Hamish McDonald: Full speed ahead to another Asian meltdown

From smh.com.au (sub required):

Across town at investment bank Morgan Stanley, its China-watching economist Andy Xie also sees an economic machine going at high speed towards a crash, similar to the meltdown that hit Asian economies in 1997.

“China is an export and investment-driven model and the connection between exports and investment is basically that the state banking system takes the money earned by exports and puts it into investment regardless of returns,” Xie says. “That model is likely to last until the crisis.”

Neither of these two economists see China’s leaders as likely to respond in more than a token way to the invitation by many Western financial chiefs, most recently at last week’s Asian Development Bank meeting, to start taking the medicine early in the form of a currency revaluation.

Walker says the signals he’s been getting are that Chinese officials agree they have to do something to placate the baying trade protectionists in the US and Europe, set off by the 35 per cent surge in China’s first-quarter exports…

Xie says he expects Beijing will keep stalling, keeping the expectations of a yuan float or revaluation alive so that speculative inflows from overseas Chinese keep flowing in but trying to put off the evil day as long as possible. Xie thinks they can spin it out another two years.

“If China appreciates the currency like other people are urging, China will eventually have a financial crisis just like in South-East Asia [in 1997],” Xie says.

These views are in distinct contrast to some others. On Friday, for example, the ING Bank’s team in Hong Kong said China could reform its exchange rate within three months. “We have changed our view on the initial revaluation and now expect it will be big, around 10 per cent,” the bank said. “Our change of view that the initial yuan revaluation will be big stems from the heightened threat of loss of market access.”

May 8, 2005 5:52 PM
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Categories: Economy