The Impact Of Asian Financial Crisis On China

YIN Xiangsho, Professor and Vice Chairman of the Department of World Economy,
Fudan University, Shangha

I. Introduction

Since the outbreak of Asian financial crisis, its impact has been gradually felt in other parts of the world, including China. In China, as in the rest of the world, people did not pay much attention to the crisis when it broke out in July 1997. But when the crisis gradually spread to other countries/regions in Asia, especially when Hong Kong was felt in late 1997, people in China began to be more serious about the crisis. However, even in early 1998, not many people were worried about the impact of the crisis on China since there seemed to be some recovery in those crisis-hit countries/regions. This can be seen from many top leaders' speeches during that time. For example, Long Yongtu, deputy minister of the Ministry of Foreign Trade said at a high level symposium that China was full of confidence to increase exports by 10% in 19981. However, the deepening of the crisis in mid-1998, especially the deterioration of the situation in Japan and Korea, and the hard hit on Hong Kong exerted some direct negative effects on China, bringing China into a more defensive way of response. At the same time, China's domestic economy is turning from a rapidly growing period in the first half of 1990s to a relatively slow growth since 1997.

What is the impact of the Asian financial crisis on China's economic development? What are the major problems China faces in its economic development today? These are the issues this paper is focusing on. In the rest of this paper, section two discusses the impact of Asian financial crisis on China's macroeconomic performance. Section three focuses on sectoral problems which are related to the macro development problems. Section four touches on some social issues, and the last section gives out some concluding remarks.

II. Macroeconomic Problems and Policy Measures

On the First Session of the Ninth People's Congress, the new Premier Zhu Rongji announced that his administration took it as its first priority to guarantee a 8% growth rate while retaining the inflation rate within 3% and maintaining the stability of Renminbi (RMB).2    Now, this goal has been more or less reached. According to the Central Statistic Bureau, the estimated GDP growth was 7.8%, the inflation was negative, and the RMB did not devalue.3   However, we must understand that the planned 8% growth rate was already a figure adjusted by the estimation of impact of the crisis, and the actual rate, lower than the planned rate, indicates that the planned rate was overestimated and that the real impact of the crisis is stronger than the estimation at the beginning of 1998. The most serious impact is perhaps on foreign trade.

1. Foreign Trade

In the past twenty years, foreign trade has been an important factor in promoting China's economic growth. Its real growth rate almost doubled that of the domestic economic growth rate. Even in 1997, total trade grew at 12.1%, compared with a 8.8% growth of GDP.4  China's economic development has depended much on foreign trade in the past twenty years. On the side of exports, the rapid growth of exports has earned China large amount of precious foreign exchange, releasing the foreign exchange hunger. Since the rapid increase of exports comes mainly from the increase of labor-intensive manufactures, exports have provided opportunities for many small and medium-sized enterprises, including foreign-invested enterprises (FIEs), township and village enterprises (TVEs) and private enterprises to develop, which in turn has helped release employment pressure. Since over half of the exports nowadays are processed exports, the value-added in the exports is relatively small. However, it has also contributed to the overall increase of GDP. On the side of imports, the large amount of foreign exchanges earned from rapid exports has made it possible for China to import more materials, intermediate inputs, machinery and equipment. The import of machinery and equipment with advanced technology has composed one of the most important inputs in China's upgrade of its industries and in promoting economic growth.

Table One Trade Performance: July 1997-September 1998 (million US$)


Total Trade

Changes (%)


Changes (%)


Changes (%)










































































































Source: Figures in 1997 are from IMF: International Financial Statistics, April 1998; figures in 1998 are from International Trade, various issues.

