Shaky Stability: China Works
To Avoid Southeast Asia's Woes
By IAN JOHNSON and CRAIG S. SMITH
(With Special Correspondent...RAREBIRD)
Staff Reporters of THE WALL STREET JOURNAL
GUANGZHOU, China -- By the numbers, China is a bastion of stability
amid Asia's economic turmoil: Its currency is formidable, its foreign
reserves are huge, and its trade surplus is rising.
But look closely, and China's apparent economic strength drains away.
Foreign investment in China is falling, and the trade surplus is expected to
dwindle next year as exports slow and imports rebound -- trends already
being aggravated by the turmoil elsewhere in Asia. Add in China's delay in
economic reform and rising unemployment, and the nation is facing its most
volatile mix since the late 1980s, when economic malaise helped to fuel
protests in Tiananmen Square.
China's leaders are worried -- and that's probably good for the nation's
economy. For while its neighbors' woes may make Beijing more cautious
about opening its financial markets -- full convertibility of the yuan has
been put off until well into the next century -- its problems are driving it to
undertake structural reforms as bold as any in Asia. Officials say China will
overhaul its weak central bank next year and, to deal with the country's
staggering load of soured bank loans, may set up a holding company
patterned on the U.S. Resolution Trust Corp. And to spur China's lagging
economic growth, a new round of interest-rate cuts is expected by year
end, and bank lending caps are to be lifted and infrastructure spending
increased.
With such moves, China hopes to swerve in time to avoid the kind of
long-term damage plaguing much of Asia in its head-on collision with
global financial markets. In most of those countries, currencies and stock
markets have plunged, borrowing is next to impossible, and foreign aid has
become crucial.
For now, China seems safe largely because -- ironically -- it hasn't
liberalized enough to be exposed to Asia's ills. The inconvertibility of the
Chinese yuan makes it difficult to speculate on the currency and to take
capital out of the country. China's modest external debt is well-managed.
Its banks, though in a mess, are government-owned and thus not at risk of
failing.
Moreover, foreigners can buy only a relatively small pool of shares and are
barred from the far-larger domestic side of the country's stock markets.
Even if share prices do crash, the economy wouldn't feel much more than
a tremor because China's stock-market capitalization totals a mere 20% of
its annual output.
China's Affliction
Instead, what afflicts China is a further slowing of its already-anemic
growth and pervasive corruption, self-dealing and backdoor deals that
undercut government efforts to reform. Between the lines, statistics tell a
worrying tale. Economic growth is set to decline to 9% this year from
9.7% last year and may drop to less than 8% next year. Those numbers
seem high, but China has one of the world's most uneven rates of
development, so that anything under the 9% it has averaged over the past
decade leaves it pockmarked with recession. Says a senior policy adviser:
"This is a tough time to rule China."
In Tianjin, China's fourth-largest city, one of the biggest bicycle
manufacturers in a country of bicycles hasn't been able to pay its workers
for two months. Years of delayed reforms have left the Flying Pigeon
factory a rundown mess of creaky equipment and broken windows.
Workers grouse that money allocated for renovation was spent on
real-estate speculation; the company declines to comment. Sun Wei, a
42-year-old welder loitering beside a factory bulletin board because he
hasn't any work to do, says his pay has been cut to the equivalent of $60 a
month from $110 -- and he isn't getting even the $60.
"We haven't eaten meat in a month and can barely afford
elementary-school tuition for my daughter," he complains.
Many Bankrupt Enterprises
At least he has hopes of getting paid. China's cities are dotted with scores
of state enterprises bankrupt in all but name. Earlier this month, the Beijing
Internal Combustion Engine Factory, one of the capital's largest
employers, fired 5,000 workers age 55 or over and left them with no
benefits at all.
"Nowadays, factory closings seem to take place daily," says a Tianjin
worker hawking fried melon seeds.
That's hardly an exaggeration. While much of East Asia is grappling with
the need to cut back once-secure "lifetime" jobs, announcements of mass
layoffs have become depressingly routine in China's newspapers. The
Ministry of Metallurgical Industry says steelmakers will cut 700,000 jobs
within three years, the nonferrous-metals industry announced 200,000
layoffs in the same time span, the railways are set to drop 240,000
workers, and a plane maker is cutting 150,000. Tianjin officials say
10,000 factory workers lost their jobs in the third quarter alone, part of a
wave of layoffs that experts say could increase unemployment from the
official figure of 9.6 million to 30 million in two years.
Real unemployment is even higher. It is masked by xia gang, an
administrative label for workers sent home but not officially discharged.
Shanghai has 800,000 such out-of-work workers, not counting thousands
of idle migrants also missed by the statistics. In Nanchang, the capital of
impoverished Jiangxi province, residents estimate as much as a third of the
labor force has been furloughed.
"People are calm this year, but it's going to get worse. Who knows what
next year will bring?" says Fang Honglu, a laid-off factory worker selling
pirated compact disks at a Nanchang market.
In the past, small-town and village-owned businesses helped absorb the
unemployed, but there, too, growth is slowing. Nearly a fifth of such firms
lost money in the 1997 first half, more than double the number in the
year-earlier period.
