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To: BillyG who wrote (27034)	12/22/1997 5:32:00 PM
From: John Rieman	Respond to of 50808

One person's opinion................................. afr.com.au Up next: China's 'big bust' Opinion, By Christopher Lingle The Asian contagion is spreading. After speculative bubbles burst in erstwhile economic powerhouses in South-East Asia, the damage spread quickly to North Asia. This should not be surprising since many of the East Asian "miracle" economies pursued similar paths for development. Indeed, it is becoming clear that systems of governance once acclaimed as the basis for rapid growth in East Asia are now seen as the source of their own economic undoing. Now that South Korea and Japan find themselves bracing from the chilling winds of economic reality, China's most recent growth spurt is also found to be sputtering. Economic performance is trailing off and export growth is falling just as neighbouring Tiger economies with weakened currencies are hoping to export their way back to prosperity. Ironically, China may have sowed the seeds of its own misery. Following its competitive devaluation of the yuan by about one third in 1994, the bitter truth is that China may have set into motion the devaluations that now plague much of East Asia. Unfortunately, economic advisers and enterprise managers in China are too ill-acquainted with markets to understand that competitive advantage is a moving target. Consequently, China's manufacturers are beginning to confront the realities of growing mountains of unsold inventory. Township and village enterprises, a Chinese hybrid of collective ownership where operations follow limited market principles, once served as an important contributor to economic growth. Now they are struggling under excess capacity and increasingly contested markets while they are starved of access to capital that continues to flow from state-run banks to state-owned enterprises (SOEs). Clearing the growing inventories may require another devaluation of the quasi-floating Chinese currency. However, it will be resisted since it will certainly put strains on the ability of Hong Kong to hold its peg against the US dollar. Perhaps the weakest link in China's continued economic progress is caused by the lack of transparency within its financial institutions. In keeping with the development approach in much of the rest of East Asia and its own authoritarian legacy, tight controls over capital markets result in a heavy reliance upon bank lending for industrial and commercial developments. Avoiding the openness demanded by private investors in bond markets, banks can be obliged to grant loans to meet political ends and so neglect appropriate risk assessment in their lending decisions. These funds may be for subsidies to support industry policy or to reward political cronies. Additionally, the Bank of China suffers from a complete lack of independence, and it has never carried out the oversight role of a modern central bank. Meanwhile, any attempt to clear up the non-performing loans held by the SOEs hangs like the sword of Damocles over the regime's head. Of the nearly 300,000 SOEs, roughly 75 per cent are effectively bankrupt and kept going by loans from state banks. With or without dramatic reform, China's banking sector faces severe problems in dealing with a ratio of 20-30 per cent of bad loans to assets. However, this figure may mushroom dramatically once property prices and rentals begin to fall in response to the overbuilding in many of China's largest cities. There is no easy way to sort out the impending financial crisis. If the SOEs are forced to privatise, they must be made profitable. Otherwise, the only steps are to liquidate or restructure. Each option requires massive cost cutting that will unavoidably mean drastic cuts in employment as well as reducing workers' benefits that often include cradle-to-grave services. As a first step, the IMF should require that China and all other emerging economies be refused access to lending unless they begin consistent provision of transparent data in a timely manner. This would allow for more intensive evaluation of their economies. Greater foreign competition in the banking systems and formation of an active and aggressive bond market would also provide more external scrutiny. In comparing China's current economic balance sheet to those in South-East Asia prior to July, it looks like deja vu all over again. However, the result may be worse since China's bubble will blow up in the face of over one billion people. While Japan continues to struggle over implementing its "big bang", look out for the shock effects of China's "big bust". The author is Visiting Associate Professor of Economics in the Weatherhead School of Management of Case Western Reserve University in Cleveland. His book, The Rise and Decline of the Asian Century,ÿwas published by Edicions Sirocco (Barcelona: 1997)