Growth Cools in China as Dissent Blazes in Indonesia

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No one can accuse China's leadership of lacking focus. Headlines on the last day of the year were dominated by the news that China missed its 8% GDP growth target by two-tenths of a percentage point. That seems a judicious lapse, since to hit 8% on the head before the year has ended would stretch credibility perhaps too far.

Rural Focus

Newspapers also carry reports of a recent speech made by President Jiang Zemin in which he said that rural stability and high rural incomes would be a priority for 1999. This is sensible given the plunging trend in rural incomes. Political preservation is the supreme art of the Communist Party of China, and its leadership clearly knows that political change throughout Chinese history has stemmed from discontent in the countryside. Boosting agricultural incomes also makes sense, since the urban consumer is saturated with the consumer goods churned out in Chinese factories.

Meanwhile, a reminder that China's economy is not as healthy as many would like to believe. Obsession with high GDP growth rates proved to be a contrary lead indicator of the Asian crisis, as could be testified by a cursory glance at investment bankers' pitch books during the bull era. China is probably the only Asian market where pitch books still carry GDP charts. Institutional investors should take note accordingly.

Flux in Indonesia

This dispatch is written from another highly populated Asian country whose political problems in 1998 must have come as a great shock to the Chinese leadership. Greed & Fear safely predicts that political tensions will grow in Indonesia in the year ahead. The regime has clearly lost legitimacy with the population following the deaths of student demonstrators in November, as has now the military. The result will likely be escalating disturbances in the run-up to the scheduled June election. The vexed issue of the investigation into the Suharto family's wealth will be sure to keep emotions charged and therefore the political temperature high.

It is Indonesia's misfortune that the opposition is disunited and that there is as yet no clear alternative leader, with popular backing, ready to take advantage of the overwhelming desire for political change that would seem to span all sections of society. The result will be the renewed decline of the rupiah and renewed focus on political problems in the early months of 1999. Any suggestion that the proposed election will not be free and fair will also call into question continued funding from the international agencies.

From an economic point of view, it is also unfortunate that the recent months of comparative stability, in terms of a stable currency, have not been used to address properly the appalling problems in the banking sector. The problem is that banking capitalisation requires making hard political decisions about winners and losers. No one wants to make these changes when the political situation remains in such flux.

Christopher Wood, the author of Greed and Fear, is the global emerging market strategist for ABN-AMRO. He is the author of "The End of Japan Inc." (Simon & Schuster, 1994) Under no circumstances is this to be used or considered as an offer to sell, or a solicitation or recommendation of any offer to buy. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

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