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.