China Spurs Asia Economies But Challenges Still Remain

`EMERGING'' markets? This term for fast-developing economies, particularly in East Asia, has seemed quite an understatement in the past few years. The Hong Kong stock market blazed ahead of American and other developed-nation exchanges with a 78 percent gain in 1993. Last year, Asia attracted only slightly less investment, measured in net capital flows, than the rest of the world combined.

The driving force has been the rapid growth of China, the world's biggest emerging market. But what's next for China and its neighbors? Robert Broadfoot, a Hong Kong consultant who has kept close tabs on Asia for two decades, offers an optimistic view, but cautions that there are also many risks.

China's industrial takeoff has created huge markets for both imports (growing close to 30 percent a year) and investments by outside companies forming subsidiaries and joint ventures. Foreign direct investment soared to $30 billion in new commitments last year.

``One of our clients did $1.8 billion worth of business in China with a 54 percent profit margin'' last year, says Mr. Broadfoot, who is managing director of Political and Economic Risk Consultancy Ltd., based in Hong Kong.

So for many companies, risk No. 1 is to fail to tap into this burgeoning market of 1.2 billion people.

Speaking to US Bank's international division in Seattle recently, Broadfoot said the infrastructure sector (transportation, power, communications) is growing particularly fast.

His consulting firm forecasts Asia's share of world air travel rising from 25 percent today to 40 percent by 2010. In the next four years, Asia's developing nations will add more than 50 million phone lines, including 18 million in China.

Lest investors get too euphoric, however, Broadfoot notes that Beijing must create a commercial banking system and cut the bureaucracy. Other challenges include:

Central government authority. The state-run part of the economy is lagging far behind private-sector growth, signaling the failure of a centrally planned economy. Yet in another sense, Broadfoot says, China needs stronger central control: Currently, Beijing negotiates with provinces for its share of tax collections, which has led to regional inequities and a sharp decline in central tax revenue as a share of the overall economy (from 24 percent in 1980 to 12 percent today). Moreover, tax evasion is ``a national sport,'' he says.

The trade deficit. China's trade account went from a small surplus in 1992 to negative $12 billion last year, and likely a worse figure this year. Broadfoot calls this deficit unsustainable. Yet Beijing will have to address this issue while facing growing pressure from the United States - its best export customer - to open its market to more American-made imports.

Inflation. Living costs rose by more than 15 percent in 1993, versus 6 percent inflation in 1992. Money-supply growth, near a 50 percent annual rate, must be held down to prevent a scramble for hard currencies and gold.

Creating a hard currency. At the beginning of this year, China did away with a dual-currency system in an effort to make the renminbi yuan convertible in foreign-exchange markets. A hard currency is useful not only to attract investment but also as a requirement for joining the General Agreement on Tariffs and Trade. Broadfoot will watch to see if black-market exchange rates diverge from official ones again.

Breakdown of the ``iron rice bowl'' system. A collapse of workers' guaranteed economic security within state-run industries is the most prominent of several factors that could lead to social unrest, he warns. In this light, US companies must ``be perceived as part of China's solutions,'' not as foreign meddlers, he says.