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Fischer frets about new Chinese bad loans

CHEJU, South Korea: China is likely to steer its high-flying economy to a soft landing but faces the risk of a financial crisis triggered by a new rash of non-performing loans, a senior banker said on Saturday. Stanley Fischer, vice-chairman of Citigroup and formerly the number-two official at the International Monetary Fund, said he was concerned that a lot of China’s recent investment lending would turn sour. Investment accounted for 47 percent of China’s gross domestic product in 2003 and was 43 percent higher in the first quarter of 2004 than a year earlier. “It is inconceivable that those rates of investment can be efficient,” Fischer told investors during the Asian Development Bank’s annual meeting. “So there are possibilities for China to have a crisis in the financial system... possibilities which are fully understood by the government.” Foreign banks and analysts estimate that 40 percent of loans outstanding in China may be bad. Fischer expressed confidence that the authorities in Beijing had sufficient policy levers at their disposal to slow China’s growth to a sustainable pace. GDP in the first quarter was 9.7 percent higher than in the same period of 2003, according to official figures, but some economists believe the growth rate was well above 10 percent. “I don’t think China is likely to make the mistake of a hard landing,” Fischer said. “So long as the landing is soft, we don’t see it as posing huge risks to the regional economy.” William Rhodes, Citigroup’s senior vice chairman, said China’s economic and political leaders were fully aware of the need to bring about a controlled slowdown. “They’ve taken a number of steps to ensure that, and will be taking additional steps as necessary,” Rhodes told Reuters. Fischer also voiced confidence that Asia could cope with a rise in U.S. interest rates, which he said was now well anticipated in financial markets. “Neither the rise in interest rates scenario in the United States...nor the Chinese slowdown strike me as fundamental threats to Asian growth. It could slow down, but there’s no crisis in sight.” Fischer believed Chinese policy makers were happy to stick with the country’s present foreign exchange regime and said he suspected the yuan’s long-standing peg against the dollar would remain in place for longer than financial markets anticipated. The outlook for the Chinese economy is a major theme at this year’s ADB meeting. Rhodes said China was exerting such an influence on the world economy that it should be given a seat at the top table of global policy making. “Given the importance of the Chinese economy not only in Asia but also for the world economy today, it’s just a matter of time before they are invited to participate in G8 meetings,” he said. —Reuters

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