WJPBR Email News List [EMAIL PROTECTED] Peace at any cost is a Prelude to War! China's Economy: The Year of the Living Dead Summary China's tentative steps at financial reform illustrate a dilemma for the government. Foreign investors urge Beijing to let the market run the economy, yet they flinch when firms go under. As a result, China winds up supporting companies that should be dead and buried. Analysis The Chinese government has announced it will overhaul a troubled portion of its financial sector, the government controlled international trust and investment corporations (ITICs), according to China Securities Daily. But few specifics have emerged about the government's plan; it is still unclear how many ITICs will be closed, or restructured, or left alone. This uncertainty reflects the ambiguous attitudes of the world's financial community, which in turn produce an inconsistent economic policy from China. Once the centerpieces of China's efforts to attract foreign investment, the ITICs are vehicles through which Chinese government agencies and local authorities raised money abroad for investments at home. But the 240 ITICs have fallen upon hard times. In 1998, Prime Minister Zhu Rongji allowed the Guangdong ITIC to declare bankruptcy, in the hopes of attracting further foreign capital by demonstrating China's commitment to market-based economic reform. But the move backfired, investors were scared off, and the ITICs have struggled ever since. ________________________________________________________________ Would you like to see full text? http://www.stratfor.com/SERVICES/giu2000/080300.ASP ___________________________________________________________________ Since the Guangdong ITIC crashed the Chinese government has hinted that other non-performing ITICs would be reformed, restructured, or simply shut down. This made sense, as many of the banks were in deep financial trouble. For example, Saige ITIC has failed to pay its staff for a year, according to the Financial Times. Finally, it was announced July 20 that the Hainan ITIC - which failed to make a June 26 interest payment - would file for bankruptcy if it failed to reach an agreement with its creditors. The same day, People's Bank of China governor Dai Xianglong said that other ITICs would be merged or shut down, but he offered no specifics. The most recent news on ITIC reform came from the Aug. 2 Hong Kong based Wen Wei Po newspaper. It cited unnamed "trust industry executives" who said that three of the 14 major ITICs will not be touched, while 11 will change. The information is probably correct, Wen Wei Po occasionally acts as a mouthpiece for Beijing. But the announcement did not detail the reform measures; it only excluded three ITICs from consideration. Closing the Hainan ITIC, along with hints of further closings, appears to be a trial balloon by the Beijing government - a way to gauge the reaction of foreign investors. If they applaud, more ITICs may close, if not, then the damage is minimal. _______________________________________________________________ For more on China, see: http://www.stratfor.com/asia/countries/china/default.htm __________________________________________________________________ The ambivalence of international investors is what confounds Beijing and makes its economic policy so wishy-washy. On one hand, Beijing is encouraged to embrace the free market and allow it to determine which enterprises rise or fall. On the other hand, investors are horrified when Beijing doesn't offer to bail them out, especially in the case of financial institutions. Remember that Beijing let the market run its course in 1998 - and investors bolted. The result is that China is tiptoeing a fine line between market reforms and government sponsorship. Afraid to scare off investors, Beijing is supporting zombie institutions - they aren't alive, but they cannot be buried. _______________________________________________________________ For more on Asia, see: http://www.stratfor.com/asia/default.htm _______________________________________________________________ (c) 2000 Stratfor, Inc. *COPYRIGHT NOTICE** In accordance with Title 17 U. S. C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment to those who have expressed a prior interest in receiving the included information for nonprofit research and educational purposes only.[Ref. http://www.law.cornell.edu/uscode/17/107.shtml ] Want to be on our lists? 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