But foreign trade was severely hurt in 1998. Even though the Central Government has taken many measures to promote exports, the growth of exports still slowed down and the overall growth of trade stagnated.5  From Table One, we can see that foreign trade slowed down since the mid-1997 and somewhat declined in 1998. According to the latest estimation, total exports and imports in 1998 are 323.93 billion US dollars, decreased by 0.4%, in which exports 183.76 billion US dollars, increased by 0.5%, imports 140.17 billion US dollars, decreased by 1.5%. The trade surplus is 43.59 billion US dollars.6

Table Two Cumulative Growth of Exports and Imports

(compared with the same period previous year, %)


1-12, 1997


1-8, 1998
















in which: ASEAN

























Latin America





North America





in which: USA










Source: International Trade, various issues; IMF: International Financial Statistic Yearbook, 1998.

If we look into China's trade with different regions, we can see more clearly that this decline can be directly attributed to the Asian financial crisis. Table Two shows that China's exports to regions other than East Asia grew by different degrees, but exports to Japan, Korea and ASEAN countries declined dramatically. The latest statistics show that China's exports to Asian countries/regions decreased by 9.9% in 1998 and the share of exports to Asia in its total exports dropped from 60% in 1997 to 53% in 1998.7  It has been predicted by many Chinese economists that foreign trade in 1999 will not quickly recover.

The decline of imports in 1998 is mainly due to three factors. One is the shrink of domestic demand. It is obvious that the slowdown of the increase of domestic demand will directly cause the slowdown of imports. The second is the slowdown of exports. Since over half of China's exports are processed exports with imported materials, the slowdown of exports would also directly affect imports. The third is policy influence. Since 1994, The Chinese Government gradually eliminated some preferential treatment on certain categories of imports and imports to various special zones, which caused imports to grow slower than before and a successive trade surplus since then.

2. Foreign Capital

Another area directly affected by the crisis is the inflow of foreign capital. Foreign capital has been another important factor in promoting China's economic growth in the past twenty years. The importance of foreign capital in China's economic development can be seen from three dimensions. First, it has increased China's total investment and output. In 1997, foreign investment accounted for 14.8% of China's total capital investment; FIEs' industrial output accounted for 18.6% of China's total industrial output and their employment accounted for 10% of China's non-agricultural labor force.8  Second, it has become one of the most important factors in promoting China's foreign trade. Since the mid-1980s, trade by FIEs increased from a negligible level to nearly 50% of total trade. In 1997, exports by FIEs accounted for 41.0% of total exports while imports accounted for 54.6%.9   Third, with the spread of advanced technology and scientific management, it has helped to upgrade China's industries and raised their technological level. The large inflow of foreign capital since 1992 has been widely acknowledged as a major force in promoting China's quick growth between 1992 and 1996. From Table Three we can see, because of the quick inflow of foreign capital, China's share in world foreign investment increased from 2% in the 1980s to over 12% in the 1990s.

Table Three China's Share in World Foreign Investment (%)















Source: Ke Nan, "New Characteristics of Foreign Direct Investment in 1997", in International Economic Cooperation, No. 4, 1998

However, because of the Asian financial crisis, the inflow of foreign capital slowed down. In 1997, the total contracted foreign capital was only a little bit over 61 billion US dollars, much lower than the average of 100.46 billion US dollars in previous four years, even lower than the 1992 level of about 70 billion dollars. Of course, because of the previous contracts, the foreign capital actually utilized in 1997 was 64.41 billion US dollars, still increased by 17.5%.10   However, the estimated figure for actually utilized foreign capital in 1998 is only about 54 billion,11   a quite large drop from the previous year.

Almost the same as foreign trade, the reduction of inflow of foreign capital can mainly be attributed to the crisis, because only capital from East Asia decreased while those from Europe and America increased. According to one report, in the first half of 1998, among the newly approved contracts, capital from Hong Kong, Macao, Taiwan, Korea, Japan, and five ASEAN countries dropped by 11.7% while those from North America and European Union increased by 73.2% and 86.6% respectively, when compared with the same period in the previous year. The share of foreign capital from East Asia decreased by 10.9 percentage points while those from North America and European Union increased by 5.56 and 5.58 percentage points. 12 Since East Asia accounted for the largest share of foreign capital China absorbs, the decrease of investment from East Asia brings about the downturn of total foreign capital inflow.

