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Was China the first domino? assessing links between China and the rest of emerging Asia

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Author Info

  • John Fernald
  • Hali Edison
  • Prakash Loungani

Abstract

We assess links between China and the rest of emerging Asia. Some commentators have argued that China’s apparent devaluation in 1994 may have contributed to the Asian financial crisis. We argue that the devaluation was not economically important: The more-relevant exchange rate was a floating rate that was not devalued, and high Chinese inflation has led to a very sharp real appreciation of the currency. Although in principle, export competition with China could nevertheless have placed pressure on other Asian exporters, we argue that the striking feature of the data is the common movement between export growth from China and from other developing Asian economies. To the extent there is evidence of export competition, it is the period from about 1989 to 1993: China’s exchange rate depreciated sharply, Chinese export growth exceeded export growth of other Asian economies, and the composition of Asian exports (measured by export shares of various goods to the United States and other industrial economies) changed substantially. Finally, we speculate on the effects of the Asian crisis on China’s prospects. China’s economic growth is likely to slow because of increased trade competition as a result of the devaluation of other Asian currencies, and because of reduced capital inflows. In addition, these reduced inflows are likely to reduce job creation in the non-state sector, and hence make enterprise restructuring more difficult in China.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1998/604/ifdp604.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 604.

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Date of creation: 1998
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Handle: RePEc:fip:fedgif:604

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Keywords: Financial markets ; Asia ; China;

References

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  1. Kasa, Kenneth & Huh, Chan, 2001. "A Dynamic Model of Export Competition, Policy Coordination, and Simultaneous Currency Collapse," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 68-80, February.
  2. Michael W. Bell & Kalpana Kochhar & Hoe Ee Khor, 1993. "China at the Threshold of a Market Economy," IMF Occasional Papers 107, International Monetary Fund.
  3. Li-Gang Liu & Marcus Noland & Sherman Robinson & Zhi Wang, 1998. "Asian Competitive Devaluations," Working Paper Series wp98-2, Peterson Institute for International Economics.
  4. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," NBER Working Papers 4858, National Bureau of Economic Research, Inc.
  5. Chan, K. Hung & Chow, Lynne, 1997. "An empirical study of tax audits in China on international transfer pricing," Journal of Accounting and Economics, Elsevier, vol. 23(1), pages 83-112, May.
  6. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
  7. Marc Quintyn & Bernard Laurens & Hassanali Mehran & Tom Nordman, 1996. "Monetary and Exchange System Reforms in China," IMF Occasional Papers 141, International Monetary Fund.
  8. K.C. Fung, 1996. "Accounting for Chinese Trade: Some National and Regional Considerations," NBER Working Papers 5595, National Bureau of Economic Research, Inc.
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