The Asian Financial Crisis and Banking Reform in China and Vietnam

The collapse of financial markets and exchange rates across Southeast and East Asia in 1997 and 1998 affected the economies of China and Vietnam much less than those of most other Asian countries. Ironically, the two transitional economies were protected to a great extent by the incomplete nature of their banking reforms and financial market development. The yuan and the dong were not yet traded internationally, securities markets were in very early stages of development, and tax codes, trade regulations, and accounting standards in the two countries did not yet fully conform to international norms. Yet the non-convertibility of their currencies served to shield the Chinese and Vietnamese economies from the sharp declines in exchange rates and securities prices that devastated the incomes of millions of people in Thailand, South Korea, Indonesia, and Malaysia.This paper examines the implications for future policy reforms in China and Vietnam of the impact of the Asian financial crisis. The relative immunity of the two economies calls into question some central assumptions of conventional economic development theory. It is no longer clear that full currency convertibility should be sought at the earliest opportunity. The experiences of the Asian economies in the late 1990s suggest that emphasis on development of stable, efficient domestic banking systems and mature financial markets should take priority over full integration with international financial markets. This argument has been developed by Pan Yotopoulos in his book, Exchange Rate Parity for Trade and Development (Cambridge, 1996), and merits further consideration with respect to the financial policies of Vietnam and China.