China Is Not The Next Domino

BEIJING: True, China’s economic system is riddled with many of the problems that trouble its neighbors – countless bad loans by state banks, government manipulation of financial markets, real estate bubbles. Some of these may be even more serious in China than elsewhere. Yet, so far, China seems immunized from the fate of its neighbors.

Why? One reason is that China’s financial markets are mostly closed: investment by foreigners in Chinese securities, for example, is limited to B class shares. In addition, China’s currency is not convertible on capital accounts; only a few foreign banks are allowed to operate, and only in certain regions; and no foreign off-shore banks operate in China. Portfolio investment, which was among the first types of funds to flee Asia, claims only a small share of the $320 billion of the foreign capital that has flowed into China.

Moreover, most investments are in manufacturing. Less than 10% of the capital that has flowed into China is in short-term borrowings of the sort that bedeviled Korea. Of China’s $116 billion in foreign debt, indeed, less that 10% is short term. Of course, by limiting foreign access China excluded itself from the full benefits of international capital flows in recent years. But these restrictions also made China less vulnerable to international speculation – at least for now.

Rather than wait for outside pressure to force it to act, in late 1993 China began its own macroeconomic retrenchments and market reforms. This early action is the second factor delivering some immunity from today’s crisis. A "soft-landing" for an overheated economy has been achieved, and most internal and external balances are restored. Inflation fell from 24% in 1994 to 0.4% in October, 1997; trade and current account surpluses have been increasing since 1993; foreign reserve continue to grow and now top $140 billion.