Commentary: Who's Really Pounding Asian Economies

The irony is rich. Recent currency and stock market upheavals pounding Asia's Tiger economies have resulted in plenty of vitriol directed at speculators in New York and London. Tales of economic sabotage by Westerners certainly provide nice cover for Southeast Asia's flustered political leaders. Yet if they're serious about examining the root causes of this mess, they ought to cast a gimlet eye at the technocrats who are calling the shots in Beijing and Tokyo.

Truth is, the region's middling economies are being squeezed most by the competing economic agendas of China and Japan, both of which have problems of their own. China's factories are churning out everything from shoes and watches to bicycles--and at rock-bottom prices. That's undermining Southeast Asia's ability to compete in low-end manufacturing. Meanwhile, in Japan, a surge of exports engineered by a depreciation of the yen is intensifying the squeeze. Unless China and Japan team up with their neighbors in the South to open all of Asia's markets, the nasty cross-currents shaking the region could get more dangerous.

NOT JUST TRINKETS. There's no question that China is playing a central role in the crisis. Andy Xie, a Morgan Stanley vice-president and a China analyst, figures that $180 billion worth of merchandise will be sold by China to the world in 1997. China's not just peddling trinkets either. The mainland is emerging as a vast, competitive manufacturing base for electronics and telecom equipment and for household appliances. Beijing needs export growth to burn off its bulging inventories and offset tight credit policies at home designed to keep China's notorious inflation in single digits. It also needs to buy time to overhaul its largely unprofitable state-owned enterprises--and this could well be a politically explosive task.

In Japan, monetary officials are hoping that a mix of near-zero interest rates, a cheap yen, and export growth will kick-start its economy. In 1995, when the yen soared to nearly 80 to the greenback, dollar-linked Asia enjoyed its highest rate of export growth in a decade. Last year, after Tokyo monetary authorities cut rates and took other measures to weaken the yen in late 1995, export growth in Malaysia, Singapore, South Korea, and Thailand went into a free fall. Michael Howell of Crossborder Capital, a London financial advisory firm, says Japan is also investing less in Asia as the yen "keeps weakening in line with a fading domestic economy."

With Japan's economy showing signs of distress because of tax hikes and weak consumer spending, Tokyo isn't about to let its currency head up much above the current level of 120 to the dollar. Even the warnings of U.S. Treasury Secretary Robert E. Rubin are unlikely to slow Japan's export drive in the short term.

These economic forces will complicate what's sure to be a painful workout for the declawed Tigers. Years of debt-fueled property deals and corporate expansion have resulted in overheated real estate markets and fragile bank sectors. In South Korea, highly leveraged industrial conglomerates, or chaebol, are collapsing left and right, while Thailand's central bank is pumping liquidity into the bombed-out banking sector.

SKILL GAP. The long-term solution for the Tigers is to move into higher-end markets before China does. Trouble is, Southeast Asia isn't turning out enough skilled workers. China's larger population base and its relatively strong school system mean that the economy can count on as many as 300,000 new technicians and engineers annually, more than Indonesia and Thailand combined, figures Morgan Stanley's Xie.

Nor will Japan's world-class multinationals likely cede much ground to established rivals, let alone newcomers. Just ask the South Koreans. Some 65% of their exports come from semiconductors, ships, petrochemicals, and computers--all of which compete head-on with Japanese rivals. When the yen weakened, starting in late 1995, South Korean exports fell off a cliff. That set the stage for the string of bankruptcies and bank bailouts in Seoul this year.

There's no denying that Beijing and Tokyo have vested interests in making sure the financial turmoil in Southeast Asia doesn't push these economies into the abyss. Yet they have problems of their own and the kind of economic clout that could make life miserable for those in the middle of the pack.

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