11/10/97 PARALYSIS IN ASIA: WHAT TO DO

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PARALYSIS IN ASIA: WHAT TO DO
If leaders don't take action, East Asia will stagnate for years to come
It all unraveled so quickly. The East Asian ''miracle'' was supposed to last for decades and propel the world economy to new levels. Instead, Asia's stock and currency markets have been tumbling for months, culminating in the astonishing collapse of the Hong Kong exchange. Multinationals that had counted on Asian customers to buy more of everything from cars to aircraft are wondering what went wrong. Bankers are aghast that Asian governments and big corporate borrowers have few coherent strategies for recovery. From Bangkok to Hong Kong, there are tales of the nouveaux riche scrambling to hock Mercedes-Benz sedans, Rolex watches, and Chinese antiquities to meet margin calls--and in come cases, just to make ends meet.
How East Asia handles the coming shakeout could well determine whether or not the miracle is finished. If governments take forceful action--slashing spending on pork barrel projects, cleaning up scandal-ridden banking systems, spurring domestic consumption rather than just exports, and forcing uncompetitive manufacturers to merge or go bankrupt--the region should be on the road to health in two or three years. Then Asia can play to its strengths again--high savings, a disciplined work force, low wages, and an aggressive entrepreneurial class. But the cleanup will come at a price. With bad bank debts of nearly $1 trillion around the region, recapitalizing its financial systems will mean higher taxes, tighter money, and slower growth.
GROUND ZERO. The question, however, is whether East Asia is up to this massive task. If leaders make only superficial reforms and allow deep structural flaws to go unfixed, the consequences could be catastrophic. Goldman, Sachs & Co. estimates that the financial cleanup could take the better part of a decade. What's more, Asia could slide into prolonged stagnation--just like Japan, which has not tackled fundamental problems since its bubble burst in 1990. Could Asia become another dead zone in the global economy? Without radical change, yes.
What's even scarier is that even after months of turmoil, Southeast Asia's leaders don't seem to have recognized that the ground has shifted underneath them. The fact is that much of Asia remains reluctant to let market forces do their work and flush out the excesses of foolish spending. That problem is intensified by a specifically Asian stumbling block. From South Korea to Malaysia, political and business chiefs have staked their prestige on the idea that they can deliver unending high growth. Any step backwards would be seen as a great loss of face.
On this count, Asia's predicament could be worse than Mexico's in 1995. The Mexican response to its peso crisis was to balance the budget and force a consolidation in the business sector. Contrast that with what's going on in Thailand, ground zero for the Asian crisis. Three months after Thailand turned to the International Monetary Fund for a $17.2 billion bailout, foreign lenders are horrified that Bangkok still has not produced a detailed recovery plan. In Malaysia, meantime, Prime Minister Mahathir Mohamed keeps backing risky, high-cost projects.
Equally worrisome is the reluctance of East Asian industrialists to get on with the needed task of consolidating overbuilt sectors. Instead, most of them are holding on for dear life. ''Some companies are thinking that if they hang on for another 18 or 24 months, growth rates will go back to 20% or 25%,'' says George Baeder, managing director of Hong Kong-based Pacific Rim Consulting Group. ''But in my view we are seeing a fundamental change to a much more cutthroat environment.''
The result is that Asia is suffering from a massive case of denial. Look at Korea. The signals have been flashing for months that its economic health is beyond critical. So far this year, six of the country's biggest business groups have keeled over, crippled by debt taken on to pursue grandiose schemes to dominate world markets. But the remaining chaebol have done nothing to reduce their debts, which on average are four times greater than their equity bases. Wages are no longer any lower than in most Western countries. ''Korea's conglomerates have just refused to face up to these challenges,'' says Kim Mahn-je, the chairman of Pohang Iron & Steel Co., who has broken with tradition by slashing his workforce by more than a fifth, to less than 20,000, over the past four years. ''The government has to adopt a ruthless policy of restructuring.''
Don't count on it. Despite a worldwide oversupply of autos, Hyundai Corp. and Daewoo Motor Co. are continuing massive building sprees in that sector, and the Samsung Group is spending $10 billion to enter the car business. Meanwhile, Seoul is caving under pressure and rescuing Kia Motors Corp., the country's No.2 auto maker, from bankruptcy. It's the same story in other industries suffering global glut: Korean Airlines Co. plans to double its fleet. A government-led consortium is financing a scheme to make 70-seat aircraft. Hyundai Group is planning a $5.8 billion steel mill--even though two other mills have gone bust this year, and in spite of heavy opposition from government planners. Businesses are pressuring Seoul to cut interest rates and ease credit so they can continue to expand. ''We've lost the ability to regulate capacity,'' says Han Duck Soo, vice-minister of Trade & Industry. ''It is impossible to tell them to cut back.''
