By Steven Mufson
Washington Post Foreign Service
Wednesday, February 11, 1998; Page A26

BEIJING—By vowing to defend its currency and prop up its economy with public spending projects, China has been playing up its role as the responsible neighbor amid Asia's financial tumult.

Vice Premier Li Lanqing said last week that China will put extra money into infrastructure and environmental projects if necessary to keep its flagging growth rate at 8 percent this year. And he promised once again to protect the value of the currency, the yuan.

"I think for 1998, greater China is the bulwark of Asian stability and growth," said William Overholt, an executive at Bankers Trust in Hong Kong. "It is very much the driver."

But even with Beijing's helpful economic policy commitments, China remains more a looming threat to the region's economies than their savior, many analysts say. Even without devaluing its currency, China has a troubled banking system, towering stockpiles of inexpensive consumer goods, huge exports, a voracious appetite for foreign investment and a virtually endless supply of what is still the cheapest labor in Asia.

"The absolute wage level is still cheaper in China," said Ken H. Chan, regional economist for Nikko Securities Research Center. "Even in the coastal region, the wage level is at most parallel with Thailand and the Philippines. But in other areas there are very, very low wages."

The number of destitute Chinese peasants expected to migrate to cities in search of low-paid work during China's current five-year plan exceeds the entire labor force of Indonesia. China sucks in one-third more investment than Vietnam, Malaysia, Indonesia, the Philippines and Thailand combined, and much of that investment has been in fixed plants that will not be picked up and moved out of the country. For the moment, China's Communist government also appears to be more stable than some of its neighbors.

"What we're seeing today around the region and the world, deflation and unstable currencies, is the delayed effect of the shock of 1.2 billion Chinese entering the world economy," said one Hong Kong-based investment manager.

China's ability to help its neighbors is also blunted by the degree to which it is similar to them. China's imports -- including machinery, technology and wheat -- come mostly from the United States, Japan and Europe and probably will not be bought from Asian countries. Although China could dig into its $140 billion foreign exchange reserves and invest in its neighbors, it remains extremely cautious about its foreign investments.

"If the region expects China to be a major buyer, don't expect it to happen," Chan said.

However, given that China already occupies a huge place in the world economy, other Asians are still breathing a sigh of relief that it appears ready to act in ways that will not worsen Asia's woes. Unlike the situation 10 or 20 years ago when China lived in not-so-splendid isolation, analysts say that the fate of the rest of Asia now hangs in the balance when China weighs what to do with its domestic economic policy and exchange rate. Most analysts agree that a move by China to devalue its currency would set off a round of competitive devaluations and spell depression for the entire region.

That would not help China either. Asia is the source of more than half of China's investment and the destination of about 30 percent of its exports. China has no incentive to cut the rest of Asia off at the knees. "A stable yuan helps China and helps Asia," a government spokesman said.

At the world economic forum in Davos, Switzerland, Li said: "China should not add fuel to the flames. . . . We are very firm in our determination not to devalue the yuan." Its devaluation, he said, "would lead to devaluations of other currencies in the region. This would have an avalanche effect. That would be a disaster for stability and growth in Asia and the growth of the world economy."

In addition to damaging China's customers and investors, a devaluation of the yuan would have other adverse consequences for China. About half of its exports rely on imported raw materials, whose price would remain the same. Moreover, a devaluation of the yuan would make imported goods -- machinery, petroleum and wheat -- more expensive and possibly reignite the inflation that Vice Premier Zhu Rongji just spent three years beating back.

Economists say that China now has two important tasks. One is to clean up its insolvent banking system. Overholt says China's banks are in many ways similar to South Korea's: loaded with bad loans to overextended companies in businesses that are not competitive.

A Chinese banker said Asia's crisis has been a wake-up call for China. "Good things can be learned from bad examples," he said. Last week, China lifted credit quotas for banks and said it will allow banks to adjust interest rates, now fixed, within a certain band depending on the bank's risk analysis of the borrower.

Now that China's inflation rate has tumbled to about zero, many analysts say the second task will be to prevent its growth rate from tumbling too. One possibility: a cut in domestic interest rates. That is possible only because China's currency is not freely convertible and does not require high interest rates to protect it.

"Clearly Japan is not playing its role as an engine of growth," said John Seel, Hong Kong-based economist for Bear, Stearns & Co. "I don't know how much China can be a growth engine. I'm not sure they'll be pulling anybody out of recession. But at least if it can be a model by not devaluing, that would be a step forward."