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

To: Julius Wong who wrote (2586)	12/14/1998 3:11:00 PM
From: Tom	Read Replies (1) \| Respond to of 2951

Julius and WONG, Received your prior posts. Thank you for the info. Pardon me for not responding sooner. Been concentrating on wrapping-up some important issues prior to year's end. On your 11-25 post, Julius, I haven't visited the HKMA site since the speculators retreated. The wealth of Hong Kong is considered by some a feature that will bolster the economy for years to come. It's the HSI's launching platform. Let's hope the wealth is not diluted by mandarin ne'er-do-wells in Beijing. Too, I've followed figures reported by the HKMA for some time now, especially during the events of this past Summer. I have never noticed a contradiction in what they report or announce. (News last week also of the PRC's intention to break-up China Telecom.) On your Singapore report, WONG, I've been purposefully avoiding most news from Singapore. Only for the purpose of avoiding distraction. I may have reported a while back what good work Deputy Minister Lee Hsien Loong offered to revive a depressed Sg economy back in 1985. He is deeply involved once again. I'm waiting for another buying opportunity. From Mr. Lee, the younger: www4.gov.sg Can certain equity investments in Singapore be considered as playing China from the periphery? I think so. ----- China's None-Too-Rosy Future by Christopher Lingle It is common for outsiders to disagree on China's long-term growth prospects and the current health of its economy. However, the fact that a similar debate is going on in China is both surprising and illuminating. While Communist Party officials insist upon painting only a rosy picture of the Middle Kingdom's outlook, there are some outspoken pessimists. Among them is Yang Fan, a leading commentator and economist from the Chinese Academy of Social Sciences. Mr. Yang foresees a major crisis in China within five or fewer years, as explained in "Strategy and Management," a magazine published by a respected Communist Party think tank. Mr. Yang says in the magazine that most of the optimistic tales are designed to induce foreigners to overlook the deep problems in the Chinese economy in order to convince them to invest more money. Mr. Yang's recent article offers details suggesting that very large sums are involved. It began with rural cadres apparently skimming off billions of yuan in public assets when the household-responsibility system was begun 20 years ago. During the 1980s, officials apparently siphoned off nearly 5 trillion yuan by demanding commissions, by altering cash receipts, and by reselling commodities purchased at fixed state prices that were sold for higher prices on the open market. He Qinglian, an author who is based in Shenzhen province, wrote in her widely discussed book about the deep-seated corruption and other flaws that are evident in the Chinese economy. She fears that China's economy will be bankrupt by the enormous weight of its accumulated debts. Her best-selling book, "Pitfalls of Modernization," describes how officials falsified accounts of state enterprises to transfer money raised through stock markets or loans from banks into personal bank accounts. She suggests that state assets amounting to 50 billion yuan (US$7.2 billion) a year have been diverted into the pockets of Communist Party officials through the issuance of shares in enterprises and the plundering of public wealth. China's financial reforms in 1992 provided new opportunities for theft of state assets through the manipulation of bonds, shares, loans, and real estate. Ms. He believes that officials may have diverted 30 trillion yuan over the past 20 years. Unfortunately, authorities in Beijing find it difficult to acknowledge the illicit transfer of public property into the hands of ruling cadres because it would undermine the legitimacy and credibility of Communist Party rule. In all events, all these improprieties put the entire strategy of economic reform at serious risk of failure. Even now the process has been slowed in order to support the illusory goal of achieving 8% real economic growth in 1998. Doctoring of accounts to provide false information about profitability of state-owned enterprises is also common. Overall economic losses for these enterprises have deepened and spread to new sectors. It is especially troubling that state banks have more than a trillion yuan in nonperforming loans, making a mass default in the banking sector very likely. While China's banks face bigger problems than Japan's, Chinese companies are also as heavily indebted as are Korea's chaebols, and China's property bubble is larger than Thailand's was. This means that much of the hard-earned savings of the Chinese people entrusted to state banks has been frittered away. At the same time, most of the capital raised on the domestic stock markets and abroad during the last six years to finance the renovation of state-owned enterprises has been squandered. Shares issued to the public were for state-owned-enterprise factories that were being operated by the same people with the same bad habits. Without a basis for profit, these companies will not be able to pay dividends to their shareholders. It is not surprising, then, that capital inflows from foreign investment have dropped by 35% from the levels of 1997. It appears that the weight of the internal contradictions arising from 50 years of economic mismanagement is finally coming home to roost in the Middle Kingdom. Unfortunately, that weight will be borne mostly by the peasants and workers. The coming recession on the mainland will almost certainly exacerbate the sort of severe social tensions that communism was meant to resolve. Apparently the evidence of the impending economic breakdown is too great to ignore. Otherwise such open and specific criticisms would not be allowed to have such a public airing. Christopher Lingle is a Hong Kong-based corporate consultant and adjunct scholar of the Centre for Independent Studies in Sydney. He is the author of "The Rise and Decline of the Asian Century" (Seattle: The University of Washington Press: 1998).

