OT
Singapore
Here, banks took a hit after SM Lee yesterday said they are headed "downhill" if they don't respond to the challenge of global competition. To compete, Mr Lee said the banks have to have talent of a global standard and he pointed out that they have thrived so far because the industry has been protected.
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Busted China
by James Harding
The story of China's economic miracle has become a media and political cliche. While the rest of Asia remains mired in regional recession, the Chinese last year boasted an audacious growth rate of nearly eight percent; and, while other Asian governments have allowed their currencies to plummet, China's leaders have steadfastly stood by theirs. This pleases economists, and it particularly pleases the Clinton administration, which touts a vast, booming China market as at least one reason for its policy of "engagement."
But what if this success story isn't exactly true? China's external sector (exports and foreign direct investment), which in 1997 was the main engine of economic expansion, has moved sharply into reverse. Export growth was flat in 1998 and fell by nearly eight percent in the first three months of this year. Foreign investment shrank by almost 15 percent. This year, for the first time in more than a decade, both overseas sales and inward investment look set to drop.
Here, on the ground, the picture is less heartening still. In central Shanxi province, the heart of China's coal-mining country, big state coal mines have not been paid by the bankrupt state enterprises they supply; in some cases, the coal mines cannot pay their workers' salaries and pensions.
In Taiyuan, the provincial capital, people laugh at the official estimate of 3.5 percent unemployment--and speculate that the actual rate is closer to 30 or even 40 percent. Protests outside provincial government buildings are a regular occurrence, as is violent crime--from highway robbery and armed burglary to kidnapping and murder. As one Taiyuan man told me, "Decent people don't go out after eleven p.m."
In the coastal city of Ningbo, exports have been falling by more than one percent a month since early last year. The local planning commission says a number of big foreign investments, such as the proposed construction of a South Korean-bankrolled shipyard, have been suspended. A bribery and fraud scandal swept away the top tier of the city's government. The city's flagship infrastructure project, a 1.5-mile long, $52 million bridge, has a crack in the middle, thanks to a design flaw, shoddy construction, and, allegedly,
misappropriation of funds. Now, the government will have to dismantle the bridge and rebuild it.
Indeed, things have gotten so bad that even the Panglossian Chinese leadership has shown some candor. Premier Zhu Rongji recently made the most bleak state-of-the-nation address to the country's so-called parliament in years: "Demand in the market is feeble ... there is overcapacity in most industries ... financial discipline is lax ... economic order is somewhat in disarray ... the pressure of providing employment for people is fairly great ... and public order in some areas is not good"--not exactly what you hear from China's boosters in the West.
Unfortunately for the Chinese citizenry, the government does not seem to have the tools to fix the problem--or is unwilling to use them. Although the government is loosening consumer credit to revive flagging demand, Beijing has only limited funds. Last year, China's government spending program, in effect, enabled Beijing to buy a few extra percentage points in growth. It cannot keep doing that for long. Meanwhile, Beijing is pressing ahead with state-enterprise reform, which may be in the nation's long-term interests but will, at least in the short term, mean more layoffs, more insecurity, and less consumer confidence.
There is, of course, one other avenue for reviving growth: devaluing the currency. In 1997, Chinese exports grew by around 20 percent, buoying confidence, easing the pain of state-enterprise reform, and inducing foreign direct investment. Last year, by contrast, overseas sales increased by just 0.3 percent, thanks in no small part to high currency values, which keep Chinese exports expensive. Confidence in the non-state sector has shrunk accordingly: investment by private and collective enterprises, which together accounted for 56 percent of industrial output in 1997, has collapsed. Falling consumer demand and industrial overcapacity, in turn, have driven down retail prices by roughly three percent.
Within the domestic market, a strong Chinese currency has also taken its toll on national enterprises. Some large shipyards in China have not won a single export order since the beginning of last year; even Chinese ship buyers are placing orders with cheaper ship makers from Japan or South Korea. South Korean steel producers off-loading cheaper steel into China have pushed down domestic prices by roughly 15 percent in some product areas, depressing earnings at China's largest steel mills.
Devaluation, of course, would not resolve everything. But it would remedy the pain felt at some of the most acute pressure points of the Chinese economy. Exporters would profit from a small boost in competitiveness; higher import costs would drive off some of the overseas competition and offer a dose of imported inflation to counter the deflationary trend. At least some foreign companies already expect devaluation; if the Chinese government finally takes the currency down, it would end the uncertainty and pave the way for a renewal of investment funds. Chinese individuals holding off on purchases in an uncertain economic environment and spiriting funds out of the country might return to more normal economic behavior.
Even a modest devaluation might do the trick, and, for that matter, it doesn't have to be called a "devaluation." The central bank could simply broaden the bands within which the currency is traded to allow for, say, a ten percent movement either up or down. This would allow the currency to depreciate but also, in time, appreciate. It would be in keeping with the central bank's commitment to currency stability, while moving gradually toward a fully convertible currency. And, given the problems pegged currencies have caused, Beijing could argue, quite rightly, that a stable exchange rate is not, ultimately, a fixed one.
Still, the Chinese government can find reasons aplenty not to adjust the exchange rate. A currency devaluation of more than ten percent could spur other emerging market economies to follow suit. While Asia is in better shape to handle a Chinese devaluation than it was a year ago--given the choice, Asian economies in the early stages of recovery might rather see strong, quality growth from China than an externally fixed exchange rate--there are still fears that a Chinese devaluation could spark another round of Asian and Latin American currency turmoil. That would cause fresh, possibly deeper pain and, perhaps, puncture U.S. confidence, too. Beijing would also have to consider the potential impact on the economy of Hong Kong. It's not written in stone that the territory's currency must depreciate if China devalues, but the downward pressure might well become irresistible.
Indeed, the bottom line is political. Not only would devaluation make life difficult for the United States and other pro-China governments abroad. For some in the upper echelons of China's government, devaluation would also be a kind of defeat--just as China marks the fiftieth anniversary of Communist rule. But, then, so is an economy running out of steam.
James Harding is the Shanghai correspondent of the Financial Times.
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Between the rocks and the shoals,...losing steerage-way.
Grab your gutchies, folks. And don't waste time looking for the laundry tag. |
