A better comparison might have been with David Copperfield, the magician who once made the Statue of Liberty disappear on live television. Zhu’s sleight of hand in Hong Kong hid all the things China has in common with the smaller Asian tigers–a real-estate bubble, industrial overcapacity, rampant corruption and unsound banks. He also glossed over China’s particular challenges: rural workers with declining incomes and unemployed city dwellers. True, Zhu is trying to boost China’s growth. But if he fails, China will drag down the region–and may face an explosive political backlash. The stakes could hardly be higher.
China can’t avoid catching some form of the Asian flu. Foreign investors shying away from the rest of the region are now nervous about China, too; planned foreign investment plummeted by 50 percent in the first half of 1997, to $23 billion. China’s machinery imports are down 14 percent, and inventories have soared. Last week China’s State Statistical Bureau said that growth had slowed sharply in the third quarter to 8 percent from 9.5 percent in the first half of 1997.
All this comes when Zhu wants to transform China’s ailing state industries. The aim is to revitalize, sell or shut down some 100,000 state-owned factories, more than half of which now operate at a loss. Together, these enterprises employ roughly 130 million workers and owe upwards of $100 billion. Zhu hopes to shed this burden in three years.
Easier said than done. How will China finance such a massive industrial restructuring? The answer used to be easy: a state-owned Chinese company could recapitalize on the Hong Kong Stock Exchange, where investors snapped up China stocks. That’s history, thanks to the market crash. Nor can China’s banks help, given their already crushing debt burden. Bad loans total 15 to 30 percent of China’s annual gross domestic product; by Western accounting measures, each of China’s four main banks is insolvent.
Like its neighbors, China is suffering from a real- estate bubble. Shanghai has become a fast-expanding megacity where vacancy rates in some areas top 50 percent. Real estate isn’t the only bargain. China is awash in cheap goods, most from state enterprises that hate to halt production. And with currency devaluations throughout Asia, it’s harder to export all that stuff than it was. Chinese toy, videogame and television exports could drop amid a glut of equally cheap products from elsewhere in Asia.
Economic growth will weaken further next year. The International Monetary Fund projects 8 percent growth; other analysts predict 5 or 6 percent. And slower growth means fewer jobs–just as China shrinks its state industrial sector.
Unemployment could be political dynamite. The official jobless rate is 4 percent; in reality, Western economists think it is probably 10 percent and rising. In some rural areas, local governments haven’t paid civil servants for months. In southern Qinghai, police who haven’t been paid since June have begun to shake down motorists for cash.
Can Zhu satisfy both the workers and the bankers? He has a good record, ever since he briefly took control of the People’s Bank of China in 1993 and squeezed inflation out of the system. But this time he’s opposed by millions of workers, factory bosses and officials. Zhu’s authority will likely increase next March, when he is expected to be appointed prime minister. But all the power in China won’t guarantee his standing among the fickle global markets. Chinese ideologues like to blur the change in their country by calling it ““market socialism.’’ Right now, market socialism needs a communist miracle man; otherwise, the Asian flu could turn
