China holds key to Asian economic stability: Report
China holds key to Asian economic stability: Report
SINGAPORE (AFP): China holds the key to Asian economic stability amid the U.S.-led global slowdown and Japan's decade- long economic stagnation, according to a regional report.
Asian economies are now in better shape than the 1997 regional crisis and will be able to "limp" through the storm this time round but "China is the swing factor," Hong Kong-based Political and Economic Risk Consultancy (PERC) said in its latest Asian Intelligence report.
While a U.S. slowdown will no doubt cast gloom over Asia, any moves by China to devalue the yuan to protect its export competiveness, particularly with the yen and other Asian currencies falling sharply against the dollar, will have severe repercussions for financial systems in the region, PERC said.
"The lower that the Japanese yen and, by implication, other Asian currencies fall against the U.S. dollar, the more likely it is that Beijing will feel the need to devalue its currency as well," said the report, entitled Financial System Inadequacies.
A yuan devaluation "will send shock waves throughout the region that would seriously test local financial systems and could also have unsettling political consequences," it said.
"It is largely for this reason that we think China is the wild card for Asia in 2001 and 2002."
The same factors that are dragging down Asian economic growth this year could also hit China which has so far seemed immune to the global slowdown with officials projecting growth of close to eight percent for 2001, PERC said.
"The same factors that are causing other Asian economies to slow down could also hit China, making it much more difficult for state-owned enterprises to survive and placing a much greater burden on the financial sector," it said.
The report, which also included expatriates' opinion of the financial systems in the countries where they are based, showed that confidence was highest in Hong Kong with Singapore second.
"The financial systems of Singapore and Hong Kong are sound and should be able to absorb the shocks of the coming year without too much trouble," PERC said.
The report noted that domestic policy changes could raise the competitiveness of the two cities.
"Singapore's financial system is being strengthened by the government's moves to open the sector more to foreign competition" while "Hong Kong's system is being strengthened by moves to reduce the powers of the local banking cartel."
The financial sectors in Taiwan and Japan are however expected to see the most profound changes taking place this year, it said.
Banks in the two countries "have more bad loans on their books than official figures indicate".
"More consolidation in the financial industry is required in both countries," it said.
"Even more important is the need to modernize internal systems and to de-link banking from politics."
Thailand, the first Asian country hit by the 1997 crisis, placed fourth from the bottom in the survey.
"Perceptions about Thailand's financial system were worsened by the January general election," PERC said.
"The outgoing government had failed to convince voters that reforms must continue, while the new government both before and after the election has argued that the reforms had delivered bargains in the form of banks and finance firms into the hands of foreigners but had not done much for the Thais or the national economy."
South Korea, another country among the worst hit in the 1997 crisis, still faces several problems in its ongoing restructuring efforts, said the report.
The government "still distrusts market forces and can't seem to keep its fingers out of business," it said.
"The government's corporate reform policies are still inconsistent, and this remains a burden on the financial sector."
Still, South Korea has made substantial progress to strengthen its financial system even though the country placed third from bottom in the survey, said PERC.
A group of profitable banks are emerging from the consolidation in the sector and the arrival of foreign banks have facilitated the transfer of new credit and management skills into the country, it added.
"There is still a long way to go, but Korea is headed in the right direction and there is reason for optimism despite the difficult economic conditions that are likely to exist in the coming year."