It should be noted that, because of the time lag of foreign investment, the impact of the slowdown of foreign investment might be more severely felt sometime later if this trend does not change. It should also be noted that not only investment from East Asia decreased, but also there is a tendency of divestment from China. Although there is no exact statistics on this phenomenon, it is not uncommon among East Asia's capital in China.

3. Exchange Rate

Before the Asian financial crisis started, there was actually talking about the revaluation rather than devaluation of RMB. However, since the outbreak of the crisis, there has been more pressure on the devaluation of RMB. The Chinese Government has stated many times that it would firmly maintain the stability of its exchange rate. Even though the black market rate has dropped by about 9%, the official rate has been maintained. The policy of maintaining the present official exchange rate is not carried out without cost. One direct effect is that it is not favorable for exports. The large devaluation of currencies in countries/regions around China makes China's exports more difficult. But now there is more or less a kind of consensus in China that simply devaluating RMB would not help China much.

First, if China devaluated its currency, there might be another round of devaluation in neighboring countries/regions, which would worsen the currency crisis and in the end be adverse even to China itself. Second, China actually had a big devaluation in 1994 with its official rate dropped by about 50%. Further devaluation has no solid foundation, because, according to China's present price level, the purchasing power of RMB is quite strong now.13   Third, the major problem with China's exports is not devaluation, but the efficiency of state-owned foreign trade companies. Since 1980, RMB has been devaluated many times. Each time devaluation helped trade companies reduce their RMB costs of earning foreign exchanges without raising their efficiency, so further devaluation would not help to improve their efficiency. Fourth, theoretically, a devaluation should stimulate exports and discourage imports; but in 1998, China's imports even dropped without devaluation. China has already had successive trade surplus since 1994 and a devaluation would further increase this surplus. Therefore, it is obvious that even China devaluated RMB, it might have some short-run effects on exports, but it would not raise the efficiency of trade companies and greatly promote China's exports in the long run. This in turn would not have much positive effects on overall economic growth.

Table Four China's Foreign Exchange Reserve: 11/1997--6/1998 (billion US dollars)





















Source: China Finance, various issues

Another cost which is not so obvious is that China's foreign exchange reserve has not increased much despite the large trade surplus in 1998. Although exports in 1998 slowed down, imports decreased even larger, made China a 43 billion dollar surplus. However, Table Four shows that the large trade surplus seems not to add to the foreign exchange reserve. This implies that the market is expecting a devaluation of RMB, so many export firms did not collect their foreign exchange earnings and sell them to domestic banks for RMB.

4. Domestic Demand

The above mentioned problems which are directly affected by the Asian financial crisis contributed much to the slowdown of the economy in 1998. But the slowdown of economic growth cannot be simply attributed to the slowdown of foreign trade and foreign investment. Actually, it is also largely affected by the slowdown of domestic demand. It is to some extent a coincidence that the expansion of domestic demand has gradually slowed down since 1997. In 1997, the growth of consumption dropped from 9.0% in the previous year to 3.2%, the lowest in the 1990s,14   and the price level turned from inflation to deflation (see Table Five). It is reported that the consumer price index and retail price index in 1998 dropped by 0.8% and 2.6% respectively when compared with 1997.15

There are many domestic factors contributing to the relative shrink of domestic market, but perhaps the most important are the following three. The first is the reform of state-owned enterprises (SOEs). Because of the reform of the SOEs, many workers have lost their jobs (xiagang), waiting at home and becoming the actual unemployed. The officially registered urban unemployment rate in 1997 is 3.1% and the number of unemployed is 5.7 million. But this figure does not include the xiagang workers, whose number stands at 11.51 million in 199716   and it is estimated that the number will increase to 15 to 16 million in 1998.17   Since some of the xiagang workers got reemployed, the total figure of unemployment should be less than 17.21 million (5.7+11.51) in 1997. One estimation shows that if 40% of the xiagang workers get reemployed, the real unemployment can still be as high as 6.9% in 1997.18   Since there are more xiagang workers in 1998, the real unemployment can be even higher. The increase of unemployment is no doubt a big factor in pulling down the expansion of consumption.

