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China's Dynamism, Japan's Inertia

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June 26, 1998, Section A, Page 23Buy Reprints
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President Clinton's trip to China should put a new vision of Asia into sharp focus -- one that all but formally recognizes that the economic and geopolitical leader of the region is no longer Japan but China. It is a shift that will also have a lasting and profound impact on world financial markets.

The shift in power was made especially clear earlier this month, when the United States decided to step in to try to stop the fall of the yen. But the emergence of China and the descent of Japan have been obvious for some time.

It first became apparent to me in February, when I spent a week shuttling between Beijing and Tokyo. In conversations with senior officials in both countries, a critical contrast emerged.

Asian financial crisis or not, China was moving ahead on the greatest economic reform and restructuring of this century. Mindful of the risks of this transition -- and willing to discuss them openly and frankly -- China's senior leaders were nonetheless committed to a market economy. In their minds, there was no turning back.

By contrast, Japan seemed frozen in place. All the top economic officials would talk about was the political inertia in their country. The ruling Liberal Democratic Party, they told me, was complacent and timid, and so were the voters. Yes, the party was dealt a monumental defeat in 1993, because of a series of scandals. But since then, even as Japan's economic problems have intensified, the party has won every election.

Japanese voters are not interested in the kind of economic change that has driven the rest of the world in the 1990's. Despite the country's ever-deepening turmoil, few Japanese have felt any real economic pain. As a result, Japan continues to cling to the model of state capitalism that served it so well in the decades after World War II.

The contrast between Japan and China -- inertia vs. dynamism -- never seemed more dramatic than when the world watched the yen tumble in mid-June. The currency began to fall sharply after the revelation that Japan's economy, the world's second largest, had sunk by a surprisingly sharp annual rate of 5.3 percent in the first quarter of this year.

Devaluation of the currency was inevitable for a Japanese economy that had lapsed into a new recession. Interest rates couldn't be lowered; they were already close to zero. And the Government had already tried to boost the economy by a series of large public spending programs -- and not much had happened. A cheaper yen was perceived to be the only remedy. That would at least lower the price of Japan's products, promoting the growth of exports.

The American Treasury Secretary, Robert Rubin, initially gave his approval to this ''solution.'' In Congressional testimony on June 11, Mr. Rubin implied that there was little the authorities could, or should, do to arrest the fall of the yen. With the United States endorsing such a policy of benign neglect, financial markets took matters into their own hands. And a meltdown of the yen suddenly seemed like a real possibility.

This is where China stepped in and said no. Fearful that a free fall in the Japanese currency would spur another round of currency devaluations elsewhere in Asia, putting more pressure on their economy, Chinese officials made it clear that such a chain of events would be unacceptable. Then they played their trump card, warning that they could be forced to reconsider the stance on their currency.

China was very careful and deliberate in upping the ante, led by two of its most prescient and even-handed officials -- Xiang Huaicheng, the Finance Minister, and Dai Xianglong, the central bank governor. They did not suggest that the official policy of a stable yuan was about to change, but they both voiced their concerns about the ultimate implications of an open-ended depreciation of the yen.

Threatening to devalue the yuan was a gamble. China had compelling reasons to hold the line on its currency. A devaluation would have caused currencies elsewhere in Asia to tumble, wreaking havoc on already unstable economies. The currency contagion would also have spread to Latin America and Eastern and Central Europe -- possibly causing a full-blown global financial crisis.

But by the middle of this month, when the yen was plunging toward 150 against the dollar, China's leaders and global investors had good reason to fear that the country might not be able to hold its currency stable much longer. At that point, the world had no choice but to take heed of the mounting risks. The United States and Japan were forced to step in and start buying yen to bolster its value.

In the end, it was that simple: China flexed, world financial markets responded, and global financial officials acted. China's impact as an international economic power has never been greater.

Courtesy of the recent and surprising resumption of nuclear testing by India and Pakistan, China now looms all the more important from a geopolitical perspective as well.

Interestingly enough, pan-Asian leadership is not a topic that most Chinese officials are very comfortable speaking about. In their view, leadership is a byproduct of their actions -- not a primary objective. While it's hard to argue with that philosophical point, there is no mistaking the ramifications of the important changes now under way in China.

A strong Chinese economy is the key to Asia's overcoming its financial crises. Japan, which was once the regional powerhouse, can still control its own economic destiny, but only if it takes drastic action now. Asia as whole, however, will depend less on Japan and more on China as a source of economic stability.

That means China must keep the value of its currency stable and remain steadfast in its commitment to economic reforms. My hunch is that it will.

A version of this article appears in print on  , Section A, Page 23 of the National edition with the headline: China's Dynamism, Japan's Inertia. Order Reprints | Today’s Paper | Subscribe

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