To: Julius Wong who wrote (2586)	2/24/1999 7:40:00 AM
From: Julius Wong	Read Replies (1) \| Respond to of 2951

International Commentary Devaluation Won't Help China Compete By Yonghao Pu, a London-based senior economist at Bank of China International, the investment banking arm of Bank of China. The great yuan devaluation debate is underway, but the arguments on both sides are wide of the mark. On one side we have economists who forecast a devaluation of China's currency on the basis of a simple premise -- other Asian countries have devalued by as much as 80%, boosting their competitiveness, therefore China must eventually follow suit. On the other side, observers who doubt Beijing will choose devaluation point out it would hurt China, both through a new round of competitive devaluation in Asia and increased repayment levels for external debt. Both sides miss the fundamental issue: China and its neighbors do not gain an advantage in competitiveness by debasing their currencies. Now that 18 months have elapsed since the Asian crisis began it is time to draw some conclusions about devaluation. Most of the competitiveness initially gained by those Asian countries that devalued was quickly lost. This is due not only to a rebound in their currencies, but also to excessive inflation fuelled by rising import prices. Against this China has made some competitiveness gains through price declines, without allowing its currency to fall. The countries that devalued gained far less in competitiveness relative to China than we at first imagined. If you exclude the two most extreme cases, Indonesia and Malaysia, the average gain has only been about 8%. I have constructed a trade-weighted yuan exchange rate against the currencies of its main trading partners and it suggests that the yuan only appreciated by 3% from July 1997 to the end of January 1999. It's certainly true that China's exports are hurting. In January this year exports registered one of the biggest falls in recent years and contracted about 11% compared to the same period last year. But this was mainly due to weak demand from other Asian countries, rather than a strong currency. It is worth looking at third-party countries where much of the competition between China and other Asian exporters takes place. In 1998, China's exports to the U.S., EU and Latin America have increased by 16.1%, 18.1% and 15.5% respectively from the previous year. Exports to Japan, which ranks as China's third largest trading partner, slumped by 7% last year due to the collapse of Japanese domestic demand. It is worth noting that, with the exception of the Philippines, all the Asian countries which devalued their currencies are experiencing negative export growth. Many Southeast Asian exporters rely heavily on imported raw materials. The higher cost of these parts is felt quicker than any subsequent rise in exports. In addition many exporters also face cash flow problems as a result of the surging cost of servicing their U.S. dollar-denominated debt. If China's competitiveness has not been eroded by external onditions, what about internally? According to my own research, I believe that China's competitive edge has been enhanced in the last two years while neighboring economies have suffered. First, the value-added element of China's export industries has been greatly upgraded during the past two years. Exports of labor-intensive goods have been declining over time. For example, primary products' contribution to total exports declined to 11% in 1998 from 14% in 1996. On the other hand, higher value-added goods, which made up only 20% of total exports in 1996, increased to about 27% in 1998. A good example of this is the export of computers and computer components. World-wide shipments for the first 11 months of 1998 were 30% higher than the same period in 1997 and nearly double 1996 levels. Before the Asian crisis, Southeast Asian labor costs in the manufacturing sector were about 2.5 times higher than those in China as measured in dollars. Although this gap shrank during the crisis, it is now widening again as currencies strengthen against the U.S. dollar and inflation starts to increase. Currently China's labor costs are less than half of its neighbors'. China is also implementing a sweeping reform of its state-owned enterprises. This has led to a surge in urban unemployment, further depressing labor costs and maintaining the country's competitive edge. Meanwhile over-capacity has become a serious problem as about 67% of its key manufactured products are discovered to be in oversupply. To combat this problem a variety of measures have been taken. These include closing down mines, scaling back petrochemical and steel production, and reducing manufacturing of low-quality items. Industry is in the process of becoming "leaner and meaner." The productivity of China's manufacturing industry has been growing speedily in recent years, due to a combination of rising unemployment and advancing technology. It is estimated that in the last two years, China has seen an annual average growth rate of manufacturing productivity of about 7.5% versus 4.3% in the U.S. This is especially relevant when one looks at the downward bias and depressed demand situation in China against the accelerating demand scenario in the U.S. Fast growth of manufacturing productivity has laid a solid foundation for both China's competitiveness and its currency. In 1998, other important economic factors in China have supported the currency: a 5% real interest rate, compared with 3% in the U.S.; a 2.6% of GDP current account surplus against a 2.7% deficit in the U.S.; and 8% industrial production growth against 4% in the U.S. In the coming years these economic leads are likely to be sustained. All of this is not to say that China has no difficulties. On the contrary, it faces a number of related serious challenges on the domestic front. These include restructuring of the SOEs, rising unemployment, weak domestic demand, deflation, reforming of the financial sector and tackling of bad debts. All of these problems are either structural or cyclic, but none can be resolved by using a devaluation shortcut. The same can be said for the current slump in exports -- a drop in the value of the yuan wouldn't stimulate demand in Japan and other crisis-hit countries. But debasing the yuan cannot revive exports or help China's export industry to reform and upgrade. Rather it would erode the confidence of foreign investors and harm Asia's recovery, which China badly needs. To restore export growth, China must continue to rationalize its industries, reduce over-capacity and further upgrade the value-added element of its export industries. It also needs a bit of luck -- continuing growth in the U.S. and Europe as well as a recovery in Asian economies. The last thing China wants or needs now is devaluation. -- From The Asian Wall Street Journal