Transcript 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
– 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
• 15th 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-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
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RMB Yuan per US Dollar 1979 - 2010
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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 Direct Investment (billion US$) in Mainland China 1983-2009
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Foreign trade regime
• “processing trade” in mainland China
– imported inputs intended for export production
– duty free and without administrative obstacles
– account for 55% of mainland’s exports
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Mainland China's Foreign Exchange Reserves (trillion US dollar) 1950-2010
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Public policy choices
• Mainland China
– more insulated economic system
– more favorable economic conditions
• economic policy choices by post-Deng
leadership
– to maintain control over the aspects of
economy most vulnerable to world market
– to maintain a more conservative and secure
position in world economy
To devalue or not to devalue?
• Competition in exports and in attracting
direct investment
• all Asian neighbors devalued currencies
– RMB Yuan was already over-valued
– export growth was negatively affected
• Yuan devaluation could trigger further
spiral of competitive devaluation among
Asian neighbors
Asian Financial Crisis
• During the Asian Crisis, mainland China
– suffered relatively few harmful effects
• opportunity to exert leadership in Asia
• demonstrate responsibility
– refrained from devaluation of Yuan
– when almost all the other Asian currencies
(except HK$) 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
Mainland China's Inflation Rate 1990-2009
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20.0%
15.0%
10.0%
5.0%
0.0%
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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 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