In Thailand, the degree of corporate denial is even more irrational. Thai companies have overbuilt everything from new phone lines to showpiece property developments and taken on billions in unhedged dollar debt to do it. Now, the Thais show no inclination to meet IMF guidelines by pulling the plug on 58 finance companies that have already suspended business. As elsewhere in Asia, most publicly traded companies still are run like family fiefdoms. And their owners tend to have powerful political connections. So do Thailand's top banks, which are loathe to let old friends go under.
CHARADE. The result is one piece of meaningless political theater after another. Prime Minister Chavalit Yongchaiyuth, for example, has promised a dramatic change in his cabinet to straighten out the mess. Instead, he has appointed executives of the powerful Bangkok Bank, Thai Farmer's Bank, and Siam Commercial Bank to the top three economic posts in his administration. These banks all have financed the top politicians' pet projects and companies, many of which are insolvent. The idea that this cabinet can police the finance sector is farfetched indeed. Even Singapore Senior Minister Lee Kuan Yew, who ordinarily is measured in his criticism of Southeast Asian neighbors, could not contain his dismay. ''Many Thai leaders in government and opposition have personal interests in the fate of finance companies and banks, hence a natural reluctance to discipline them,'' Lee said in a recent speech in Boston.
Foreign creditors would dearly love to force the breakup or bankruptcy of Thailand's most leveraged companies. But they have little legal power to push the issue. Thai Petrochemical Industry Co., the $1 billion baby of well-connected tycoon Prachai Leophairatana, has suffered an estimated $416 million in foreign currency losses. Prachai's empire is so strapped for cash that its cement subsidiary is paying creditors with sacks of cement. And yet Bangkok Bank, the company's biggest creditor, seems to be exerting no pressure to force a restructuring, and the Leophairatana family is not about to give up management control to sell off assets or bring in a foreign partner. Says Cyril Alappat, an advisor to Thai Petrochemical's board: ''The maximum you can expect would be a 50-50 relationship with a foreign partner.''
8% GROWTH. It seems that magnates in other countries don't want to take the situation very seriously, either. In Indonesia, President Suharto still vows to back a controversial national car project owned by his son and a state-owned passenger-jet company. Malaysia says it will postpone big dam and highway projects. But Malaysian national auto maker Proton--dreaming of itself as an export power--is still expanding. In mid-October, Malaysia signed deals to build two silicon-wafer fabrication plants. And in its latest budget, the government is sticking to its goal of 8% growth this year. Investors, hoping Malaysia would sharply tighten up on new lending, sent the ringgit reeling.
The economic scene could get a whole lot grimmer if China--the last great hope of the region--starts to falter. The conventional wisdom is that China should keep expanding at a healthy 8% pace, thanks to a booming export sector, some $130 billion in foreign reserves, and an enviable 40% savings rate.
But other countries in Asia boasted of similarly strong statistics only last year. And by other measures, China could be another train wreck in the making. Consumer spending is tailing off. More alarming, growth among hundreds of thousands of township and village enterprises, long the most dynamic part of the economy, is cooling down. China's four major banks have an estimated $90 billion in nonperforming loans and are technically insolvent. State-owned industries continue to pile up staggering losses. Says Brookings Institution Sinologist Nicholas R. Lardy: ''The course China is on is clearly unsustainable.''
If that weren't bad enough, the beating taken by ''red chips''--mainland companies listed in Hong Kong--will probably force postponements of dozens of initial public offerings. State enterprises have been counting on that capital to modernize and pull off all the mergers and acquisitions that President Jiang Zemin, speaking at September's 15th Party Congress, declared were on the way.
Most economists still contend that China's nonstate sector is strong enough that the country can outgrow its debt problems. Besides, they point out, many of China's state industries actually are profitable--they just don't tell authorities in order to avoid taxes.
What's unsettling about these explanations is that nobody really knows the financial system's true condition. Countries such as Thailand also boasted impressive savings, exports, and investment statistics, but now are revealed to be houses of cards. Says World Bank economist Howard G. Broadman, a specialist on China's state enterprises: ''If a meltdown happened in Southeast Asia, the bad debt situation can't go on indefinitely in China.''
Politicians and corporate chieftains across the region still may believe that they are weathering a temporary downturn. But global financial markets can't send the message any more forcefully that a wrenching new era has dawned in East Asia.
By Pete Engardio in Hong Kong, Michael Shari in Bangkok, Mark Clifford in Seoul, and bureau reports

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