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China's economic bubble will burst - but not too soon

So I was thinking about buying an office building in Shanghai. You know, something with lots of glass and steel to impress my friends. To do it right, I thumbed through the latest Jones Lang Wootton research on the state of the Asian-Pacific real estate market. I was surprised. There was a lot to choose from. The vacancy rate for Shanghai office buildings was 32 percent, and many more new buildings were coming up. I checked out Beijing; the vacancy rate there was 33 percent. So I checked out Bangkok, Thailand. Same story as China.

What's the message here? Very simple: China is not immune to the laws of gravity - the same economic laws of gravity that have recently pulled down the growth rates of some of the highest-flying Asian tigers, namely Thailand, Indonesia and Malaysia. Of course, you say, how could anyone think China would be immune? You'd be amazed at how many people think China's boom will last forever. It will not. Pay attention to this economic crisis in Southeast Asia. It has huge implications for China.Don't worry, China won't become Thailand overnight. China's economy today is at a different stage of development than those of the Asian tigers. For the moment, most of the foreign investment in China is direct investment in factories or buildings, meaning that it is not "hot money" invested in stock markets or Chinese bonds that global speculators could pull out at the drop of a hat. And with its high savings rate and huge reserves - $125 billion - China could defend any global attack on its currency.

But that is yesterday's news. In order to keep raising its standard of living, building its roads, phone system and power plants, and privatizing its state-owned factories, China will have to open itself more to global financial flows. And the model that China is following is the same state-directed, authoritarian, crony capitalism practiced by the Asian tigers Malaysia, Indonesia, Thailand and Korea.

China is already exhibiting some of the weaknesses that sapped the strength of these tigers - weaknesses that can be masked by rapid growth but become apparent the minute things slow. The weaknesses include huge amounts of foreign capital cascading that get misallocated into pet political projects and white elephants, weak financial regulatory institutions, a banking system virtually bankrupt from lending to failed state enterprises, overbuilding of real estate, corruption, a weak watchdog business press and sycophantic foreign investors who never tell you the truth.

Understand: What happened in Malaysia, Thailand and Indonesia is not just an economic crisis, not just a currency crisis, but a political crisis. Their people worked hard, got a lot of the economic fundamentals right, but never developed all of the economic and political institutions needed to properly allocate resources. Look at Thailand today - the government is going to have to shut down some of the bankrupt banks, but it can't decide which ones because each is tied to a different politician. It was all fine as long as so much money was flowing in and investors were mesmerized by growth rates. But when these economies really started overspending, and investors took a closer look, they got hammered.

"This is where China is vulnerable," says Jeffrey E. Garten, dean of the Yale School of Management. "As China grows more integrated with the global economy, it will not be able to rationally allocate the massive flows of incoming capital - not with its current political system, which thinks it can manipulate the markets, which is rife with cronyism and lacks developed regulatory institutions."

When global investors stampeded Malaysia for these same weaknesses, its prime minister, Mahathir Mohamad, angrily accused the West, global speculators and "the Jews" of deliberately wrecking his economy. One can only wonder, and worry, about what sort of angry howl China would emit if it really got stampeded by U.S.-led global marketers. If you think Malaysia is ugly, multiply by 100.

When President Clinton meets with China's president, Jiang Zemin, next week, and the subject of political reform in China comes up, Clinton should just walk the Chinese leader through what happened in Thailand and Malaysia. China will not be immune to these same forces. And if you think it will be, there's a skyscraper in Shanghai I'd like to sell you.

New York Times News Service