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1、China'sEconomicSqueezebyWilliamH.Overholthinaisinasqueeze.ThedomesticcauseisthesamefamiliaronethatCsparkedtherecentAsiancrisis:governmentuseofthecreditsystemtogivespecialprivilegestocertain®rms(inChina'scase,thestateenterprises).Excessivecredithassubsidi
2、zedunderproductivesectorsoftheeconomyandin¯ateda®nancialbubble.AsinSouthKorea,thefavoredenterpriseshaveusedtheiraccesstoexcessive,low-costfundingtocreatevastempiresofovercapacityandinef®ciency.AsinSouthKorea,theavail-abilityoffundsregardlessofpro®tsuppor
3、tsalaborsystemthatassuresworkersinfavoredsectorslifetimeemploymentandawiderangeofsocialbene®ts,eveniftheircompaniesprovidenousefuloutput.AndasinSouthKorea,thebanksthatunderwritethissystemnowconfrontadauntingaccumulationofbadloansthatthreatentheviabilityo
4、ftheentire®nancialsystemandjeopardizedecadesofimprovementinthestandardsofliving.China's®nancialbubblediffersfromSouthKorea'sinimportantways,however.WhereasSouthKorea'sbubblewaspuncturedbyaforeigndebtcrisisinDecember1997,Chinahasproportionatelyfarlessfore
5、igndebtandproportionatelyfargreaterforeignexchangereserves,anadvantagethatshieldsthebubbletosomedegreefromexternalpressures,butthatprovidesnoprotectionfromsigni®cantinternalproblems.Secondly,China'sstateenterprisesarealsofarlessef®cientandcompetitivethan
6、Korea'schaebol,andthesqueezecomesatamuchlowerlevelofadministrativeandtechno-logicaldevelopment.Thirdly,thesheerscaleofmanagementproblemsin-volvedinconductingreform,givenChina'svastsizeandpopulation,isordersofmagnitudegreaterthaninSouthKorea.Finally,given
7、China'slowerlevelofpercapitaincomeandpoliticaldevelopment,theconsequencesofamajoreconomicsetbackcouldincludeextensivestarvationandpoliticalupheaval,neitherofwhichisatriskinSouthKorea.Ironically,thetimingofthesqueezeresultsfromgoodpolicyÐthemostproactivee
8、conomicreformprogramintheworld.BecausethestakesWilliamH.OverholtisauthorofTheRiseofChina(W.W.Norton,1994)andAsiaeconomistforNomuraInternational(HongKong)Limited,bywhosepermissionthisarticleappears.Winter200013OVERHOLTaregr