Table Five Change of Consumer Price Index (CPI) and Retail Price Index (RPI)

(Same period of previous year as 100)























































Source: China Statistics, various issues

Of course, the Asian financial crisis also has impact on people's expectations, which is the second factor affecting domestic demand. People are now less optimistic than before and they expect their future income flow to be smaller than they expected years ago. Therefore, even though their income still increased these years, their bank deposits grew faster than income growth. According to official statistics, average per capita net income in rural area was 2090 yuan RMB in 1997 and 2150 yuan RMB in 1998, increased by 8.5% and 4.0% respectively; average per capita disposable income in urban area was 5160 yuan RMB in 1997 and 5454 yuan RMB in 1998, increased by 6.6% and 6.8%. 19 However, bank deposits (time and demand deposits) of all rural and urban residents increased by 20.1% in 1997 and by about 17.9% in the first half of 1998.20   The faster growth of bank deposits than income means a smaller share has been spent on consumption, which would no doubt have negative impact on investment and economic growth.

Perhaps still another factor for the economic deflation is the inertial influence of previous tight macroeconomic policies to cure high inflation for "soft landing". It seems that the landing was not as "soft" as expected and its impact was felt in 1998 after a period of time lag.

5. Policy Measures

Since China has promised to maintain the stability of its currency, exchange rate policy could not be used to promote exports and adjust macro economy, monetary policy and fiscal policy were frequently employed in 1998. At first, the policy emphasis seemed to be on monetary policy and on measures to promote exports. Interest rates were decreased several times and rebate rate of VAT for certain exports were raised. However, these measures seemed not to have immediate effects. Bank deposits still increased despite the decrease of interest rate; exports stagnated even though trade companies were granted preferential treatment for exports. So the policy focus gradually turned to fiscal measures. The major measure was to increase the governmental expenditure by issuing more treasury bonds.21   It seems that the macroeconomic policies have had some effects: the growth in the third and fourth quarter of 1998 was accelerated. However, there are perhaps more problems than the slowdown of the growth rate and people are more aware about these problems since the outbreak of the financial crisis.

III Sectoral Problems

1. Real estate and stock markets

One of the important phenomena in Asian financial crisis is the crash of bubble economy. As in other Asian economies, with the quick development of its economy, short-term speculation in real estate and stock markets was stimulated by bank loans while long-term investment was somewhat neglected. After Deng Xiaoping's southern tour speech, the economy heated up and real estate prices inflated even faster. In many cities, real estate prices increased several times. However, since late 1993, when Zhu Rongji, the then vice premier, started to crack the bubbles, the real estate prices gradually decreased and the market became sluggish. From Table Six, we can see that real estate markets in major cities have not recovered since then.

Similar to the real estate market, the stock market also boomed in the early 1992. The Shanghai Stock Index shot from 100 in 1991 to over 1300 in mid-1992 and 1400 in early 1993; the Shenzhen Stock Index also increased to over 350 in early 1993. Then with the crackdown of the bubbles, both markets became sluggish from late 1993 to 1996 when they started to warm up. The second-round boom reached its historic peak in mid-1997 when Hong Kong returned to China. The Shanghai Index again went over 1400 and the Shenzhen Index shot to near 500. But immediately after that, with the outbreak of Asian financial crisis, China's domestic stock markets also became stagnated. Now the Shanghai Index lingers around 1150 and Shenzhen Index around 350.

It should be mentioned that since China's capital account has not been opened, the real estate and stock markets are also somewhat insulated from the international markets and their fluctuations are not in consistent with the international markets. But still they have been affected by the Asian financial crisis. For example, in real estate markets, office buildings and residential buildings specially designed for foreigners are more sluggish than other buildings. In stock markets, the B share indexes which is specially designed for stocks denominated in foreign currency (US dollar in Shanghai and HK dollar in Shenzhen) plummeted much lower than the A share indexes.

