Mainland China and the Asian Financial Crisis

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
• Chinas domestic transition
• Deng Xiaopings 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 Chinas 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 NIEs
• both effectively pegged their currencies to the
  U.S. dollar

9
(No Transcript)
10
Mainland China and ASEAN-4

• Similarity rapidly industrializing economy
  outgrew the financial system
• mainland Chinas financial system
• dominated by state-owned banks
• banks in turn are dominated by government
• personnel control
• directed loans to SOEs, cronyism, and favoritism
• capital markets are relatively less developed
• non-performing loans may be 20 of total

11
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

12
Capital movement into mainland

• only 1/5 were foreign loans
• 4/5 were direct investment

13
Foreign trade regime

• processing trade in mainland China
• imported inputs intended for export production
• duty free and without administrative obstacles
• account for 55 of mainlands exports

14
(No Transcript)
15
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

16
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

17
(No Transcript)
18
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

19
Domestic transformation

• The bubble economy of 1993
• Deng Xiaopings reform package
• decentralization and marketization
• financial laxity and inflationary pressure

20
Zhu Rongjis policy regime

• Zhu Rongji
• Vice-Premier (1991-1998)
• President of the Peoples Bank of China
  (1993-1995)
• Premier (1998-2003)
• Zhu Rongjis policy regime in 1993-1995
• macroeconomic restraint
• regulatory reforms

21
Macroeconomic austerity

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

22
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 SOEs
• privatization
• abolished the dual-track of exchange rates
• fiscal reform to re-centralize tax revenues