Economic Pebble May Roll Back as an Avalanche
Call it a coincidence that Chinese President Jiang Zemin swept into the United States for an official visit the same day that the Asian economic contagion felled the New York Stock Exchange.
But the Asian currency turmoil that triggered Hong Kong’s stock avalanche and shook the world’s markets recalls a pebble dislodged many years ago in China’s scramble to reach the top of the region’s economic heap.
A decade ago, China started a gradual devaluation of the yuan to make Chinese exports cheaper for American consumers. It was part of a strategy that, along with other countries’ structural weaknesses, worked wonders: In the last 10 years, China’s share of East Asia’s exports to the United States has grown from 6% to 26%.
Though it has its own internal problems, China’s emerging strength highlighted the precarious foundations of Southeast Asia’s economic miracle. Countries such as Thailand and Malaysia had been putting the proceeds from their export-driven growth into nonproductive assets--real estate, theme parks, the tallest building in the world--more than in sectors that would motor the economy.
It was just such unsustainable growth that led to July’s speculative attacks on Thailand’s currency, the baht, setting off a domino effect of devaluations throughout the region. That made the Hong Kong dollar--the last Southeast Asian currency to hold firm, pegged at 7.8 to the U.S. dollar--a provocative target for speculators trying to force the currency’s value down in concert with other countries’.
The result: a panic as the government protected the dollar peg, which sent interest rates into the stratosphere and stocks tumbling. In turn, the huge decline unnerved U.S. investors and triggered a fall in an overvalued U.S. market.
Now, in a kind of economic karmic cycle, China itself stands to suffer from the economic crisis that its step toward capitalist-style competitiveness presaged long ago.
The world’s most populous country is trying to reform its stagnant state-owned enterprise sector, forcing hundreds of thousands of laggard factories to sink or swim and putting millions of employees out of work. It needs to keep growing quickly enough to create jobs for those jobless hordes, and requires enough capital to whip outdated enterprises into shape.
But the current market chaos that reaches from Hong Kong to New York to Mexico City suddenly threatens key sources of capital coming from the T-shirts and tennis shoes China sells in the U.S., as well as the listings of state-backed companies on the Hong Kong and New York stock markets.
The Chinese government has already postponed several planned listings of state-owned companies on the Hong Kong exchange, after the flop of China Telecom’s debut last week.
“If Hong Kong is not healthy, then China can’t raise the capital it has to have for its market reforms,” said Russell Napier, regional analyst for Credit Lyonnais Securities Asia. “If it can’t reform state-owned enterprises, there may be widespread unemployment and massive instability. The consequences would be huge for the world, not just for China.”
Meanwhile, the chance of economic slowdown in the U.S., combined with competition from the newly cheaper exports from Southeast Asia, also could mean slower growth for China.
Compared with the weakened regional currencies, the relatively stronger Chinese yuan and Hong Kong dollar make Chinese exports seem more expensive than just a few months ago. If the U.S.--its largest market by far--indeed slows consumption because of the stock market dive, as many analysts predict, it could knock a huge chunk off China’s forecasted growth.
“The U.S. market is extremely important to China,” said Andy Xie, an economist at Morgan Stanley Asia Ltd. in Hong Kong. He predicts China’s economy could slow from 9% growth to 6% due to the strong yuan and weak U.S. market next year. “If the U.S. slows down significantly,” he added, “all bets are off.”
And in the inevitable whiplash of globalization, U.S. multinationals that have significant investments in China--companies such as Motorola, Procter & Gamble and American Insurance Group--would feel immediate consequences of both countries’ downturn.
Some analysts think China has enough momentum to keep itself and Hong Kong out of economic crisis. To make sure, China has been quietly supporting state-backed companies on the market, as well as its floundering bond issues.
A top Chinese economist said Tuesday that Beijing doesn’t want to interfere in Hong Kong but that it won’t let the currency peg--a symbol of stability and confidence in the economy--fail.
“I think the central government will take a positive attitude toward the treatment of the [Hong Kong stock market] problem,” said Qiu Xiaohua, chief economist of the State Statistical Bureau. “They attach great importance to this.”
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