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Strategies & Market Trends : HONG KONG -- Ignore unavailable to you. Want to Upgrade?

To: Ron Bower who wrote (1668)	5/21/1998 7:55:00 PM
From: MikeM54321	Read Replies (1) \| Respond to of 2951

Ron, I found an interesting article that supports your commentary. It's unusual for me to find an article like this one. I didn't clip off the Japan section. Even though this is the Hong Kong thread, I thought it was interesting to see the contrast in problems. MikeM(From Florida) Ron writes: >>IMO - The growth far exceeds the numbers being reported by other Asian countries considering the lack of investment from and export sales to the rest of Asia. Unless these numbers progressively worsen, there should be no rush for them to devalue the yuan.<< The article: >>The Chinese Worry Wall by Leif Olsen May 19, 1998 -- China and Japan overshadow the economic recession sweeping through East Asia. Currency devaluation in China and a further decline in the Japanese yen, coupled with a deepening recession, will spread economic decline in the already beleaguered East Asian countries. If that happened, global economies would also feel the depressing effects. Analysts and investment managers whose job it is to anticipate problems and disasters before they occur are becoming increasingly concerned that China will be forced to devalue the yuan. That worry is almost entirely fed by the observation that economic growth does not seem to be speeding up in response to enlarged fiscal spending on infrastructure. Also, unemployment is rising. However, it is too early to draw conclusions about fiscal spending. The program was initiated only a few months ago. In any event, China's economic policy-makers undoubtedly recognize that devaluation aimed at making China's exports more competitive will not work. Other East Asian countries whose currencies are all floating are likely to be forced lower by market forces, thus wiping out any competitive advantage China might be seeking. Furthermore, trying to force more exports into such countries as Thailand and Korea would be futile even if China was successful in cheapening its currency relative to those countries. Recessions have reduced employment, income and a willingness to lend on the part of banks. As a result, consumption is in the pits. Devaluation by China will not be undertaken voluntarily and speculators cannot force it to happen. China does not have a trade deficit. Instead it enjoys a significant surplus and its foreign exchange reserves keep growing. Even if rising unemployment produces some social unrest, it is not likely the government will devalue, recognizing that it will not produce much stronger growth. China's exports grew by 20% in 1997 but in the first four months of this year they increased by 11.6%. However, exports to the U.S. climbed 20% in those four months. Lower interest rates and shifting more exports to Western markets to compensate for the weakness of East Asia can bring economic growth to the 8% target set by the government. Now Japan. Here the problems are different and more real. There is one central problem, namely the lack of sufficient credit for even sound borrowers. Japan does not have a broad competitive credit market with many alternative sources of credit. The banks and the government are essentially the only sources. The banks are unwilling to lend because the bankers are suffering from a trauma brought on by the huge volume of bad loans on their books. They are concerned about the need to increase capital as a ratio to assets. Increasing assets, namely loans, is not very appealing. The government needs to recognize this and buy preferred stock from the banks, thus injecting capital. This has been done in a very small way. More needs to be done. Japan has huge foreign exchange reserves and they are growing. This is a direct result of Japan's growing exports outside of East Asia. In the early 1930s the Federal Reserve failed to apply an expansionary monetary policy but instead inadvertently tightened. The ensuing liquidity crunch was so severe, and so undermined the confidence of bankers, that over the rest of the 1930s banks ran huge excess reserves. In other words, the Fed eased but the banks would not lend very much, preferring to pile up excess reserves to guard against another liquidity squeeze. In the early 1990s, banks curtailed lending in response to the trauma of huge, bad loans extended to finance commercial real estate. Many banks failed. Capital requirements were raised and banks curtailed their increase in assets in order to boost capital as a ratio to assets. The slow increase in bank credit also contributed to slow economic growth for a year or two. It was interesting that at the time Alan Greenspan, chairman of the Fed, testified that the slow economic growth was due to the excessive borrowing that had been undertaken in the 1980s. Nevertheless, the Fed was trying to get households and businesses to borrow more in order to get the economy growing faster. American policy makers are undoubtedly sharing these experiences with their counterparts in Japan. So far there has been very little evidence that they are doing the right things. But history reveals that when things get bad enough, governments act. Apparently things are not bad enough yet in Japan. <<