China Stands on Sideline of Asian Financial Chaos

BEIJING — As Asia’s once-booming economies continue to stagger and slide, one big question remains to be answered: Will China be next?

At first glance, economists mostly agree, China’s swelling economy has many of the same symptoms that have brought other Asian economies to their knees, including an overvalued currency, heavy external debt and a weak banking system.

Yet China has not gone the way of Thailand, Malaysia, Indonesia and South Korea. The main reason the world’s most populous country has so far avoided the fall, according to regional economic experts here, is that China does not share one thing with its Asian neighbors: an easily convertible currency.

“At this point in time,” said Laurence Brahm, managing director of NAGA, a Beijing-based venture capital and investment counseling firm, “China is probably the safest place to have your money because its currency is not fully convertible and therefore is not exposed to the kind of speculation which has sparked the crisis in Southeast Asia.”

Ironically, China also has been shielded from the Asian economic tumult in part because it does not belong to the World Trade Organization--though it has clamored for years to join--and therefore remains outside the main international economic order.

“For China, entry into the WTO is a two-edged sword,” said investment analyst John Mulcahy, managing director of Indosuez WI Carr in Hong Kong.

Mulcahy said having very strong exports while being able to protect domestic manufacturers has helped China weather this crisis. “But if China were a member of WTO,” Mulcahy said, “they would have more constraints. They might be forced to open their markets to a greater degree than they want, especially in telecommunications. They haven’t been making much noise about WTO entry at the moment.”

Publicly, at least, the Chinese leadership has kept a brave face as the crisis has spread, domino fashion, from one Asian economy to another. On Sunday in Vancouver, Canada, where he is attending the Asia-Pacific Economic Cooperation forum, Chinese President Jiang Zemin did not even mention the regional economic crisis in a keynote speech he delivered before a local group. Instead, he predicted “excellent” economic results for the mainland Chinese economy.

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Foreign Ministry spokesman Shen Guofang, also in Vancouver, boasted that China’s much-maligned, centrally managed socialist system had spared the country from the wild fluctuations suffered by much more open regional economies. “We have always stressed efforts to find a road to development suitable to China’s conditions,” Shen said. “In the course of our reform and opening, China has always been prudent in opening up its capital and financial markets to the outside world.”

Here in China, however, the government has been much less sanguine about its ability to avoid the crisis. That Jiang decided, after early hesitation, to attend the APEC meeting showed his concern about the economic situation, experts here said.

Moreover, China’s top leaders met at length last week with Finance Ministry officials here to discuss the regional crisis. The normally routine annual financial conference in Beijing was attended by Jiang, Premier Li Peng, economic czar Zhu Rongji and Politburo member Hu Jintao.

“The meeting demonstrated the across-the-board concerns of the leadership,” said investment counselor Brahm. “China may not be the next domino in the Asian currency crisis, but the leadership is looking at it with a lot of concern, hastily taking measures to avert patterns which are obviously similar.”

In an unusually critical recent article in the official Economic Daily newspaper, journalist Ka Lin argues that important reforms are necessary to avoid falling into the same situation as other Asian countries.

“China’s financial field is rife with risky factors,” Ka writes, “some of which are getting worse.”

The journalist for China’s most influential financial newspaper listed bad loans to state-owned enterprises, illegal financial dealings and excessive speculation in the country’s two main stock markets as areas of concern.

Nicholas Lardy, an economist at the Brookings Institution in Washington, says that in several important categories, China’s situation is even worse than its Asian counterparts.

“China’s currency has appreciated 25% over the past three years and is widely viewed as overvalued,” Lardy argues in a paper he prepared for delivery early next month before an Asian security group. “China’s external debt, among the highest in the world, stood at $116 billion at year-end 1996. By several indicators, China’s banking system is at least as fragile as those of Thailand, Malaysia, Indonesia or South Korea.”

China has so far avoided the same fate as those countries, Lardy writes, because it has:

* A very healthy rate of direct foreign investment (estimated at more than $200 billion).

* A relatively high rate of medium- and long-term borrowing (compared with the heavy short-term borrowing accounts in Thailand and other troubled economies).

* And a national currency that is not easily convertible for capital-account transactions.

China could face a serious banking crisis if millions of its citizens lose confidence in their banks and withdraw their money, Lardy writes. China now has one of the highest savings rates in the world. With few other options for their money, Chinese wage earners bank an average of more than 37% of their income--savings that keep the country’s four main banks afloat.

To avoid a run on its main banks, Lardy contends, China needs to sharply reduce its string of bad loans to thousands of state-owned enterprises. This is a step that the Chinese leadership--horrified by the fallen state of neighboring Asian economies--now appears to recognize as necessary.

“Most financial institutions’ loans are to state enterprises, which are unable to repay the loans, leading to a high proportion of bad debt,” Ka writes. “The capital for these loans mostly comes from citizens’ savings. Needless to say, this is a hidden peril.”

Even if China addresses its banking problems, economists contend, it still faces challenges as the other Asian economies, their currencies sharply devalued, become more competitive with China in export markets.

In fact, many contend that the problems faced by the struggling Southeast Asian and East Asian economies have their roots in a similar currency devaluation implemented by China in 1994, when it increased its official exchange rate from 5.7 renminbi to the dollar to more than 8.3 renminbi. With this devaluation of its currency, China greatly enhanced its export profile for foreign markets.

“Indeed,” notes the London-based Economist magazine, “China’s subsequent export boom may have laid the ground for some of Southeast Asia’s woes. Now China’s own exports are likely to be dented as currency devaluations all around East Asia increase the competitiveness of its rivals.”

* Times staff writer Maggie Farley in Hong Kong and Anthony Kuhn of The Times’ Beijing Bureau contributed to this report.