As the Asian crisis runs its course, it gives China a unique opportunity to capitalize on its economic assets — enormous domestic savings and a steady growth rate. At the same time, the urgency of the crisis has given the Chinese leadership the imperative to implement needed economic reforms. Judging from the nature of legislation that emerged from the National People’s Congress (NPC) held in March 1998, Chinese leaders are placing economic reform at the top of the national agenda.
Since the start of the crisis in July 1997, analysts have labeled China the "last line of defense" for the economic stability of the region. Global financial analysts have wagered on whether China will devalue its currency and if so, when.
Comparatively speaking, China has one of the most stable economies in the region, with more than $139 billion in foreign reserves and steady but slowed growth rates at 8 percent. Despite these new advantages, China is not taking its favorable economic position for granted.
China has already begun to feel the aftershocks of the crisis, demonstrated by lagging consumer demand and a degree of loss of competitiveness in export goods. To mitigate the effects of the crisis, Chinese leaders recently proposed bold reform measures.
Some of the more prominent plans included a "New Deal with Chinese characteristics," shedding three million jobs in the state bureaucracy, issuing US $32.6 billion in bonds for bank recapitalization, and reforming the state enterprise system.
In light of these new plans, many question whether China can successfully reform its unwieldy economic system while defending its economy from the effects of the Asian crisis. Devaluation of the yuan appears to be the easiest way to take some of the pressure off China’s economy, but it would cause more problems than it would solve.
The obvious windfall of devaluation would make Chinese exports more competitive. But on the other hand, the cost of imports of raw materials would rise, thereby increasing costs to manufacturers. Additionally, the cost of capital goods would increase, hindering the modernization of the Chinese business sector.
Finally, the most serious possibility is that devaluation may spark another round of speculative attacks on the national currencies in the already battered region.
Despite the grim economic prospects facing China, it has an "ace up its sleeve"—its stock of household savings. Chinese households save on average more than 40 percent of their earnings. If the Chinese leadership uses these funds efficiently, it may not have to devalue its currency. A caveat is that the bulk of the savings reside in the state banks (historically, not the most effective financial intermediaries.)
In recent months, Chinese leaders, cognizant of the inadequacies of the state banking sector, have proposed plans that would loosen and develop Chinese equity and debt markets thus providing more efficient opportunities for the use of savings.
However, the country’s savings reserves cannot fully stimulate the economy and solve China’s unemployment ills. An estimated ten million state workers will lose their jobs by the end of 1998. It appears that the leadership has conflicting viewpoints about how to address unemployment.
A number of officials have touted plans that would increase employment and stimulate the economy through new large-scale infrastructure projects, public works and housing programs.
In contrast, during the National People’s Congress, NPC Chairman Li Peng announced that Chinese workers should expect more mass lay-offs, and a ban on most new industrial projects and investment money going into infrastructure projects. Considering that China has not yet felt the brunt of the Asian crisis fallout, in the near future, Chinese workers could face hard times.
Over the past year, China has been given the title "new superpower" of Asia. However, this moniker may, in fact, be overstated in light of China’s serious economic challenges.
The Asian crisis gives China the opportunity to both demonstrate that it is indeed an emerging economic force in the region and to come to terms with its banking, employment, and state enterprise reform woes.
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