Table Six (A) China Real Estate Indexes, Fourth Quarter 1996

(Fourth quarter 1994 as 1000)






City indexes













































Note: In each category, the left column is the index and the right column is the change of index when compared with the previous quarter.

Table Six (B) China Real Estate Indexes, Third Quarter 1998

(Fourth quarter 1994 as 1000)






City indexes



































































*Figures are for second quarter 1998.

Source: China Real Estate Information, No. 3, 1997 and No. 12, 1998.

2. Financial Sector

Banks and other financial institutions are the most important players (also victims) in the financial crisis. Although China's financial sector has not been seriously affected in the crisis, yet, this does not mean that there is no problem in China's financial sector. Since financial sector problems are one of the root causes of the crisis, there have been a lot of discussion about China's financial problems. One of the problems concerning many people is the bad loans from state-owned banks. There is no formal official data on bad bank loans. But according to some report, by the end of June 1997, inadequate loans from state-owned banks accounted for 10.7% of total loans, among which about 5-6% were bad loans that could not be paid back.22

The main reason for large bad loans is that most of them have gone to SOEs who are losing money these years. Because of the high debt/asset ratio (70-80%), SOEs depends much on bank loans. However, many of the bank loans are policy loans directed by governments. According to one estimation, policy loans in the 1990s accounted for over one third of total state-owned banks' loans, and a large portion of these loans cannot be paid back. On the other hand, because of the large inadequate loans, banks also have high debt/asset ratio (about 80%). 23 Thus financial risks are on the increase.

This problem was actually noticed by the Central Government years ago. In order to solve this problem, the Central Government established several policy banks such as Import and Export Bank, Agricultural Development Bank and National Development Bank to let the original big state-owned banks be reformed into commercial banks. However, because of the large number of SOEs, these relatively small policy banks cannot take over all the policy loans and the big state-owned commercial banks are still caught in the bad loans.

When the state-owned banks are gradually pushed into "commercial" banks responsible for their own profits and losses, they become more and more unwilling to make loans to SOEs, unless these loans are policy loans directed by the Central Government or local governments. However, with the increase of deposits, they have to find some way out for these deposits. Since loans to private sector are politically unsafe and loans to SOEs are economically not profitable, they put more and more money into real estate and stock market. After the outbreak of Asian financial crisis, however, the Central Government exercised tighter control on loans to real estate development and forbade banks to invest in stock market. So banks are losing profits, some even went into bankruptcy,24   and the problem of bad loans becomes more prominent.

3. Manufacturing

Since the early 1980s, because of the quick expansion of consumption, especially because of the existence of the so-called "shortage economy", development of manufacturing industries has been much quicker than the development of basic industries and infrastructure, making the overall processing capacity surplus. Moreover, this kind of overproduction is also a result of duplicate investment in many sectors in different regions. Although there is no public statistics to show the severity of this problem, this is widely discussed from top leaders to local officials and academic scholars. And it can be observed that many manufactured goods have been produced in different provinces with local protectionism.25   The duplicate investment in same industries and overlapping construction of same plants not only caused overproduction, but also bring about low efficiency with relatively small scale.

This problem becomes more obvious when the Asian financial crisis broke out and exports and domestic demand stagnated. Now there is large surplus of production capacity in industries such as textile, clothing, washing machine, refrigerator, television, VCD etc.

Another problem with manufacturing is the over expansion of township and village enterprises. The quick development of TVEs in the 1980s on the one hand helped promote the development of rural area and solve the employment problem there; but on the other hand, the small scale, low-technology enterprises not only produce with low efficiency but also cause serious environmental pollution. The seriousness of pollution problems in some regions has alerted the Central Government and many small pollution-producing enterprises have been forced to close.

