Essay on China 's World Wide Crisis Through Contagion

Essay on China 's World Wide Crisis Through Contagion

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In 1997 Asia’s ‘miracle economies’ were hit by an unprecedented and unexpected financial crisis, causing falling export growth, currency shocks, declines in productivity and resulting in a US$60 billion IMF bailout. Contemporaries feared that the localised crisis would lead to a world wide crisis through contagion, starting with China due to their considerable intra-regional trade and investment with those countries affected by the crisis. China suffered from the same inherent structural weaknesses that caused the demise of its Asian counterparts, perhaps most clearly seen through its “bank-dominated financial systems, weak central bank regulation and supervision of commercial banks, excessive lending, and a large buildup of non-performing loans (NPL’s).” However China’s performance throughout the crisis was remarkable, achieving GDP growth of 7.8% in 1998, while the lowest rate since 1990, other Asian economies were seeing substantial declines in growth and even negative growth. China’s survival can be attributed to the their strong external accounts, stringent capital controls and the role of the government in Beijing. China still faced slowing growth, real appreciation of the Renminbi and increased risk premiums from investors.

The causes of the Asian financial crisis and explanations of why other Asian countries were affected so greatly is instrumental in understanding China’s success. The foremost theories speculate that the primary cause was poorly regulated and over-leveraged financial institutions, making inefficient loans sparking investor panic. Financial weaknesses were also prevalent in China’s financial system as seen Table 1, China’s bank loans to GDP was very similar to that of Malaysia at 92.7 and considerably hi...


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... Between 1995-1997 Chinese exports to the US increased by 8% in the same period Japanese exports declined by 2.4%. Parks argues that the crisis can at least in part be explained by this growth of Chinese exports at the cost of other asian economies, though this is refuted by Sachs and Radelet ‘the impact of the devaluation of the yuan was probably … relatively limited.’ This export growth lead to a constantly increasing current account surplus and the build up of immense foreign exchange reserves thereby enabling China to maintain a pegged exchange rate with the dollar offsetting pressure for nominal appreciation and avoiding a worsening position in the ‘trade war.’ It is possible that China’s survival was not a result of their response to the crisis but ‘the outcome of a long chain of circumstances that allowed Beijing not to be forced into floating its currency.’

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