It's nearly August, so if you're superstitious, it's time to begin worrying about another global financial crisis.
Two years ago in August, the Asian flu was beginning to infect markets in Thailand and Korea; last August a sudden Russian default sent financial markets into a panicky free-fall that knocked the Dow Jones average down more than 1,000 points.
I'm not by nature superstitious, especially when it comes to financial matters. Markets have a logic, even if it's sometimes hidden from the understanding of people whose last name isn't Greenspan. Still, there are some worrying signals coming out of Asia these days that suggest we should at least take our umbrellas along on vacation this August.
The X-factor in global financial markets right now is China. In a few short months, it's gone from being the most important stabilizing force in Asia to potentially the most destabilizing. Part of the problem is Beijing's belligerent huffing and puffing over Taiwan. Chinese leaders may be right in blaming Taiwan's President Lee Teng-Hui for upsetting a 50-year status quo by calling for two Chinas. And the Clinton administration is certainly right in trying to patch things back together before hard-line politicians on both sides of the strait turn this into a military crisis.
But the Taiwan flap, and Beijing's recent crackdown on a seemingly harmless religious sect, has reminded the financial world that China is still run by an aging clique of communists who are entirely capable of screwing up a good thing. China's smart young bankers and computer scientists may represent the country's future, but they don't control its present. These political realities were probably a big reason behind Standard and Poor's decision last week to downgrade China's bond rating.
The financial world's China angst is compounded by growing signs that Beijing may soon be forced to devalue its currency -- something Chinese leaders resisted doing even during the darkest days of the Asian financial crisis. Indeed, it was China's stalwart refusal to join in the wave of competitive devaluations that helped keep the crisis from becoming even worse.
But Beijing's financial troubles are mounting. Economic growth is likely to fall below the 8 percent target this year. Exports also fell sharply in the first half of this year, and the rate of unemployment in some of China's cities is now thought to be well above 5 percent -- a politically dangerous level. Some economists warn that China may be following Japan into a deflationary spiral, with factories churning out far more products than cautious consumers are ready to buy.
To deal with these growing pressures, devaluation is an increasingly attractive option. China's central banker, Dai Xianglong, upset markets this month when he dropped the usual soothing refrain that China wouldn't devalue and said the exchange rate would be "determined by the market." And the World Bank's chief economist, Joseph Stiglitz, seemed almost to be inviting such a move when he said in Beijing last weekend that a devaluation could be good for China's economy -- by stimulating demand and thereby reducing deflation.
Whatever benefits a devaluation might have for China, it would upset other economies in the region. Hong Kong in particular would be battered -- forced to raise interest rates to defend its own currency. And other nations might be tempted to rush into a new cycle of competitive devaluations, which could erode the confidence that has slowly been building in Asia over the past six months.
Treasury officials are watching China closely. They won't discuss the two big questions -- will China devalue and will that devaluation have a harmful effect on the region? But they're staying in touch with finance ministries around the region.
A nice cushion against any new China shock is the recent recovery of South Korea and Thailand -- the two countries that were hit hardest by the 1997 crisis. The South Korean stock market is up more than 50 percent this year, and the Thai market has gained more than 25 percent. South Korea has been surging so fast that economists keep raising their growth forecasts, with official estimates now for 6.8 percent growth this year, and some private forecasts predicting 8 percent.
But even this good news has some analysts worried. They fear that complacency and "reform fatigue" may be taking hold in Seoul and Bangkok -- creating political obstacles to the changes that are still needed to make those economies fully part of the global marketplace. Though governments there have promised to continue with reforms, the sudden return of prosperity is making it harder to get the patient to take the medicine.
As Americans discovered over the past two years, we have a lot at stake in the financial health of the Asian economies. That's why it's so unfortunate when China becomes a mindless political football in U.S. politics. China's economic reformers are midway through one of the world's most important transitions, and they deserve strong and steady U.S. support.
But even with the best intentions, Beijing and Washington must contend with the curse of August. With the Dow still at dizzying heights, it could be an interesting month.