China to lag behind in more competitive post-crisis Asia (fwd)

Stephen E Philion philion at hawaii.edu
Sun Jun 27 03:08:52 PDT 1999


China to lag behind in more competitive post-crisis Asia

SHANGHAI, June 27 (AFP) - China, which at first seemed unscathed by the Asian financial crisis, will ironically emerge from it less competitive than worse-hit economies forced into reform and restructuring, economists say. By holding its yuan stable against the dollar when its neighbours suffered a withering series of currency devaluations, China avoided the crisis that erupted two years ago and took on the image of an island of stability.

But as the rest of the region begins to recover, China remains mired in slowing growth and deflation due to unresolved systemic problems with its domestic economy, said Hong Kong University economist Xiao Geng.

"Stability kept China more competitive during the crisis, but other countries were forced to undertake reforms," he said, citing moves to rid financial systems of corruption and cronyism and make them more transparent.

"Their transaction costs and institutional costs have been improved ... Because China has not devalued, its institutions have not been improved," he said.

South Korea, in particular, has emerged a tougher challenger. "Overall their economy is more competitive," said Xiao, who advises both the Chinese government and the World Bank.

Bob Broadfoot, an analyst with the Political and Economic Risk Consultancy in Hong Kong, said Chinese officials had overstated the negative impact of the crisis and used it as an excuse to delay needed restructuring.

"Non-performing loans of the banks are still going up," he said, referring to high levels of risk still plaguing a financial system that remains too closely linked to inefficient state-owned industries.

"When the rest of the region appears to be stabilising, China appears to be moving into a more vulnerable period," Broadfoot said. Worsening relations with the United States are especially a cause of concern, he said.

"Until recently China's exports were outperforming other Asian economies ... now they are deviating from other Asian economies in a negative way," he said, adding: "We're watching that very closely."

The crisis flushed out a few kinds of systemic weakness -- such as the troubled trust and investment sector -- but continue to weigh down the economy, he said.

China's official gross domestic product (GDP) growth -- seen as overstated by most foreign observers -- is expected to fall from 7.8 percent last year to between 6.5 and 7.2 percent in 1999. It has been slowing since 1992.

Retail prices were down 3.5 percent in April, the lowest point in 20 consecutive months of deflation.

The crisis stifled Guangdong International Trust and Investment Corp.'s (GITIC) ability to mask its massive debts with short-term loans and pushed it into a highly spectacular collapse -- uncovering a trail of insolvency that led to hundreds of other troubled financial companies in China.

Broadfoot said China had only worsened its economic inefficiency by trying to support the flagging economy and prevent recession through non-quality government spending.

The chairman of the world economy department at Shanghai Financial and Economy University, Zhu Zhongdi, said surviving exporters in the crisis-hit economies now make higher value-added products that outperform Chinese counterparts on overseas markets.

"Because they received a tougher challenge to exports, their production upgrade has been more radical," he said, adding that China was still stuck with "old-style" products.

Xiao said entry into the World Trade Organisation (WTO) -- and the wide-open international competition it would bring -- may be China's only hope of forcing the fundamental economic changes needed to keep pace with the global economy.

Although reformers in Beijing have taken the path of policy-driven change from within for 20 years, progress has not been fast enough, he said.

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