China restless after Asian crisis

In all the confusion of the south-east Asian financial crisis during the second half of this year, China did something which, despite its huge implications, went almost unnoticed outside this part of the world.

It participated in an International Monetary Fund package for Thailand, giving $1 million (£0.6 million) to help prevent an economic collapse. This was the first time the once-isolated communist giant took part in a regional bailout and it underlined the fact that China recognises it has a substantial interest in the stability of the world economy.

Now China is getting the jitters itself. Since the Thai rescue package in August, south east Asian currencies have devalued at a dizzying pace and stocks have plummeted. Beijing's economic soothsayers, who have served the country brilliantly for five years, are now faced with the prospect that China will also be dragged into the crisis.

Beijing has escaped so far as its currency, the yuan, is not yet convertible on the capital account, and not subject to manipulation by fund managers like Mr George Soros. Foreign capital is also tied up in infrastructure projects and other long-term fixed investments, and cannot flee like the hot money which fuelled Thailand's credit-for-all bank spending spree.

But the building boom in China as elsewhere in the region has outpaced demand, leaving unfinished office blocks in the eastern cities, and, just like the struggling southeast Asian economies, China too suffers from the debilitating diseases of corruption, over-stocked warehouses and a lack of transparency.

Against this background, and with a looming bank crisis of its own, Chinese leaders will gather in Beijing on Monday to focus on financial reform. The meeting has been organised by the Chinese cabinet, the State Council, reflecting its importance. It will consider ways to reduce risk in the country's financial system and avoid the mistakes that led to the currency and market turmoil in its backyard.

President Jiang Zemin, Premier Li Peng and economic wizard Zhu Rongji will reportedly head the meeting, and provincial Communist Party secretaries have been summoned to take part.

While red flags are being hoisted, Chinese leaders still express confidence they can swim against the tide. Mr Li Peng said in Japan yesterday that China has not been affected by the market turmoil and that he remained confident of steady growth of the Chinese economy.

The World Bank in September predicted that China could carry its rapid growth of around 9 per cent through to the year 2020 if it: (a) reformed the banking system; (b) further integrated into the world economy; (c) tackled bankrupt state enterprises, and (d) built a proper legal system.

But its report did not anticipate the impact of a regional crisis of such severity.

Some experts are now beginning to revise downwards the figures for growth in China. Seventy percent of China's foreign direct investment comes from other Asian countries, prompting Mr James Winder, the chief economist of US investment house Merrill Lynch, to predict yesterday that China's growth rate would fall to something above 5 per cent.

World growth overall would slow because of Asian-initiated turmoil, he said in Australia, with China, Brazil and South Korea as the main economic trouble spots. Mr Winder also drew attention to China's significant bank difficulties, estimating that problem loans were at least 20 per cent of total loans and non-performing loans exceeded banking capital by five times.

In China the state-controlled media has been preparing the ground in recent weeks for bank reform, highlighting the extent of bad loans in the state banking system and of shaky illegal savings and loans institutions.

A big question facing the State Council summit, which will go on for three days, is whether or not to revalue the Chinese yuan, fixed by the central bank at a rate of 8.7 to the US dollar. Chinese exporters would like to see the yuan drop a little to restore the competitiveness they have lost after the aggressive devaluations of its neighbours. This would be difficult, given the pressures to value upwards arising from reserves of $134 billion and a trade surplus of $31 billion for the first nine months.

China devalued in January 1994, allowing its manufacturers to undercut competitors in southeast Asian countries, and some economists say the regional crisis can be traced back to that act. Now the afflicted countries are able to undercut China. What Beijing worries about is what will happen three years from now as the cheaper neighbouring currencies eat into its export drive.

The highest red flags are being hoisted in the state-controlled media. China had better watch out, "because the problem of huge bad loans and economic structure common to south-east Asia also exists to varying degrees in our country," the official Economic Daily said yesterday. Although the Asian crisis had not yet produced a great threat to China's economy, "it has taught us a deep lesson".