Mainland China and the Asian Financial Crisis Asian
- Slides: 22
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 – declines in exchange rates of currencies – banking crisis – problems of short-term debt repayment
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
Major events in China in 1997 • Deng Xiaoping died • Hong Kong returned to China • 15 th CCP National Congress
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
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
Mainland China and ASEAN-4 • Exports from mainland China and from Indonesia, Malaysia, Philippines, Thailand
Mainland China and ASEAN-4 • both benefited from export restructuring – rapid export growth up to mid-1990 s • 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
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
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
Capital movement into mainland • only 1/5 were foreign loans • 4/5 were direct investment
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
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
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
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
Domestic transformation • The “bubble economy” of 1993 – Deng Xiaoping’s reform package – decentralization and marketization – financial laxity and inflationary pressure
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
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
Regulatory reforms • Market-oriented reforms in 1980 s let the economy “grow out of the plan” • new task of improving the legal and regulatory environment in 1990 s – 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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