"The pen is mightier than the sword." For nearly a decade, Brahm has used newspaper articles, magazines and authored over 20 books to explain current affairs, reshape stalled negotiations, and provide a communication platform to Asian leaders and policymakers. His writings reveal underlying central challenges facing Asia over the past decades.

Shaky Financial Defences

Written by Laurence Brahm - Published by South China Morning Post on 01/24/2006

A report issued last year by the People’s Bank of China consisted largely of self-praise; nowhere in its 200 pages was there a word about the money that the bank and Finance Ministry have spent to bail out the financial system. An enthusiastic reader might have concluded that China’s financial situation was rock solid.

A historical footnote might have clarified the picture. There was little concern about risk in China’s central bank before the Asian financial crisis in 1997. The country’s closed financial system and restrictions on currency flows were a solid defence against the quick movements of foreign funds that hit Southeast Asia in 1997.

Those defences have fallen, though, because of excessive reliance on foreign direct investment and exports to fuel the economy. Now the mainland economy is exposed to hosts of influences form the international system.

For that reason, the PBOC hedges its optimistic report with caveats and assumptions about stability and no external disruptions. Those could include a worsening of international tensions concerning Iran, affecting mainland oil supplies; or the US trade deficit could become so politicized that Washington slaps new tariffs on Chinese goods. Either could spark a falling-domino series of factory closures, since the nation is already tottering on an over-production crisis funded by bank credit.

Either scenario would be a severe shock for the mainland’s financial system; foreign investment and trade drive 70 per cent of its economic growth, according to some estimates. So it is not surprising that China’s central bankers have consistently disregarded the International Monetary Fund’s recommended medicine of opening up their financial and currency trading system—as Indonesia did, probably to its regret—or listening to Washington’s insistent advice to let its currency appreciate. Following the Asian financial crisis, some 26 provinces, autonomous regions and municipalities under the central government had to bail out their own financial institutions. Similarly in 1998, 270 billion yuan in special treasury bonds were issued to recapitalize the “big four” state owned commercial banks; their 1.4 trillion yuan in non-performing assets were separated into assets management companies.

In June 2003, reforms of rural credit co-operatives began: half their debts were wiped out. When the Anshan Securities scandal broke a year ago, the central bank came up with US$60 billion, drawn from its foreign-exchange reserves, to head off a potential series of crashes among securities firms. At the time, critics warned that the central bank was ultimately only encouraging bad debts and securities malpractices, by always standing by like a parents to get its child out of trouble. So, tally up the bill. From 1998 to this year, Beijing invested some 3.24 trillion yuan to keep its financial institutions afloat. To put that in perspective, the mainland’s fiscal earnings for 2004 were 2.63 trillion yuan. In the hall of the central bank, one hears talk of strengthening mainland China’s deposit-insurance system as immunization against a financial crisis. This means ensuring that depositors keep their money in the key state-owned commercial banks on the assumption that the central bank will always bail them out. But this is not a sustainable solution. Despite the glowing written reports, PBOC governor Zhou Xiaochuan has warned: “Because of historic burdens on financial institutions, net assets will become negative and they may be forced to close. Then who will compensate [those who lose]? In China, this question has yet to be solved…Fiscal funds are public, derived from taxpayers. Central bank funds belong to depostors.”

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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