4. Reforms

Since the capital account has not been opened, China's financial sector, including banks, nonbank financial institutions, stock markets, etc. have not been seriously affected, but this does not mean there is no effect. Several points should be mentioned. First, people in China, especially officials, see more clearly about the relations between open to the outside world and domestic reform. The consensus now is that we must carry out institutional reform before further opening, especially before the opening of capital account. The critical areas of reform are the financial sector and the state-owned enterprises. But in the past several years, the reforms seemed to fall into a dilemma: if we reform the financial sector, especially the state-owned banks first, then many state-owned enterprises cannot survive without the continuous loans from banks, and the bankruptcy of large number of SOEs is not acceptable socially and politically; but if we reform the SOEs first, the elimination of inefficient SOEs will also bring down many banks because of the bad loans. This dilemma in reforms remains for some years. However, the Asian financial crisis let the Chinese know the seriousness of the problem and accelerated the reform. Two kinds of measures have been adopted. One is to tighten central supervision on financial sector through legislative means while at the same time mitigate administrative control. The restructure of the Central Bank into nine regional branches instead of thirty is one example. The other is to quicken the reform of SOEs and solve the problem of loss-making in three years. The focus is to further separate govermental administration and business operation, and to keep the large ones and let go the small ones. But until now there is no fundamental changes.

IV Social Effects and Business Environment

1. Unemployment and waiting (xiagang) workers

The Asian financial crisis also has social impact on China. One is quite psychological which somewhat changed people's attitude and behavior. For a long time, workers in SOEs treated their enterprises as big pots and their jobs as iron bowls. Even after the reform started in 1978, for quite a long time, nobody thought they would lose jobs. When some workers lost their jobs in late 1980s or early 1990s, many of them could not accept it. But gradually, with the increase of xiagang workers under the reform of SOEs, people took it more or less as a "normal" phenomenon. After the Asian financial crisis started, workers become more aware of the impact of market economy. They realize that one cannot only rely on government or enterprise for help. They must help themselves. Many of the xiagang workers are now looking for jobs by themselves and have found jobs. According to one investigation in Gangdong and Shanghai, almost half of the xiagang workers get hidden reemployment, which means that on the one hand they still receive subsidies from their original enterprises or from local governments, on the other hand they get wages from their new jobs.26

Of course, the Chinese Government has not neglected the xiagang workers. Actually, governments at all levels take the employment problem as one of the most important problems. Many provincial governments or lower level governments have established reemployment centers to help those xiagang workers: to let workers get governmental subsidies and to recommend new jobs to workers.

Although the unemployment problem mainly arises from domestic SOE reform, the Asian financial crisis also has some impact on those who work in FIEs. The FIE employees, especially those work in enterprises with East Asian capital, feel heavier pressure on employment and income reduction. Besides, college graduates now find it more difficult to get jobs in FIEs.

2. Consumption behavior

Since more and more people in SOEs are losing jobs and since people in other East Asian countries/regions falling into crisis become worse off, even those employed are becoming more and more prudent on consumption. The expected future income flow is decreasing, but the future expenditure is expected to increase in four areas. One is that there is no more retired wage. Workers should retire on their pension which seems to be much smaller than their present wages, so they have to save some extra money for retirement. The second is housing. Free allocation of houses will stop in 1999 and people should buy their own houses which will also cost a lot of money. Even though there is mortgage loan, enough money should be saved to pay the down payment and pay back the loans. The third is health care. With the reform of health care system, individuals should buy medical insurance and pay more money on medical treatment. The last one is children's education. China used to provide free higher education. Now there is no more "free lunch" on higher education and tuition is sure to increase. Since most families have only one child and most parents want their children to be well educated, they must save more money for their children's education, especially higher education.

3. Income distribution

Income distribution becomes more unequal in recent years but this has no direct relation with the Asian financial crisis. This problem can be looked at in three dimensions. One is that the income gap between coastal region and hinterland. The second is the income gap between different social groups. The third is the income gap between urban and rural areas.

