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Mainland China and the Asian Financial Crisis

Mainland China and the Asian Financial Crisis. Asian Financial Crisis of 1997. Thai currency lost half its value in 6 months replicated in Malaysia, South Korea, Indonesia, etc. in various degrees rapid outflow of foreign capital plunges in stock markets

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Mainland China and the Asian Financial Crisis

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  1. Mainland China and the Asian Financial Crisis

  2. Asian Financial Crisis of 1997 • Thai currency lost half its value in 6 months • replicated in Malaysia, South Korea, Indonesia, etc. in various degrees • rapid outflow of foreign capital • plunges in stock markets • declines in exchange rates of currencies • banking crisis • problems of short-term debt repayment

  3. Impact on mainland China • Asian Financial Crisis • important impact on domestic political economy • given the new openness to world economy • was not the main force of transformation • China’s domestic transition • Deng Xiaoping’s “southern tour” of 1992 • “socialist market economy” in 1993

  4. Major events in China in 1997 • Deng Xiaoping died • Hong Kong returned to China • 15th CCP National Congress

  5. Political evolution • Consolidation of the post-Deng regime • CCP General Secretary (’89-’02) Jiang Zemin • PRC Premier (’98-’03) Zhu Rongji • acceleration of domestic transformation

  6. Impact of the Asian Crisis • Vulnerability of mainland China’s economy • relatively open economy • exports were 22% of GDP • nearly 80% direct investment from East Asia • similarity between mainland China and the “crisis economies” • similar patterns of investment • similar structure of exports

  7. Mainland China and ASEAN-4 • Exports from mainland China and from Indonesia, Malaysia, Philippines, Thailand

  8. Mainland China and ASEAN-4 • both benefited from export restructuring • rapid export growth up to mid-1990s • both competed in exporting labor-intensive manufactured consumer goods • both competed in attracting investment from Japan and NIE’s • both effectively pegged their currencies to the U.S. dollar

  9. Mainland China and ASEAN-4 • Similarity: rapidly industrializing economy outgrew the financial system • mainland China’s financial system • dominated by state-owned banks • banks in turn are dominated by government • personnel control • directed loans to SOE’s, cronyism, and favoritism • capital markets are relatively less developed • non-performing loans may be 20% of total

  10. Mainland China and ASEAN-4 • ASEAN-4 had a more open political and economic system • in regard to capital movements • capital movement into mainland China were overwhelmingly direct investment, not loans • in regard to currency convertability • Chinese renminbi Yuan is convertible only on current account, not on capital account

  11. Capital movement into mainland • only 1/5 were foreign loans • 4/5 were direct investment

  12. Foreign trade regime • “processing trade” in mainland China • imported inputs intended for export production • duty free and without administrative obstacles • account for 55% of mainland’s exports

  13. Public policy choices • Mainland China • more insulated economic system • more favorable economic conditions • economic policy choices by post-Deng leadership • to maintain control over the aspects of economy most vulnerable to world market • to maintain a more conservative and secure position in world economy

  14. To devalue or not to devalue? • Competition in exports and in attracting direct investment • all Asian neighbors devalued currencies • RMB Yuan was already over-valued • export growth was negatively affected • Yuan devaluation could trigger further spiral of competitive devaluation among Asian neighbors

  15. Asian Financial Crisis • During the Asian Crisis, mainland China • suffered relatively few harmful effects • opportunity to exert leadership in Asia • demonstrate responsibility • refrained from devaluation of Yuan • when almost all the other Asian currencies (except HK$) were devalued • financial aid to crisis economies • $4.5 billion commitment to the IMF

  16. Domestic transformation • The “bubble economy” of 1993 • Deng Xiaoping’s reform package • decentralization and marketization • financial laxity and inflationary pressure

  17. Zhu Rongji’s policy regime • Zhu Rongji • Vice-Premier (1991-1998) • President of the People’s Bank of China (1993-1995) • Premier (1998-2003) • Zhu Rongji’s policy regime in 1993-1995 • macroeconomic restraint • regulatory reforms

  18. Macroeconomic austerity • conservative monetary policy • banks faced harder budget constraints but also more authority • banks gained bargaining power • to resist demands from especially SOE’s • banking laws re-centralized banking system • to resist demands from local governments • banks were forced to be profitable

  19. Regulatory reforms • Market-oriented reforms in 1980s let the economy “grow out of the plan” • new task of improving the legal and regulatory environment in 1990s • legally defined ownership categories for SOE’s • privatization • abolished the “dual-track” of exchange rates • fiscal reform to re-centralize tax revenues

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