Can China live up to Asia's expectations?

Can China live up to Asia's expectations?

Ching Cheong
The Straits Times
Singapore

Just last year, people were talking about the "China threat"
in the economic dimension, meaning the rise of China would
squeeze out the lesser economies in Asia. Now they are hoping
that it can hedge the region's economies.

Two international forums -- the Asia-Pacific Economic
Cooperation (APEC) and the World Economic Forum (WEF) held
recently in Shanghai and Hongkong respectively -- looked towards
China as the cornerstone of economic stability in Asia. Two
themes dominated both discussions -- terrorism and the
deteriorating global economy.

As an enraged United States went to war against terrorism,
Asian governments are caught between U.S. demands for support and
domestic pleas for restraint and peace. Asian businesses are
afraid that their already-weak economies would be plunged into
outright recession.

Most agree that China has a historic role to play.
Politically, it has demonstrated its full support in the fight
against terrorism during the APEC meeting. Economically, it can
help pull the flagging Asian economies out of the current
doldrums.

For example, its neighbors hope that China would serve as the
anchor of regional currency stability. At the height of the 1997
financial crisis, when Asian currencies fell like dominos, China
kept steady the worth of its currency, providing a measure of
stability in a stormy time but at the expense of its own external
competitiveness.

This time round, pressure on the renminbi works in both
directions.

According to a report released by the People's Bank of China,
the central bank, as more foreign direct investment (FDI) is
likely to enter the country in the aftermath of Sept. 11, the
pressure is for an upward direction.

Yet, as the renminbi is pegged somewhat to the dollar, which
is expected to dip because of the war, there is pressure for the
Chinese currency "to devalue passively", said the report.

At this time of great uncertainty, it is natural that Asian
neighbors would like China to hold firm its currency again.
Compared with other Asian economies, China has the wherewithal to
do so. As of mid-October, its total foreign-currency reserve
reached a record US$200 billion (S$367 billion), providing a
massive cushioning effect against external shocks.

Asian economies would like to see China exporting capital to
them after sucking up massive amounts of FDIs. During the decade
1991-2000, China absorbed one quarter of the FDI which flowed
into developing countries, with an average annual intake, in
terms of actually utilized capital, of about $40 billion. In the
first eight months of this year, total utilized foreign capital
reached $27.4 billion.

The Sept. 11 tragedy is likely to drive the annual total near
to $50 billion, according to an Economist Intelligence Unit (EIU)
estimate.

The EIU report points out that investment seeks cheap,
educated labour and political stability. China has provided both
of these since 1997 while most Asian countries have not. Before
the 1997 crisis, two thirds of FDI flowing into Asia went to the
ASEAN countries. Now two thirds go to China. The fact that China
is getting so much of it suggests that the rest of Asia is
missing out.

Or worse, the situation could be that China has reached a
point of having a monopoly over FDIs. As compensation, people
hope that China could increase its export of capital. In this
regard, the WEF participants are optimistic. According to Victor
Chu, chairman of First Eastern Investment Group, after the Sept.
11 attacks, Asia will be at the forefront to absorb Chinese
overseas investment.

Companies, therefore, need to come out with projects that can
complement Chinese investments.

To woo Chinese capital, neighboring countries are
contemplating massive railway links built with Chinese capital to
connect their countries to China. During the WEF summit, South
Korea and the Greater Mekong sub-region revealed plans to do so.

Most people also hope that China can contribute to regional
economic stability by opening up its huge market to Asian
exports. Georges Ugeux, group executive vice-president of New
York Stock Exchange, said that with Japan's economy still gloomy,
"China is becoming the biggest engine of growth for Asia" by
absorbing Asian exports the way the U.S. did in the past.

However, the EIU report is a lot more cautious. It argues that
the country's demand for imports from Asia is not yet sufficient
to sustain regional growth. Despite steady growth, China will not
be large and advanced enough to provide an alternative source of
demand for Asian exports until perhaps 2020.

Currency stability, export of capital and opening up of its
vast markets are the three contributions that China's neighbors
expect of it.

The big question is whether China can deliver. Even if one
disregards the rather-alarmist and extremist views of U.S. lawyer
Gordon Chang's well-researched book, The Coming Collapse Of
China, the Chinese economy is no doubt vulnerable, given a
staggering bad debt of 1.8 trillion yuan (S$402 billion) at the
end of September.

Chinese central banker Dai Xiang-long told an international
forum that non-performing loans account for 26.6 percent of total
lending by China's four state-owned commercial banks: China
Construction Bank, Industrial and Commercial Bank of China, Bank
of China and Agricultural Bank of China. Together, they issue 70
percent of all loans and hold 80 percent of all deposits in
China.

The size of China's bad debt shows that the nation's banking
sector is still in trouble despite the transfer in 1999 of 1.4
trillion yuan in bad loans to asset-management companies. The bad
debt could cripple the fragile financial system and bring grave
consequences to the country and the region.