China Now and the 1997 Financial Crisis Then

choi

On Jan 16, I had a posting titled "This Week’s Cover Story in The Economist: China’s Economy." The following is part of that cover story.

Free exchange | Fight or Flight; China’s leaders face a menu of unappealing exchange-rate options. Economist Jan 16, 2016.
http://www.economist.com/news/fi ... ons-fight-or-flight

Quote:

(a) "Some see a resemblance in China’s predicament to the Asian financial crisis of the late 1990s. Then, fast-growing countries like Indonesia, South Korea and Thailand faced outflows of capital as investor sentiment flipped from bullish to bearish. Governments were forced to abandon currency pegs as their foreign-exchange reserves dwindled. Massive depreciations led to financial havoc, as asset prices tumbled and these countries’ enormous debts ballooned in dollar terms. Painful recessions ensued.

"The lessons of the Asian crisis were not lost on China’s leaders, however. During its great boom, in the 2000s, China maintained tight capital controls, permitting foreign direct investment while eschewing 'hot money.' * * * Where the crisis countries of the 1990s ran persistent trade deficits, China kept its current account in surplus

(b) "Many economists reckon China will allow the yuan to fall. * * * Yet a sinking yuan poses threats. Roughly $1 trillion of China’s accumulated debts are denominated in dollars. That is small beer next to $28 trillion in total Chinese debt. But because Chinese firms are so highly leveraged, even a small rise in the cost of servicing dollar-denominated debts could force some into asset sales or bankruptcy.

"The economy could expect only a modest boost to exports for its trouble. Since much of the material that goes into Chinese exports is itself imported, devaluation does not boost exports that much. It also squeezes the purchasing power of Chinese consumers and thus slows the rebalancing of its economy

(c) "And China seems not to have absorbed the most important lesson of that [1997] crisis: that confidence matters.

Note: There is no need to read the rest of both the foregoing and the following Economist essay. Regarding quotation (a) ("the crisis countries of the 1990s ran persistent trade deficits"), see
Ten Years on; How Asia shrugged off its economic crisis. Economist, July 4, 2007
http://www.economist.com/node/9432495
("Among the key conditions were the presence of fixed or semi-fixed exchange rates in countries such as Thailand, Indonesia and South Korea; large current-account deficits that created downward pressure on those countries' currencies, encouraging speculative attacks; and high domestic interest rates that had encouraged companies to borrow heavily offshore (at lower interest rates) in order to fund aggressive and poorly supervised investment")