China Staves Off Devaluation

The second reason why China came to the forefront of the international finance scene following the East Asian financial crisis is China’s economic performance became the key to the current economic stability of East Asia. During 1997 - 1998, China was the only country in the region to sustain significant growth. In particular, maintaining the stability of the re

Growth of Foreign Direct Investment Inflow (%) 5.9 12.3 7.0 0.0 -6.7

Additionally, while China was the largest capital importer in East Asia, more than 60 percent of the capital inflow was in the form of foreign direct investment (mostly multinational corporations establishing businesses, commerce and infrastructure to support their presence there and direct international investment into Chinese firms by Western institutions and private individuals). Therefore, it had not borrowed as much as other companies and its debt-service ratio was maintained at low levels. In contrast, the other countries had borrowed short-term money from agencies and institutions. When their currencies were devalued, they were forced to pay back more in their own currency, which they no longer had available.

These factors are mutually induced; for example, the inefficient state-owned enterprises demand budget subsidies and contribute to non-performing loans. This worsens the already poor financial and fiscal conditions. Due to shortages in revenues, the government has often had to shift its financial responsibilities onto the state-owned banks in the form of policy loans that are often set at low interest rates and are rarely paid back. These factors and many, many others create an interlocking web providing a complexity of relationship that inhibits the government’s ability to fix the situation on a sector-by-sector basis. The problems also contribute to other difficulties facing China, such as unemployment pressures and regional disparity. The financial system has become more fragile due to the preponderance of non-performing loans; real estate bubbles and excess production capacity are widespread.

Some topics in this essay:
World Bank, Europe China’s, Control SAEC, Huang Yang, East Asia, Chinese Communist, USD Beijing, China Collectively, China China, East Asian, foreign exchange, exchange rate, foreign trade, chinese economy, east asian, non-performing loans, trade balance, import export, hong kong, current account, foreign direct investment, foreign exchange controls, chinese statistical yearbook, yearbook 1998 ceic, ratio non-performing loans,