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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Why Has China Survived the Asian Crisis So Well? What Risks Remain?
John G. Fernald; Oliver Babson
1999-633  (February 1999)

Abstract:  China’s strong growth in the midst of the Asian crisis is striking. We explore features of China’s financial system that helped insulate it from the crisis, and then try to assess whether China has avoided crisis or simply deferred it. We argue that regardless of whether the Asian crisis resulted from weak fundamentals or from "country runs" by investors, it is not surprising that China has survived so far. In a market-oriented system, pressures generally force rapid adjustment when institutions are, or are perceived to be, insolvent; these mechanisms do not operate fully in China. In addition, China’s external accounts remain strong. Even in the absence of capital controls, the strength of these external fundamentals would plausibly preclude a self-fulfilling "country run" on China. Whatever their other effects, capital controls may have played a role in preventing Chinese financial institutions from borrowing excessively abroad, and hence may have helped keep China’s external fundamentals strong. Clear risks remain for China’s outlook.

Full paper (173 KB PDF)

China, financial crisis, financial markets, international finance, monetary policy

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