When the financial crisis unexpectedly hit the high-performing East and Southeast Asian economies in mid-1997, it was widely believed that the People's Republic of China (PRC) would be the next domino to fall. This chapter argues that China's handling of the crisis, and in particular, the country's ability to withstand the crisis, must be understood within the context of its domestic political economy. An important lesson of Mexico's peso crisis of 1994 and the Asian financial crisis was that a sound banking sector is the single most essential element of a healthy financial system. The State Administration for Foreign Exchange (SAFE) approval requirements and the related limitations on foreign participation in PRC equity markets had translated into low levels of portfolio investment. The Chinese authorities significantly intensified the enforcement of exchange and capital controls and moved to reduce circumvention.
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This introduction presents an overview of the key concepts discussed in the subsequent chapters of this book. The book presents the case studies of the individual countries: Thailand, Indonesia, South Korea and the People's Republic of China (PRC). It examines the factors behind the financial crisis and highlights the underlying similarities and the fundamental differences between the individual cases. The book provides a review of the competing perspectives on the new international financial architecture. It explains a number of fundamental issues and its implications for the emerging market economies. The book also presents a more nuanced picture of the International Monetary Fund's (IMF) policies and its socioeconomic impact. It assesses the IMF's efforts to reduce moral hazard. The book also examines the reasons behind Asia's remarkable economic recovery and the challenges that lie ahead.