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Politics : Ask Michael Burke

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To: Knighty Tin who wrote (30732)	8/7/1998 1:03:00 PM
From: GuyNixon	Read Replies (2) of 132070

MB: Just came back from Shanghai. My family has business in China, Hong Kong and Taiwan. You are right about the Chinese growth rate. Much of China is now in a recession due to overcapacity and maturity of demand in primary product. Deflation is very real. There are at least 1.5 million unemployed in Shanghai alone. Small scale protests are common. The country has excellent top leadership but the size of its population relative to a thin resource base is just very challenging. However, I don't think China will devalue in the short term. 1. The state banking sector is in effect bankrupt. The last thing Chinese govt. want to happen would be a loss of confidence. Because this can lead to a deadly political crisis. Under no rational circumstances would Chinese leadership want to take a chance with this. 2. Devaluation can't solve the problem. Everyone in the region will just join in again. President Jiang has repeatedly promised ASEAN not to devalue. China has gained valuable political goodwill in the region against US and Japan. Which are being perceived as blood suckers and irresponsible neighbour. So it is also in the long term strategic interest of China not to devalue. 3. China has over 100 billion US dollar in reserve, and since it's a close system. Speculators and domestic capital flight will have a hard time pulling the currency down. 4. If China devalue, HK will be in deep trouble. The currency will suffer a major run by locals rushing to convert to US dollars. Interest rates will spike up to monster level. (In fact, most banks in HK are already walking on thin ice due to years of reckless real estate lending.) Even HSBC will go under. China has too much investment in HK to risk this. On other hand, the govt. is really quite shaky. The chances of political unrest is increasingly daily... If the US does indeed go into a recession, then... Guy

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