Asian crisis offers relevant lessons
The Asian financial crisis, which swept through the region two decades ago, had many consequences – currency devaluations, high inflation rates, bursting bubbles and economic downturns. As one of the leading figures behind China’s economic affairs at that time, then premier Zhu Rongji adopted appropriate macro-control policies and proactive responses to protect the Chinese financial sector and economy from the crisis’ impact.
The crisis still has relevance in terms of correctly understanding the economic situation, dealing with new crises and most importantly, promoting reforms during turmoil.
The Asian financial crisis of the late 1990s had serious consequences for many countries, with currency instability, rising inflation and capital outflows jointly causing a major economic downturn. The crisis had several major causes.
The first was an unhealthy economic structure in these countries, which invested heavily in the real estate sector but did not have their own core industries. The second was foreign debt, much of which was short-term. The third was corruption, with loans to large, well-connected groups damaging many banks.
At that time, China faced overheated real estate investment, enterprises with low efficiency, increased bad debts and other similar problems. In regard to overheated property investment, policymakers took immediate measures to curb such spending. By rectifying the real estate sector, cracking down on speculation and cleaning up bubbles, China reduced property investment significantly. Despite the costs, China prevented such problems from deteriorating during the crisis.
As regards currency depreciation triggered by the Asian financial crisis, it was necessary to make good use of foreign exchange reserves to maintain the yuan’s stability. While China knew that a yuan devaluation could help boost exports, it would only be by a slight margin, and a depreciation would bring more harm than good as it might trigger fears about the Chinese economy. In 1998, China’s foreign exchange reserves stood at $140 billion, second only to Japan’s $200 billion.
As for the financial risks that caused the crisis, China decided to promote financial reforms to prevent and resolve its financial risks. At the same time, China learned from international experience, and it established financial asset management companies to dispose of non-performing assets and resolve risks for commercial banks.
Moreover, China knew that the rule of law was a must in the process of strengthening financial laws, improving the credit system and ensuring the sound operation and development of the financial sector.
China also adopted a prudent monetary policy to better serve financial reform and economic development. A prudent monetary policy should not be aggressive, because an aggressive monetary policy will generate excess liquidity, which will do nothing but impede financial reform.
As to how finance should support the real economy, it is important to follow the economic and financial laws. Banks should have the right to make decisions and take responsibility for their own operating results. While banks can be encouraged to improve their services for local economic development, they should not be forced to lend.
In regard to financial openness and supervision, the development scale of financial institutions must be compatible with financial supervisory capabilities. The openness of a country’s financial market should be consistent with its actual situation. Ignoring such objective realities will lead to failure and irreversible losses.
The successful policy measures taken by China in response to the Asian financial crisis provide lessons in promoting and developing reforms in the economy and financial system.
The policymakers of the period, and their views and measures, helped China resolve financial risks. By deepening reform and opening-up at a crucial time two decades ago, China overcame its difficulties and further developed its economy.
Even amid today’s widening emerging market crisis, the appreciation of the US dollar, capital outflows and the intensifying trade war with the US, the lessons of the crisis still warrant reflection and study. They can show how China should further push forward with its financial system reform and maintain the sound, sustainable development of its economy.
Amid today’s emerging market crisis, the appreciation of the US dollar, capital outflows and the trade row with the US, the lessons of the crisis still warrant reflection and study. They can show how China should maintain the sound, sustainable development of its economy.