to the Financial Times. Finally, it
was announced July 20 that the Hainan ITIC - which failed to make a
June 26 interest payment - would file for bankruptcy if it failed
to reach an agreement with its creditors. The same day, People's
Bank of China governor Dai Xianglong said that other ITICs would be
merged or shut down, but he offered no specifics.
The most recent news on ITIC reform came from the Aug. 2 Hong Kong
based Wen Wei Po newspaper. It cited unnamed "trust industry
executives" who said that three of the 14 major ITICs will not be
touched, while 11 will change. The information is probably correct,
Wen Wei Po occasionally acts as a mouthpiece for Beijing. But the
announcement did not detail the reform measures; it only excluded
three ITICs from consideration.
Closing the Hainan ITIC, along with hints of further closings,
appears to be a trial balloon by the Beijing government - a way to
gauge the reaction of foreign investors. If they applaud, more
ITICs may close, if not, then the damage is minimal.
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The ambivalence of international investors is what confounds
Beijing and makes its economic policy so wishy-washy. On one hand,
Beijing is encouraged to embrace the free market and allow it to
determine which enterprises rise or fall. On the other hand,
investors are horrified when Beijing doesn't offer to bail them
out, especially in the case of financial institutions. Remember
that Beijing let the market run its course in 1998 - and investors
bolted.
The result is that China is tiptoeing a fine line between market
reforms and government sponsorship. Afraid to scare off investors,
Beijing is supporting zombie institutions - they aren't alive, but
they cannot be buried.
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