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The Chinese Conundrum: External Financial Strength, Domestic Financial Weakness

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  • Brad Setser

Abstract

China's recent investment boom looks much like the investment boom in the Asian tigers of the 1990s. Both were marked by a surge in bank credit to the private sector, a real estate boom and questions about the quality of domestic financial intermediation. Yet, China has few of the external vulnerabilities that marked the Asian tigers. Its current account surplus is rising, and its reserves far exceed its short-term external debt. However, China's external strength is unlikely to allow it to avoid future banking trouble and a new round of costly non-performing loans. The trigger for the next generation of bad loans in China, though, will not be sudden withdrawal of external credit (JEL classification: F32, G21). Copyright 2006, Oxford University Press.

Suggested Citation

  • Brad Setser, 2006. "The Chinese Conundrum: External Financial Strength, Domestic Financial Weakness," CESifo Economic Studies, CESifo, vol. 52(2), pages 364-395, June.
  • Handle: RePEc:oup:cesifo:v:52:y:2006:i:2:p:364-395
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifl005
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    Cited by:

    1. Philip Lane & Sergio Schmukler, 2007. "The Evolving Role of China and India in the Global Financial System," Open Economies Review, Springer, vol. 18(4), pages 499-520, September.
    2. Andrew Sheng & Allen Ng, 2008. "The External Wealth of China: An Investigation from the International Balance Sheet Perspective," Working Papers 012008, Hong Kong Institute for Monetary Research.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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