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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

When Is Ignorance Bliss?

China would rather forget Hong Kong's woes

By Tim Healy and David Hsieh / Beijing

PERHAPS WITHIN THE CONVOLUTED logic of last week's topsy-turvy stock markets it makes sense: China's two bourses, normally among the world's most volatile, reacted calmly as the rest of the world crashed and soared. Speculation about the reasons was rife. Government officials lauded the nation's relative economic health -- steady growth with low inflation. Others said China was insulated from outside volatility because, in key respects, the country remains closed to the free flow of capital. The Liberation Daily newspaper in Shanghai editorialized against what it saw as a global plot to bring down China through a securities attack on Hong Kong. And skeptics less inclined to see a conspiracy credited a concerted effort by the state-managed media to downplay, or avoid entirely, the volatility in Hong Kong.

Whatever the real reason, the impact was clear: stocks in Shanghai and Shenzhen fell Oct. 28 by just a third of what the Hang Seng Index did in Hong Kong, half as much as Jakarta, and less than Manila, Bangkok, Singapore or Taipei. And the following day, when most exchanges in Asia rallied, Shanghai and Shenzhen recorded comparatively small increases.

It all reflects the relative economic serenity in China these days. Reported inflation has fallen from nearly 30% at the end of 1994 to less than 2% today. Credit goes to economic czar Zhu Rongji, widely expected to replace Li Peng as Premier next March. Zhu has apparently brought China's rampaging growth under control without falling into a recession.

For Asia, the near-absence of inflation, along with excess production capacity, means China is likely to remain price competitive even against the exporting nations that have devalued their currencies. This probably adds up to lower inflation for importers, which in turn should serve to keep interest rates down.

All of which is good news for Beijing, right? Not exactly. Professor Xiao Zhuoji of Peking University believes two factors serve to protect China from outside volatility: the insular nature of its stock markets and the lack of capital-account convertibility. The nation's two exchanges, in Shanghai and Shenzhen, offer different classes of shares for foreigners and locals, a fire wall to keep trading separate. As for convertibility, Xiao believes the ups and downs of exchanges outside China reinforce the view that it is too soon to open up. "We have to be prudent," says Xiao. "Convertibility must be stabilized."

Meanwhile, the World Trade Organization beckons. China is anxious to join, but that is unlikely as long as it restricts the free flow of capital. Capital-account convertibility means foreigners are free to bring money into China and take it out without significant restrictions on exchanging renminbi in either direction.

The whole idea of giving up authority over such conversions frightens China's leaders, which helps explain why they have been keen to stress stability and restraint. Says Premier Li: "We must be prudent in opening our capital markets. We must strengthen financial supervision to prevent and mitigate [excessive] risk." A similar effort to maintain constancy may explain why the official Chinese media turned Hong Kong's wild ride into a non-story. The day after the SAR recorded its third-worst decline ever, the English-language China Daily reported it under the tortured headline: "Hong Kong mart status remains unchanged."

The conundrum is that China needs foreign capital. In September, President Jiang Zemin outlined an ambitious plan to remove government support for most state-owned enterprises (SOEs), many of which are money-losers. But the nation must attract a huge amount of investment from within and outside China to finance an SOE revival and avoid bankruptcies and unemployment. Up to now, the number of Chinese companies venturing outside to attract capital has been small. Volatility and the tepid response to China Telecom, a large recent initial public offering, offer no encouragement. Yanzhou Coal Mining had planned to go public in Hong Kong at the end of October, but postponed its issue -- even before the Oct. 28 plunge. China World Trade Center, Sichuan Chemical and two road construction companies also recently canceled plans for IPOs.

Song Wenlei, an analyst in the Beijing office of Daiwa Securities, says all this proves that some Chinese companies have become disillusioned with raising money with IPOs in Hong Kong. "The reason the Hong Kong market grew so much over the past year is the huge amounts of domestic investment [from China]. But because share prices are beyond the control of the enterprises and there are so many uncertainties, current attitudes are less enthusiastic." Like Professor Xiao, Song applauds China's caution in its approach to capital convertibility. The question now is whether, as a trade-off for WTO membership, the leadership will throw such caution to the wind.

-- With reporting by Assif Shameen

This edition's table of contents | Asiaweek home



U.S. secretary of state says China should be 'tolerant'

Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

Land mine explosion kills 11 Sri Lankan soldiers

Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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