Was China the First Domino?: Assessing Links between China and the Rest of Emerging Asia

48 Pages Posted: 3 Jun 1998

See all articles by John G. Fernald

John G. Fernald

Federal Reserve Bank of San Francisco

Hali J. Edison

International Monetary Fund (IMF) - Research Department

Prakash Loungani

International Monetary Fund (IMF)

Date Written: March 1998

Abstract

We assess links between China and the rest of emerging Asia. Some commentators have argued that China's apparent devaluation in 1994 may have contributed to the Asian financial crisis. We argue that the devaluation was not economically important: The more relevant exchange rate was a floating rate that was not devalued, and high Chinese inflation has led to a very sharp real appreciation of the currency. Although in principle export competition with China could nevertheless have placed pressure on other Asian exporters, we argue that the striking feature of the data is the common movement between export growth from China and from other developing Asian economies. To the extent there is evidence of export competition, it is the period from about 1989 to 1993: China's exchange rate depreciated sharply, Chinese export growth exceeded export growth of other Asian economies, and the composition of Asian exports (measured by export shares of various goods to the United States and other industrial economies) changed substantially. Finally, we speculate on the effects of the Asian crisis on China's prospects. China's economic growth is likely to slow because of increased trade competition as a result of the devaluation of other Asian currencies and because of reduced capital inflows. In addition, these reduced inflows are likely to reduce job creation in the non-state sector and, hence, make enterprise restructuring more difficult in China.

JEL Classification: O5, F1, F3

Suggested Citation

Fernald, John G. and Edison, Hali J. and Loungani, Prakash, Was China the First Domino?: Assessing Links between China and the Rest of Emerging Asia (March 1998). FRB International Finance Discussion Paper No. 604. Available at SSRN: https://ssrn.com/abstract=94960 or http://dx.doi.org/10.2139/ssrn.94960

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

Hali J. Edison

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6946 (Phone)
202-589-6946 (Fax)

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

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