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How to avoid financial crisis a la Thailand 1997

By Zhang Chunyue
Updated: 2007-05-15 09:34

Coupled with this year's dramatic stock market plunge on February 27, when the Shanghai Composite Index dropped nearly 9 percent, China's financial market has left international observers wondering if the next financial crisis might start in China.

In the past decade, China has grown into the world's fourth largest economy and the third largest trading nation.

China weathered the storm of the 1997 Asian financial crisis, but that was then, and this is now. Suppositions are rampant on how damaging it would be for the Chinese economy if the $70 billion in hot money currently flowing freely was suddenly squeezed out of the country's stock and property markets.

Yet, with ever-maturing monitoring and management measures, the country is capable of heading off a possible financial crisis. In order to cope with financial risks, China should be prepared in three areas.

First, China should work to optimize its financial system before opening its financial markets further. Allowing foreign banks to incorporate locally and allowing them to open yuan services to Chinese citizens indicates great progress.

To some extent, introducing stronger competition will help boost domestic banks' competitiveness. But it is crucial that foreign capital does not dominate the Chinese financial market. Thailand's experience serves as a stark warning.

Foreign capital accounted for 34 percent of the Thai market before the financial crisis. The sudden outflow of speculative money was the element touching off the crisis.

Second, financial market watchdogs should be further educated to better oversee the financial market. At present, many supervisory staff lack experience handling large inflows and outflows of capital. Confronted with long-time international capital market players, Chinese watchdogs need to catch up as soon as possible.

Third, in the process of reforming the financial system, Chinese banks need to become more competitive. This includes the major four State-owned banks and joint-stock banks, as well as city commercial banks.

A high GDP growth rate is inevitable at this stage. China is like a giant elephant riding a bicycle it has to maintain a fast speed, otherwise it will crash. Though the Chinese currency is now forced to float, it still comes within the reach of the supervisory departments.

Driven by the Beijing 2008 Olympics and the World Expo 2010 Shanghai, the Chinese economy can be expected to continue to grow and attract more international capital.

It is essential for the government to craft policies aimed at rebalancing the economy to achieve a shift in production from industry to services. China needs to rely more on domestic demand and growth instead of external factors.

The author is a lecturer at the Central University of Finance and Economics in Beijing

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