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China's Decisive Role in the Asian Financial Crisis

Global Beat Issue Brief No. 24
January 27, 1998

Copyright Richard Halloran 1998*

With Asia's financial crisis rumbling on, it has become evident that China, not the United States or Japan, holds the high cards as Asian nations try to rebuild their once-vibrant economies.

Beijing sits with three aces:

Whether to maintain the value of China's currency and thus support recovery, or to devalue and undercut Asian neighbors. So far, Beijing has held the line.

Whether to draw on its extensive foreign exchange reserves to assist distressed nations or to withhold its aid. So far, China has helped.

Whether to exercise leadership that would enhance China,s campaign to dominate Asia and ease out the U.S. So far, China has been well ahead of the U.S. and Japan.

China's Vice Minister of Foreign Trade and Economic Cooperation, Long Young-tu, addressed these issues in Honolulu last week: "We have evaluated the pros and cons and decided that it is in the best interests of China not to devalue. This might affect China's competitive position but we have more important things to do."

Chinese with access to official thinking say President Jiang Zemin and his associates see the economic crisis as an opportunity to enhance China's standing. Beijing seeks to revive the Middle Kingdom's dominance over Asia and gradually to build political pressures that would force the U.S. to withdraw its military forces.

In contrast, the financial turmoil that began last July caught Washington by surprise and the Clinton Administration was slow to react. President Clinton brushed off the crisis last fall as a temporary setback. Congress showed little enthusiasm for bailing out Asia economies. The tempest over President Clinton's alleged sexual misbehavior has further distracted Washington.

The U.S. failed to see the crisis coming because of failures by the press, academics and think tanks, the government in Washington, the business and banking and investment communities, and the intelligence agencies. The signs were there but few gave them heed.

Paul Krugman of the Massachusetts Institute of Technology, an economist who earlier denigrated the "Asian miracle," has written: "It seems safe to say that nobody anticipated anything like the current crisis in Asia." He asserted that this has been a "much more severe downturn than even the most negative minded anticipated."

Predictions of disturbing consequences to the U.S. have begun rolling in. The Economic Policy Institute in Washington, for instance, has estimated that a million American workers would be laid off over the next two years and the trade deficit would rise by $100 billion. California, New York, Texas and North Carolina would be hardest hit because Asian imports, made cheaper by devalued currencies, will rise sharply.

By January, the Administration began to realize that U.S. could be hurt but responded with little more than platitudes. Clinton telephoned President Suharto of Indonesia to encourage reform and called Prime Minister Ryutaro Hashimoto to solicit Japanese help. The President also dispatched the Deputy Secretary of the Treasury, Lawrence Summers, to Singapore, Indonesia, Thailand, Malaysia, China, and South Korea to urge reform.

In his address on the State of the Union, the President sought Congressional support for U.S. aid to Asian economies, notably new funds for the IMF. He argued that "preparing for a far-off storm that may reach our shores is far wiser than ignoring the thunder until the clouds are just overhead."

Japan, which has the resources to stimulate recovery, has also been inert. The U.S. and Asians have called on Japan to draw in more imports from its Asian neighbors to help their earnings but Prime Minister Hashimoto has said: "Japan needs to worry about its own self-interest. We are certainly not arrogant enough to think that we can take the role of locomotive for Asia."

Japan has been further hampered by its own financial scandals, the latest of which caused the resignation this week of Finance Minister Hiroshi Mitsuzuka and, even more telling, of Vice Minister Takeshi Komura, the career official at the peak of his ministry's vaunted civil service. Their ritual resignations were to atone for the earlier arrest of two senior officials accused of accepting $40,000 in bribes. Hashimoto, whose own political standing is shaky, apologized to the parliament.

Without leadership from the U.S. or Japan, the International Monetary Fund, or IMF, has arranged bailouts and insisted on reforms. The IMF, however, has been criticized for seeking to revive economic colonialism, for excessive bureaucracy, and for failing to tailor demands for reform to each Asian nation.

In a larger picture, this is the first time since the Peoples Republic of China was founded in 1949 that Beijing has been in a decisive position in an international crisis. In its early years, the PRC was riven with the Great Leap Forward and the Cultural Revolution. Then, in 1978, China embarked on economic reform but that was severely set back by the Tienanmen episode in 1989 in which perhaps 2000 democratic activists were killed. Over the past year, however, President Jiang Zemin has orchestrated what an American official called an "explosion of diplomacy" that culminated in Jiang's visit to the U.S. last fall.

A critical decision in Beijing is whether to maintain the value of China's currency at 8.3 renminbi to 1 US dollar. If China devalues, as it did by 33 percent in 1994, that would make its exports less costly and thus undermine efforts of other Asians to restore their economies. Vice Minister Long said in Honolulu: "If China devalues, that would set off a new cycle of devaluations and that would be disastrous. Therefore I have been authorized to tell you: China will not devalue."

A widening circle of economists say they believe China but skepticism remains. A financier, Frank S. Orrell, President of CB Commercial, responded to Long's remarks: "I can tell you right now, the marketplace doesn't believe that China will not devalue."

Behind the currency pledge are $140 billion in foreign exchange reserves; China's holdings are second only to Japan's $228 billion and are more than those of Germany ($77 billion) and the U.S. ($56 billion) combined. Chinese officials say China will give more than $1 billion to Indonesia and has given $1 billion to Thailand.

Politically, Chinese leaders have visibly supported for their Asian neighbors. Jiang Zemin was prominent at a Asian summit in Malaysia in December and a senior trade official, Bao Kexin, said in Beijing recently that Asian nations could count on China to a "safe island" for stability to the region.

*Richard Halloran, formerly with The New York Times in Asia and Washington, writes about Asia from Honolulu. He is a consultant to the Center for War, Peace, and the News Media, and a regular contributor to the Global Beat. For reprint rights, please contact him at tel: 808-395-0511, fax 808-396-4095, or e-mail:

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