Already, street protests are breaking out regularly across China as the
state sector implodes. Early this month, 200 pensioners from the Tianjin
No. 2 Wool Factory staged a sit-down strike, blocking a main road into
town in one of the weekly protests against reduced wages and pensions.
And violence is increasing. Protesters fighting forced evictions in Shanghai
last month clashed with police, landing one injured man in the hospital.
Although Asia's financial crisis isn't likely to sweep through China, it is
compounding the country's problems. Here in the southern city of
Guangzhou, investors from Southeast Asian countries say the devaluation
of their home currencies is causing them to buy less and invest less in
China.
Varin Thongsarnsern, general manager of Unisound Electronic (Thailand)
Co., says the devaluation of the Thai baht forced his company to cancel
$2 million in orders from Chinese suppliers. Unisound had planned to buy
electronic parts in China for television sets to be assembled in Burma and
sold in the Indian subcontinent. Now, he expects to buy parts elsewhere in
Asia and pay for them by increasing exports of Thai lumber and grain.
"Chinese goods are too expensive now; so, we have to look elsewhere,"
he says.
So although exports, which surged 23% in the first 10 months of this year
from a year earlier, are the strongest source of China's economic growth,
the rate of increase is slowing. Some economists expect it to be cut in half
next year; Chinese products are now too costly to the rest of Asia, where
demand is slowing anyway.
In addition to hurting Chinese exports, the devaluations raise the cost of
foreign plant-and-equipment investments in China, which has kept its yuan
steady at about 8.3 to the dollar. "We're waiting to see if China devalues,
too. If not, we might go elsewhere to invest," says a Taiwanese investor
here, whose Christmas-lighting factory postponed a $500,000 expansion
at least until midyear because of a slide in the New Taiwan dollar.
So direct foreign investment in China also is expected to drop. This year, it
is running about $40 billion, about equal to last year's pace, but next year it
might be half that, says Fred Hu, a China economist at Goldman, Sachs &
Co. in Hong Kong.
Some economists think China, too, will devalue next year to stay
competitive with its neighbors. And with foreign investment sliding, China
probably will turn for capital to its banks, which are already hard-hit by
nonperforming loans conservatively estimated at $200 billion -- not
including bad loans rolled over each year. Until now, the banks had
maintained a sort of equilibrium thanks to a 40% national savings rate,
which pumped money into them.
But as competing institutions grow and as China reforms its housing
programs by cutting back on subsidized apartments in favor of forcing
workers to buy their homes, savings deposited in banks will dwindle. At
midyear, the growth of bank deposits from a year earlier was already
down to 22%; the gain at the end of 1996 from the end of 1995 was
52%. Slowing deposit growth could leave banks with little money to lend,
quickly crippling institutions that pay interest on deposits but aren't being
paid on many existing loans.
Though China's banks look shaky, they probably won't collapse. Beijing
can shore them up by issuing bonds to increase their capital or by raising
interest rates to draw money back into the system. But either move could
shave economic growth just when it is already slowing dangerously.
Until now, leaders have played down any need for quick financial reform.
"Shock therapy does not apply to China," Li Fuxiang, deputy director
general for China's State Administration of Foreign Exchange, said
recently.
But the rhetoric is changing now that Asia is in trouble. In a recent
handbook for party leaders, President Jiang Zemin wrote: "In recent years,
we have seen a series of financial crises in other countries, and this should
be an object lesson for us. Failure to do so could lead to financial and
economic risk and even endanger the entire economy."
So while moving to restructure the state sector -- many of the layoffs stem
from efforts to streamline money-losing operations -- Mr. Jiang and other
leaders are also pushing a package of financial reforms bolder than those
expected even a month ago. At a closed-door meeting last month, they
agreed to restructure the central bank, the People's Bank of China, to
increase its power, government advisers say. They add that several
hundred branch offices will be replaced with powerful regional offices
along the lines of the U.S. Federal Reserve System.
The country is also considering its own version of a Resolution Trust
Corp., the agency formed to clean up the U.S. savings-and-loan mess a
decade ago. Some former RTC executives conferred with People's Bank
of China officials early last month, and more meetings are planned. The
result may be a special bad-debt bank designed to fix the banking system.
One person familiar with the talks says China is trying to model its financial
system more on that of the U.S. -- a shift from the days when it looked to
other Asian nations.
And aides to Vice Premier Zhu Rongji, who is expected to become prime
minister in March, are drawing up plans to stimulate the economy, such as
by lifting banks' lending caps and reducing the reserves they must keep at
the central bank. In addition, the State Planning Commission is drawing up
a list of projects that can be quickly approved to increase infrastructure
investments, an official says.
But can such reforms push change through a system clogged with
self-interest? Beijing has made some tentative moves. For example, it took
over a delinquent insurer last month, the sort of step other Asian countries
have approached reluctantly. Says Tao Liming, the Bank of China's
director of research: "These neighbors' experiences have changed the way
we view development and opening. It's giving us a whole new attitude
toward the need for further reforms."
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