Weathering the Asian Crisis: the role of China

Abstract

During the Asian crisis, China's healthy reserves and low debt made possible the avoidance of a 'country run'. Nonetheless, it did experience an apparently autonomous rise in private savings and a rise in capital outflow. This paper employs global general equilibrium analysis to examine the relative contributions of external and internal shocks in China during the crisis. The savings rise appears to have been dominant domestically and, by coincidence of timing, it was a significant contributor to the international effects of the crisis. The successful defence of fixed parity with the US dollar, however, has made the combined shocks more contractionary in China than would have been the case had it been possible to retain a flexible exchange rate regime.