Fleeing from the Asian financial crisis: China's economic policy in 1997-2000

By now, three years have passed since the outbreak of the East Asian crisis. China has demonstrated its ability to weather the storm. This paper aims to evaluate China's policy response to the crisis. In the next section, we shall analyse why China was able to maintain exchange rate stability during the Asian crisis. We then point out in the third section that due to the launch of new wave of reforms around the mid-nineties, China has been beset with the problem of insufficient demand. The situation was exacerbated by the decline in external demand during the crisis. The Chinese government initially attempted to stimulate domestic demand by lowering the interest rates, but soon found that it was ineffective. An expansionary fiscal policy was then adopted. A huge amount of treasury bonds were issued to finance the increased fiscal deficits. This policy shift will be analysed in the next section. The rapid build-up of public debts, however, has raised concern. While Chinese officials have argued that the deficit and the total debt levels have been far from dangerous, we suggest in the fifth section that their argument is problematic. In the concluding section, we analyse some possible changes in China's economic policy in the years to come.