All eyes on China.

AVOIDING THE ASIAN FLU, IT IS MORE ATTRACTIVE THAN EVER

When the Asian currencies began their precipitous decline last fall, few local companies were hit as hard as Iwerks Entertainment Inc.

In recent years, the Burbank-based designer of location-based entertainment systems and giant-screen movie theaters had relied on Southeast Asia, Korea and Japan for almost 40 percent of its sales. So when a series of severe currency devaluations plunged the entire region into fiscal turmoil, Iwerks suddenly found a third of its business on hold - a fact that recently forced the company to lay off 13 percent of its work force.

Now in the process of retooling the company's business strategy, Iwerks executives have no intention of abandoning Asia. But rather than waiting for its former customers to recover, the company is setting its sights on a country to which it has paid only scant attention in the past - China.

"We see it as a potential growth market," said Bruce Hinckley, Iwerks' vice president and chief financial officer. "It is the one part of the Far East that doesn't seem to be much worse off than it was in the past. Plus, there's an enormous population which has not had exposure to location-based entertainment."

Hinckley is hardly alone. For more than a century, investors and exporters around the world have swooned at the idea of tapping into China's vast potential market. And now, with China so far having escaped the troubles that have befallen so many of its neighbors, interest in the country is stronger than ever.

That heightened interest has powerful implications for Los Angeles. The L.A.Long Beach port complex is the nation's leading gateway to Asia. And mainland China is the region's second-largest trading partner - and trade is growing fast. In 1996, some $21 billion worth of cargo moved between L.A. and China - up from just $3 billion in 1988.

"Our largest sector of growth has been China. Absolutely, hands down," said Larry Keller, executive director of the Port of Los Angeles. "We expect to see double-digit growth with China this year. China is hugely important."

As evidence of that importance, Keller is accompanying Mayor Richard Riordan and business executives on the mayor's current 15-day trade mission to Asia. The trip, Riordan's first overseas visit since 1995, will include a series of high-profile meetings with Chinese government officials and trade executives including representatives from China Ocean Shipping Co., or Cosco, Port officials have been attempting to woo the fast-growing Chinese government-owned shipping line from its current home at the neighboring Port of Long Beach.

Long Beach port officials also were in China last week, on a previously scheduled visit of their own, where they too were scheduled to meet with Cosco officials.

Most local trade executives agree that such high-profile delegations are an important way of building ties between L.A. and new markets overseas. But below the radar screen, local business people have been forging such links for years.

Indeed, significant cultural and economic connections have emerged between L.A. and China. L.A.'s growing toy industry, for example, is largely the marriage of design and marketing talent here and inexpensive manufacturing muscle in China. The same goes for local apparel firms, which have created similar relationships with mainland Chinese factories. Meanwhile, entertainment and high-tech firms such as Iwerks, attracted by 1.2 billion potential consumers, have been forging ties to the country.

There is quite a bit of flow in the other direction as well.

In the past four years, investors from mainland China, Hong Kong and Taiwan have pumped at least $700 million into the local economy through banks and major real estate purchases. That investment has helped transform the San Gabriel Valley into perhaps the most vibrant Chinatown in the nation. An estimated 200,000 ethnic Chinese reside in the Valley - the largest population of Chinese Americans in the United States.

L.A.'s large Chinese American population "is a major force in the offing. It's something we're going to be hearing more and more about," said economist Tom Leiser, associate director of the UCLA Anderson Forecast. "Mainland China is a lot more open than it used to be, and that is opening opportunities for people with a linguistic and cultural affinity with China."

In recent years, the People's Republic of China has boasted one of the world's fastest-growing economies. That growth rate remains respectable, although it has tapered off. In 1997, the Chinese GDP grew by about 9 percent, and is project to increase by about 8 percent this year. That's down from a 10 percent jump in 1996 and a 14 percent increase in 1992.

But what makes the country such an attractive prospect for traders right now is not so much the rate of economic growth as the stability of its currency.

Unlike most currencies, the Chinese renminbi is not traded on the open market, and as a result is not subject to the same speculation and volatility that have sent other regional currencies into a tailspin. Instead, the renminbi's value is set by the Chinese government, which so far has resisted pressures to devalue the currency, giving the country a degree of economic stability amid the chaos engulfing its neighbors.

How long China will continue to resist such pressures remains an open question. Some economists argue that China, which built its $180 billion exporting empire largely by underpricing its neighbors, will have no choice but to devalue its currency to remain competitive with Thai, Indonesian and Malaysian rivals who can sell goods to the West at rock-bottom prices.

"China could lose market share because of under-valued currency elsewhere in Asia," said Daniel Lynch, a political scientist at USC's School of International Relations. "It may have to contemplate devaluing."

Currency concerns are far from the only question mark hovering over China's future.

Some economists say that just like in Southeast Asia, mainland Chinese banks have made a disturbing amount of unwise loans during the heady years of double-digit growth, pumping money into speculative developments that are unlikely ever to see a return.

"Their balance sheets are in very bad shape," said Charles Wolf Jr., an international economist at Rand Corp. in Santa Monica. "They have a huge amount of non-performing loans among their assets."

Official estimates suggest that bad loans comprise 20 percent of the total loans outstanding; unofficial estimates run as high as 40 percent.

"Nobody really knows," said Wolf.

Others, however, point out that China is considerably Jess vulnerable than its Southeast Asian neighbors, thanks in large part to the closed nature of the its economy.

"The domestic banks did not rely heavily on foreign funding sources," said Gregory Fager, director of the Asia department of the Institute of International Finance, a Washington-based association of global financial institutions. "That makes it a much different situation. The banking system and the financial system as a whole are not as vulnerable to international shifts."

But other specters hover over China's economic future. The bulk of the country's economic vitality has been centered in fast-growing coastal cities such Guang Zhou, Sheri Zhen and Shanghai, obscuring the fact that much of the country's interior remains extremely poor, with a largely agricultural economy.

"Disposable income is low, and that is certainly one of the major hurdles," said Hinckley of Iwerks.

Another hurdle is the Chinese bureaucracy, which remains enormous, with some 55 million Communist Party members working in a confusing labyrinth of state-owned enterprises, government ministries and provincial, city and town administrations. Corruption remains a significant hurdle for outsiders seeking entry to the market.

"The political system still dominates the economy," said USC's Lynch. "You have to have the right connections, and then and only then will you see if the market dynamics will work for you."

Such concerns have prompted some companies to take a go-slow approach to doing business in China.

About five years ago, the Pasadena-based engineering giant Parsons Corp. investigated boosting its Chinese business and "opted not to become heavily committed," said Mike Coleman, an executive in the firm's transportation group.

The company, so active elsewhere in the world, currently has just one major project underway in mainland China - a heavy rail mass-transit system in Shanghai - and the country represents less than 5 percent of Parsons' international business, Coleman said.

Nonetheless, Coleman said that despite his cautious approach, increased activity in China probably is inevitable.

"China has survived the Asian crunch pretty well," he said. "Like a lot of people, we look at China and say, 'One of these days they're going to need the types of projects we put together.'"