ASSESSING THE POTENTIAL IMPACT OF THE ASIAN FINANCIAL TURMOIL ON CHINA

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005467610
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 2
• Document Creation Date: June 23, 2015
• Document Release Date: December 11, 2009
• Case Number: F-2010-00133
• Publication Date: December 24, 1997

! (b)(1)
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APPROVED FOR RELEASED
DATE: 11-30-2009
24 December 11997
Assessing the Potential Impact of the Asian Financial Turmoil on China
China so far has been relatively unscathed by the East Asian financial crisis.
Beijing's tight controls on capital flows, strong balance of payments, and the relatively
small size of domestic stock markets have sharply limited damage in the rear term:
? China's export growth has gradually slowed since mid-year. but this is
mainly a base effect: exports accelerated in the second half of 1996.
China's trade surplus in the first ten months of 1997 was over S35 billion
and the Chinese Yuan is still under pressure to appreciate.
? China's stock markets have dropped about 5 percent since October, but
this was primarily caused by Beijing's decision to accelerate new, stock
issues, rather than any contagion from other East Asian bourses,
During the next two years, however, slower growth in the region and the many
c rrency devaluations of competitors will hurt China's export performance.
Weaker export performance will complicate Beijing's efforts to address existing
smuc Ural problems. Many Chinese industries are operating at less than
50 percent capacity, and declining prices for industrial goods have depressed profits. In
acdition. urban unemployment has risen sharply--unofficial estimates cited in Chinese
press suggest it may be over 10 percent--and there have been increasing numbers of labor
disturbances over unpaid wages.
Moreover, Beijing's ability to compensate for slower export growth by stimulating
domestic investment may be constrained by its reform goals:
? Vice Premier Zhu Rongji--the main driver of China's economic policy--has
staked his political future on a promise to make most large and
tedium-sized state firms profitable by 2000, and has stressed limiting bad
investments as a key method to achieve this goal.
 SUBJECT: Assessing the Potential Irnpac: of the Asian Financial Turmoil on C`una
-Nevertheless, should China's balance of payments position markedly deteriorate.
economic growth slow, and unemployment rise to destabilizing levels, Chinese
policymakers may reconsider a devaluation. Such a move probably would set off another
round of come etitive devaluations in Southeast Asia, and could well force other e rer;:ig
market economies such as Brazil to follow suit:
export growth dropped to 2 percent.
China's slowing growth and massive structural problems have led to speculation in
the international press that China will follow the lead of its East Asian competitors and
devalue its currency. Zhu and other senior officials, however, have strongly denied that
China will devalue, according to Western press reports:
? The government's tight controls on capital flows and strong balance or
payments position make such claims more credible than similar statements
made by other East Asian governments before they devalued.
? 'Moreover, China in the past has absorbed blows to export performance
without incurring substantially slower GDP arowzh, such as last year when
and therefore are lending far less than their credit quotas.
having difficulty finding qualified borrowers, according to Dress reports
? Zhu also has set a goal of reducing the share of state bank loans that are
nonperfo=, g by two percentage points annually, and Chinese bankers are
under substantial pressure to avoid new bad loans. Most Chinese banks are
? This could prolong slower growth in emerging market economies for
several years, extend deflationary pressures to industrialized economies,
and yield a substantial drop in world GDP growth.
? We judge that a large sudden devaluation by China within he next year is
of low probability. Nevertheless, we cannot rule it out because of the
potential for increasing labor unrest, political tensions, or financial
instability as Beiiing implements its ambitious economic reform program.