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."