China causes jitters in Asia - China's debt raises fear in Asian economies

Business Asia, August 17, 1998

Disappointment over the early days of the Obuchi Government in Japan is being overshadowed by new fears of a Chinese yuan devaluation -- a scenario causing jitters in Asian markets.

Critics have chastised the Japanese Government for failing to offer new plans to revive Japan's stagnant economy, with Prime Minister Obuchi merely reiterating a pledge to cut income and corporate taxes by more than six trillion yen (US$41.4 billion).

Falls on Wall Street have also jolted United States complacency over Asia's crisis. However, China's internal decision-making is emerging as the most serious threat to the region.

"This is a Greater China issue more than a yen issue," said Mr Callum Henderson, currency analyst at Citibank.

"It's more focused on will Hong Kong go, will China go, and what that means for Korea and Taiwan."

Speculation that China may devalue the yuan has risen after the governor of the People's Bank of China said the mainland could adjust its currency peg to the US currency "a little bit".

China's decision not to devalue in the face of internal pressures has been credited for stabilising Asia's economic situation.

Fears of a devaluation hit markets in North Asia recently, putting pressure on currencies in Taiwan, South Korea and Hong Kong.

Growth is slipping in China and a banking crisis looms.

Dr Yiping Huang, director of the China economy program at the Australian National University, is cautious about predicting the collapse of China's domestic financial system.

Recent estimates put NPLs (non-performing loans) at China's four leading banks at 25 per cent -- far higher than in South Korea or Thailand before they fell prey to the Asian contagion.

Dr Huang admitted that State banks' bad debts exceeded total assets.

"On the one hand, it's very serious. The banks are technically insolvent," he said.

"But my judgement is that the banks will not collapse for the time being, mainly because about 30 per cent of the banks' deposits (are supplied) by government organisations, so banks should still have enough money."

Dr Huang said large household deposits had shored up the banking system. In the 1990s, household deposits grew at an average rate of 33 per cent, but the growth rate declined to 20 per cent last year.

"If the deposit growth rate drops, it will signal big problems for the financial sector," he said.

China's external position remains strong. Over the first five months this year, Chinese exports rose 30 per cent to Europe and 24 per cent to the US.

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--Business Asia, Reuters, Bloomberg