Why Has China Survived the Asian Crisis so Well? What Risks Remain?

36 Pages Posted: 24 Mar 1999

See all articles by John G. Fernald

John G. Fernald

Federal Reserve Bank of San Francisco

Oliver Babson

Board of Governors of the Federal Reserve System

Date Written: February 1999


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.

JEL Classification: E66, F30, 053

Suggested Citation

Fernald, John G. and Babson, Oliver D., Why Has China Survived the Asian Crisis so Well? What Risks Remain? (February 1999). FRB International Finance Discussion Paper No. 633. Available at SSRN: https://ssrn.com/abstract=154629 or http://dx.doi.org/10.2139/ssrn.154629

John G. Fernald (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-2135 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/jfernald.html

Oliver D. Babson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2373 (Phone)
202-736-5638 (Fax)

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