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China’s “Triangle of Woes” and Its Impact on Financial Stability

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  • Beoy Kui Ng

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)

  • Andreas Thorud

    (Nanyang Technological University, Singapore)

Abstract

The purpose of this paper is to apply Dean’s (2001) model of the ‘Asian governance triangle’ to assess the symbiosis relationships among the Chinese government finance, state-owned enterprises (SOEs) and the banking system in China. According to Dean, the relationship as a whole is fragile and unhealthy. This is because crises of such character are interdependent and contagious in that crisis in any one corner could readily lead to crises in the others. However, China has so far managed to avoid a financial crisis, which according to Dean (2001), is due to three reasons. Firstly, China remains willing to pour public funds into its SOEs and banks. Partly, as a result, hundreds of millions of ordinary Chinese people keep adding to their bank deposits, which enable the banks to sustain their flow of non-repayable loans to the SOEs. Secondly, China remains shielded from the crisis by its holding of massive foreign exchange reserves. Finally, the financial system is well protected by its exchange and capital controls. However, over the years, a series of reforms of its SOEs and banking system has severed the symbiosis relationships through the introduction of banking and corporate governance in the system. Any disruption of the gradual approach towards the reforms by hastily adopting a f lexible exchange rate and free capital flows would do more harm than benefit China in the long run.

Suggested Citation

  • Beoy Kui Ng & Andreas Thorud, 2006. "China’s “Triangle of Woes” and Its Impact on Financial Stability," Economic Growth Centre Working Paper Series 0605, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:0605
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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2006/2006-05.pdf
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    References listed on IDEAS

    as
    1. Bonin, John P. & Huang, Yiping, 2001. "Dealing with the bad loans of the Chinese banks," Journal of Asian Economics, Elsevier, vol. 12(2), pages 197-214.
    2. Yiping Huang & Yongzheng Yang, 1998. "China's Financial Fragility and Policy Responses," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 12(2), pages 1-9, November.
    3. Alicia García-Herrero & Sergio Gavilá & Daniel Santabárbara, 2006. "China's Banking Reform: An Assessment of its Evolution and Possible Impact," CESifo Economic Studies, CESifo, vol. 52(2), pages 304-363, June.
    4. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    China; corporate governance; banking governance; banking reforms; government finance; state-owned enterprises; state-owned banks;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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