China Offers Reforms, Rules Out Currency Devaluation

China today outlined bold steps to avoid a Southeast Asian-style financial crisis, including a sweeping reorganization of its creaking banking system and a plan to clean up bad debt.

Central bank Governor Dai Xianglong, unveiling the moves at a news conference, again ruled out a devaluation of the Chinese currency to help China’s export competitiveness.

He also said China had no immediate plans to lower bank interest rates, another move that would give a shot in the arm to an economy facing a major threat from Asian rivals whose currencies have collapsed.

He stressed Beijing’s support for the Hong Kong dollar’s peg to the U.S. currency, even at the expense of falling stock prices.

Dai painted a relatively optimistic picture for China’s economy this year, predicting growth would top 8% and inflation would stay below 3%. Growth last year was 8.8%.

He said China’s foreign exchange reserves at the end of last year had reached $139.9 billion, boosted by the country’s growing trade surplus.

On banking reform, Dai announced a reorganization of the People’s Bank of China, the central bank, that would eliminate provincial-level branches and establish regional headquarters along the lines of the U.S. Federal Reserve.

Centralizing economic supervision would cut interference from local authorities, who are able to thwart government policy on credit by leaning on local officials of the central bank to approve pet projects.

Dai said state-owned commercial banks would shut money-losing local branches, and joint-stock banks would be set up in 300 cities under the reform program that would take three years to complete.

State media have suggested that commercial banks will concentrate their lending in large cities, abandoning a vast network of poorly run small branches through which bad loans have been seeping.

Dai said 20% of all Chinese bank loans were nonperforming, and 5% to 6% were unrecoverable.

China would write off more than $6 billion in bad loans this year and another $7.1 billion to $8.6 billion in 1999 and 2000, he said.

He made clear the Asian financial meltdown had pushed into the indefinite future any plans to make the Chinese currency fully convertible into other currencies.

China’s near-watertight barriers to capital in-flows have largely protected it from the Asian financial contagion, since speculators cannot get their hands on the yuan.

Dai insisted financial risks in China had been adequately “dealt with and mitigated,” partly through boosting supervision over financial institutions. “Ongoing monitoring was imposed on financial institutions with high risks,” he said.

He said the collapse of Hong Kong investment bank Peregrine Investment Holdings would not affect China’s plans to list shares in the territory.

Peregrine dominated the market for Chinese share offerings in Hong Kong, and was poised to play a key role in bringing to market a new batch of Chinese state-companies under Beijing’s ambitious new privatization plan.