Congressional Meeting to Set the Tone in China

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China

starts its annual parliamentary session this week, which is not usually anything to pay particular attention to. But with Asian financial nerves still frazzled, all eyes are on the People's Republic to hold the line of stability. The session of the

National People's Congress

will be important in giving the country and the world a sense of what to expect in the months ahead.

The conclusion remains as before: Don't worry about China too much, and don't equate China with

Indonesia

and

Korea

.

The Congress session, which begins Thursday, is in no way a democratic event. But it is a key forum for the Communist Party leadership to explain, clarify and readjust. This year will see

Zhu Rongji

, the savior of the Chinese economy, elevated to premier, which is good news all round. The biggest danger China faces, it can be argued, is Zhu's demise. He is 69, but thankfully appears to be in robust health.

This year will mark a confirmation of developments in the past few years, such as the rationalization and trimming of the huge government structure (after all, it was the Chinese who invented bureaucracy). China has rejuvenated the leadership ranks, bringing in more competent people, and most important of all, institutionalized political power. It is interesting to note that nobody in China is paying much attention anymore to who gets what post -- a huge difference from five years ago. The key is that Zhu gets the premiership and becomes the effective ruler.

On the economy, the direction is clear and of great benefit to the rest of Asia: no change in the currency exchange rate, probably for the rest of the year, and continued progress on restructuring the bankrupt state sector, despite the pain involved, on the assumption that it has no choice anyway, and the sooner it can make some progress on solving the state enterprise problem, the better.

China is clearly ready to take the short-term consequences: higher unemployment and the risk of escalating social tensions. But the leadership in Beijing seems to have a very good feel for the mood of the nation and, on balance, will probably get away with it. Ordinary people complain, and this is going to be a tough couple of years. But there is also a strong sense that there is no alternative, and that, in the longer term, it will be worth the pain. The Chinese economy will slow down this year, but there will a constant string of infrastructure and other programs to keep people busy.

Foreign investment in China will continue at a reasonably high level, despite the higher relative costs versus other Asian nations. Foreign investors, having looked at other countries, will come back to China and decide that things are not all that bad.

One of the biggest problems the Chinese face is unquestionably the sick state of the official banks, loaded down with nonperforming and unrecoverable debt. But here again, there are strong signs of change and improvement. The reserve ratio applied to the banks is finally to be reduced, and a huge domestic bond flotation will help to recapitalize them.

More important, major changes are already taking place in the Chinese banks -- they are becoming much more risk aware. They don't want to lend funds to money-losing state companies, and they are finding it easier than ever to ignore political and administrative pressures to throw good money after bad.

Also encouraging is the growing belief that interest rates will be cut soon, possibly by the end of this month. That will have a direct and positive effect on the China stock markets, which are pretty sickly at the moment.

But not much, and not for long. If you want to buy China, the best defensive position is still through

Hong Kong

.

Anton Graham, our Hong Kong-based correspondent, provides commentary weekly for TheStreet.com. His column appears every Wednesday. He most definitely welcomes your

feedback.