Chinese Economic Leaders Read a Warning in Asian Crisis
by Seth Faison
SHANGHAI, China -- Over the last few weeks,
Chinese leaders have watched with growing alarm as financial
crises engulfed other Asian countries, knowing that China's own
fragile banking system is deeply vulnerable as well.
After a series of private meetings, the nation's senior economic officials emerged Wednesday with a public view of the matter, and it was sober and alert.
The top economic authority, Deputy Prime Minister Zhu Rongji, appeared on television Wednesday night as he addressed Chinese bankers, and he urged them to try to avert the kind of panic that had sent currencies and stock markets tumbling elsewhere.
"The currency devaluations in Southeast Asia pose a severe challenge," said Zhu, who is widely expected to be named prime minister when the nation's nominal Parliament meets in March. "We must meet this challenge."
Since China's currency is not freely exchangeable to hard currencies, and its stock markets are relatively small, it has been insulated from the kind of cash outflow that has devastated Indonesia, Thailand and South Korea. Zhu pledged Wednesday night that China would not devalue its currency, the yuan, any time soon.
But the pressures on the Beijing authorities are strong. Their banks are saddled with untold billions of dollars in bad debt and are caught in a wrenching shift from a planned economy to one driven by market forces. Should depositors lose confidence in China's state-run banks, which depend on the nation's 40 percent savings rate to function, the financial system could falter.
This year, China is trying to engineer a big sell off of state industries, and there is a pressing need for domestic and foreign investment, both of which seem to be receding. Should the financial crisis spread to China, tens of millions of urban workers may well be unemployed.
Although Wednesday night's broadcast did not say so, in recent weeks Zhu has quietly ordered Chinese provinces to close many local trust companies -- small finance operations that underwrote much of the real estate boom that produced drastic overbuilding in coastal cities.
In Shanghai, Mayor Xu Kuangdi said Wednesday that leaders recognized the significant financial danger posed by the real estate bubble. So many new office buildings were completed in Shanghai's already overbuilt market last year that shiny skyscrapers remain empty and the office vacancy rate is near 40 percent.
Although he argued that bank exposure to bad real estate loans was limited, Xu said the Shanghai government had decided to suspend all new land sales. "We're not fortune-tellers," he said, trying to explain the property glut. "We didn't know such a serious Asian financial crisis was coming."
The mayor added that the broad Asian crisis would affect China principally by reducing its exports and foreign investment, the twin engines of economic growth.
"What has happened in Southeast Asia gives us a wake-up call," Xu said at a news conference. "We must pay very close attention to our financial structure."
Another danger facing the Chinese economy is the effect of falling stock prices in Hong Kong. Many of China's best-run companies were preparing to issue stock in the Hong Kong, Shanghai and Shenzhen markets in the coming year, and the loss of enthusiasm about those markets means that most of those offerings will be delayed. The effect of the delays on Chinese corporate money-raising efforts and on the sale of state industries will only become clear in coming months.
This week, several of China's notoriously secretive national banks reported severe earnings declines, which at least partly reflected bad debts owed by failing state industries.
As for the overall economy, Zhu offered a healthy forecast of 8 percent growth in 1998. "China is politically stable," he said. "China will become a center for overseas investment in Asia."
Copyright (c) 1998 by The New York Times Co. Reprinted by permission