Dollar's Dive Spells China Crisis; City Comment

The Evening Standard (London, England), January 22, 2004 | Go to article overview

Dollar's Dive Spells China Crisis; City Comment


Byline: ANTHONY HILTON

THE world's business leaders now assembling in Davos for the annual World Economic Forum have currency fluctuations at, or close to the top of, the list of what they are worrying about. They see the collapse in the dollar's value as having the potential to spread economic pain throughout the world - something President Bush for some reason failed to mention in his State of the Union Address on Tuesday.

One aspect of dollar weakness largely overlooked, even in Davos, is how it heightens the risk of an economic crisis in China. Because that country is fixing its exchange rate to slide down with the dollar, it has experienced an effective 40% devaluation against the euro and only a little less against sterling in the past 18 months. But because the Chinese economy was already running flat out, the stimulus from devaluation could cause it to blow in a way that would be eerily reminiscent of the 1997-98 Asian economic meltdown.

All the economic warning signs are there. According to a December paper from Lombard Street Research, industrial growth was then running at more than 17%, exports were growing at an annual rate of 36%, imports at 30% and broad money in excess of 20% - all this in an economy with a sustainable potential growth rate of 8% a year.

Such indicators show that the economy is running at collision speed but there is no sign of understanding from anyone in the leadership that the brakes need to be applied.

There are other reasons to think the Chinese boom cannot go on much longer without an enforced pause for breath. The nation is undoubtedly home to most of the worst banks in the world, organisations so riddled with corruption, nepotism and bad debts that they make the Japanese banks look like pillars of economic probity and virtue. Their dominant purpose is to prop up the legions of businesses that are chronically loss-making and to protect the interests of the local party politicians and businessmen who dominate them.

This desperate weakness of the banking system is also the main reason the Chinese have become so open to foreign investment. Chinese banks on their own could never supply the capital needed. The Chinese boom is massively dependent on ever-expanding inflows of foreign money.

At some time in the next few months - or, if we are very lucky, years - most of the foreign investors' money will be lost, just as it was in Asia, and the dollar collapse brings that day nearer. …

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