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To: Mohan Marette who wrote (74109)	10/23/1998 10:59:00 AM
From: Rif Kamil, M.D	Read Replies (1) \| Respond to of 176388

OT OT OT The Chinese Economy Mohan, you have posted some fine info on the possible recovery in SE Asia as the first step to a global recovery. This article is from today's issue of "The Economist". Enjoy (!?) MUCH of the outside world's preoccupation with China in recent years has been with that country's strengths: would a rich China be a threatening one, could such a China be absorbed comfortably in regional and global institutions, how much money might be made from selling goods to a billion richer Chinese, how many jobs lost to imports from that same productive billion? It is time, however, for the focus to shift. The most important question today is not how strong China might become but rather how weak it now is. The danger of an economic collapse is growing. Such a collapse would hurt Asia directly, and would damage the rest of the world too. The biggest potential danger, however, is of economic trouble leading to political chaos. If that transpires, all bets would be off. Will it? Officially, China is destined to enjoy economic growth of 8% both this year and next, and the government tells anyone and everyone that it will hit that target, come what may. Against signs of slowdown, it has launched a big programme of public spending on infrastructure. China's economic leaders are determined and impressive people, popular on the international circuit for their frank talk, their willingness to hand their e-mail addresses to anyone with a complaint, and, most particularly, for their promises not to devalue the Chinese yuan or the Hong Kong dollar. And then there is the stalwart Chinese worker: having at last achieved a higher standard of living in the 1980s and 1990s after 30 disastrous and painful years, surely he is not going to take to the streets at the first sign of economic trouble? The force of reality To try to assess the situation in China, and to understand its wider importance, it is as well to begin there: with the stalwart Chinese worker. The past two decades certainly have brought new opportunities, new freedoms and new wealth to many urban Chinese, at least in the coastal region. It is also true that in other countries, most notably Russia, predictions of popular unrest have frequently proved wide of the mark, as ordinary people showed themselves reluctant to take to the streets despite severe hardships. The same could well prove true in China. But one group that is far from confident about this is the Chinese leadership itself. On the face of it, what China most needed in 1997-99 was an economic pause. After the helter-skelter growth of the previous five years, when property booms and speculation were rife and structural reforms of state-owned enterprises and dodgy banks were rare, the emphasis needed to shift to reform. Last year, President Jiang Zemin made such reform his slogan; so, last March, did his new premier, Zhu Rongji. Such reform must by its nature be painful, since it involves closures, mergers, privatisation, unemployment. This year, President Jiang and Premier Zhu lost their nerve, and reform has been postponed. Slow growth and large-scale unemployment was a risk they felt unable to take. They, at least, do not believe the Chinese worker is as stalwart as all that. Their belief, it seems, is that slow growth would be disastrous, both for China and for their own jobs. No one can be sure in advance, but their worries could well be justified. The legacy of 50 years of communism is that the party has no intellectual or moral hold on its people, just a material and a nationalistic one. Prosperity is its chief source of legitimacy; once that is endangered, there is only nationalism to fall back on. This summer, after three years of more open political discourse, the party's rhetoric reverted to its old form, with calls to rally against national threats from floods and from the Asian financial crisis. The 8% target is the rallying point. So will it be achieved? It looks highly unlikely (see article). Official statistics are becoming more and more dubious, but even on the basis of official growth of 7.2% in the first nine months of the year, an annualised rate of 10.4% needs to be achieved in the next three months if the target is to be met. Instead, exports are sagging, deflation is taking hold and unsold inventories are ballooning. Despite the counter-blast from public works spending, an annualised rate of 5% or so looks more plausible. The prospects next year look just as tough: the debate about the outside world is whether it will get a bit bleaker or a lot bleaker, so either way exports will again be under pressure. Foreign firms have been cutting their new investment plans, while foreign banks, worried about the recent closure of the Guangdong International Trust & Investment Corporation, with debts of $2.4 billion, are cutting their lending. Although China has more of a domestic debt problem than an international one, its foreign debts are larger than they appear (see article) and official worry about this foreign exposure is now a powerful argument against devaluing the yuan. A bright future, frustratingly out of reach Against this, it can be argued that China has a bright future ahead of it. With entrepreneurial vigour of the Chinese sort, every problem in the Chinese economy can plausibly be redefined as an opportunity. Every bust, inefficient, polluting state enterprise is a potential efficiency gain if it could only be managed by different hands. Every sign of the wasteful allocation of capital in the state-run financial system is evidence of how well things would proceed if only capital was allocated more efficiently. If it has grown this fast while being run badly, think how well China could do if it were run better. The question, though, is how to get from here to there. That is what is dogging the Chinese leadership, and it should worry outsiders, too. Long-term growth will require privatisation of the state enterprises and banks; a freer flow of labour through the abolition of the household registration system; the legalisation of private property; and more. Such moves will involve economic and social pain. There will anyway soon be 18m-20m unemployed. Meanwhile, falling fertility and the one-child policy mean that China is greying rapidly, with a baby-less baby-boom generation fearing for its future. The well of actual and potential resentment is deep. Hence the leadership's reluctance to risk (or admit to) slow growth, or to take the political decisions necessary to move to a brighter future. Lately, worries about China have focused on the will-they, won't-they question of devaluation, accompanied by fears that this would trigger a new financial panic in East Asia. Yet this is to miss the point. The real issues are whether China's growth is slowing or even grinding to a halt; whether the resulting unemployment will prompt political unrest, or a power struggle among the leadership; and then whether that will send China in a disturbingly nationalistic direction. The right bets, on current evidence? Yes, yes and probably.