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How Is China to Avoid Financial Crisis?

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  • Yang Fan

Abstract

The Thai financial crisis was touched off by the fact that Thailand became intoxicated with its achievements in economic growth, that it hoped to replace Hong Kong as an international center of finance, and opened up its capital market too quickly, with the result that international speculative capital entered in a big way and continuously impacted the fixed exchange rate system, forcing Thailand and other Southeast Asian currencies to devaluate by 30 percent. The same thing happened in Mexico a few years ago; its unfavorable trade balance was more than 10 percent of its GNP, its foreign debt was 50 percent higher than its gross domestic investment, and the proportion of speculative capital in its foreign funds reached 70 percent, thus providing the conditions for the outbreak of its financial crisis. In this sense, the fact that international speculative capital can hardly impact China is related to China's slow opening up to the outside, and especially to the fact that the capital market has not been opened up in an overall manner to foreign capital and that the renminbi has not been made entirely freely convertible. Moreover, 80 percent of the foreign funds brought into China consists of direct investment, the central monetary authorities control the appreciation of the renminbi, and a favorable trade balance has been maintained over the years. The reform of the foreign trade system and the contributions made by township enterprises to exports, the lowering of wage standards by the influx of peasant labor into the cities, and the reconfiguration and reorganization of state-owned enterprises have enabled China's products to maintain their international competitiveness. Foreign capital has not yet entered China's finance and insurance services to a significant extent. All these voluntary measures and objective circumstances with regard to opening up to the outsideâor, one could say, the fact that China's opening up to the outside has not yet been fully implementedâhave saved us from the full impact of the international financial crisis.

Suggested Citation

  • Yang Fan, 1999. "How Is China to Avoid Financial Crisis?," Chinese Economy, Taylor & Francis Journals, vol. 32(1), pages 63-67, January.
  • Handle: RePEc:mes:chinec:v:32:y:1999:i:1:p:63-67
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