The politics of a meltdown

As Chinese president Jiang Zemin enjoyed the red carpet treatment in Washington last week, President Bill Clinton and his advisers took an unorthodox view of the falls and rises shaking the stock markets.

Washington insiders accept that Hong Kong's crash spooked Wall Street, but they trace the fall, in part, to Taiwan's surprise 17 October devaluation of its currency to offset the devaluations of other Asian countries. Taiwan has the world's largest currency reserves and had been under no speculative pressure.

"The market view was that if even Taiwan can't hold its exchange rate, then no one can," said William Cline, deputy managing director and chief economist at the Institute of Interna- t ional Finance.

A still longer fuse to the region's cycle of devaluations was China's devaluation in January 1994. China's export competitiveness put pressure on neighbouring countries to regain lost sales through devaluation. Speculative froth and economic mismanagement in Asian countries did the rest.

The prevailing view inside the Clinton Administration is that the overheated US market was due for a fall. If the correction in overpriced Asian emerging markets had not lit the fuse, something else would have done. Alan Greenspan, chairman of the Federal Reserve, said as much on Wednesday.

Many US officials dismiss the economic threat of the "Asian contagion" to the US economy.Others are worried about the collateral damage the uncontrolled contagion may cause. Spillover from Asia tripped Thursday's market plunges in Latin America, whose exports are competitive with Asian goods. Prolonged economic and political instability in Asia and Latin America is worrisome.

Such worry motivated the US to put up $3bn in financing to support Friday's $18bn (pounds 12bn) IMF-led emergency aid package for Indonesia. US leaders are examining ways to influence the IMF's $17.2bn stabilisation programme in Thailand. Right now, says a high US official, the IMF "has no clue as to the size of the hole there. These are dicey issues because there is a weak political establishment."

Some insiders feel the US has been too passive in deferring to Japan's insistence that Asia is its sphere of influence and that the US should follow its lead: Japan put up $4bn in the Thai programme, the US nothing.

The controversy over the US-led $37.5bn bail-out of Mexico from its 1994- 95 peso crisis has kept officials from putting up funds. After Mexico, US Congress imposed limits on the Administration's legal lending flexibility. In advancing $3bn to Indonesia, the Administration has decided the Asian contagion is so serious that these political risks must be faced.

Meanwhile, Treasury Secretary Robert Rubin has been consulting on mechanisms to strengthen Asia's economic and financial architecture. This is expected to produce results. Resolution of the tumult will be conditioned by the Chinese theatre. "If the Hong Kong dollar holds [its US dollar peg], it'll be okay," said Mr Cline at the IIF.

Yet the cloud looming over Hong Kong is China's exchange rate policy. "A lot of the Asian turmoil is due to the pricing in of uncertainty over what China will do," says a US official. "Will they feel they have to devalue to establish their competitive position? That is driving Hong Kong to some extent."

This is why US officials will be watching China closely as Jiang Zemin returns home.