The income gap between coastal region and hinterland, which has been widely discussed in recent years, is related to regional development. Since 1980, the economic development in East coastal region is much faster than the development in Middle and West regions. According to one report, between 1981 and 1997, the per capita income of urban residents in East coastal region increased by 12 times while that in Middle and West regions increased by 10.06 and 10.30 times.27

The same report also indicates that the income gap between different social groups has been widened. In 1987, the income of the richest 20% urban families was only 2.0 times that of the poorest 20% families while in 1997 this gap increased to 4.2 times. However, according to World Bank, in 1995, the highest 20% accounted for 47.5% of China's total income/consumption, while the lowest 20% only had 5.5%.28

The widening of income gap between urban and rural areas seems not so obvious, but it is also increasing. If we only compare income in 1997 with income in 1978, we see that the income of rural people increased by 15.64 times while that of urban people increased by only 15.03 times, which indicates a narrowing rather than widening of the gap. However, the rapid increase of income for rural people happened mainly during the period between 1978 and 1985. During that period, the income of rural people increased by 2.98 times while that of urban people increased by only 2.15 times. Since 1985, however, their income grew much slower than urban people. Between 1985 and 1997, the income of rural people increased by 5.26 times while the income of urban people increased by 6.98 times.29   So we can say that the income gap between rural and urban areas again widened since the mid-1980s.

4. Social impact: What people feel?

Table Seven Impact of Asian Financial Crisis on People's Life

Aspects of impact



Reduction of job opportunities



Increase of psychological pressure



Decrease of income



Deterioration of business environment



Loss of investment earnings






Note: Since there are multi-replies, the sum of the rates is larger than 100%.

Source: International Finance News, January 8, 1999

Although the present social problems arise mainly from domestic factors, there are still people think that their lives have been affected by the crisis. The Zero-Sohu Net Investigation System carried out an investigation in December 1998. 5514 people responded to the questionnaire. Among them 42.3% are managerial personnel, 26.4% white-collar office workers, 14.1% students, 5.6% teaching and research personnel, 5.1% blue-collar workers, and 6.6% others. According to this investigation, 34.2% thought that their lives have not been affected by the crisis; but over 60% thought that the Asian financial crisis has more or less impact on their lives. Among them 27.5% thought the impact is very large.30

The different aspects of impact can be seen from Table Seven. We find that the largest impact is on job opportunity (38.1%), and other important aspects are psychological pressure (28.7%), reduction of income (26.9%), business environment (26.7%) and loss of investment earnings (26.6%). Since this is a random investigation on the net, we cannot say it represents the popular feeling of people at large. However, this is a latest survey which, to some extent, accounts for people's feeling about the impact of the crisis.

5. Business environment

Superficially, business environment seems to be worse now than years ago both because of the impact of Asian financial crisis and the deflation of domestic market. But perhaps it is not proper to simply say that the overall business environment has deteriorated. At the macro level, the economy still grows at about 7-8%. The aggregate effective demand does not grow as quickly as before, but this actually is beneficial to those really efficient firms. Firms with high efficiency can crowd out the less efficient ones and expand their market share under such a situation. On the other hand, the Central Government has decided to further expand public expenditure on infrastructure, agriculture, energy, transportation and communication, etc. in 1999. Enterprises involving in these businesses actually face an expanding rather than shrinking market. Moreover, the heavy flood in the summer of 1998 also means a need for large reconstruction along the Yangtze River Valley, which requires large investment not only in infrastructure and housing, but also in daily necessities such as food processing, clothing, basic medicine, etc. This is no doubt a very good opportunity for enterprises to develop rural markets.

At the micro level, wages do not grow as fast as before, and because of the large pool of unemployed xiagang workers, wage cost in some firms even begins to decrease. This is helpful for enterprises to cut down their overall costs. On the other hand, although the aggregate demand grows slower, this does not mean there is no market demand. Actually, many observers find that there are too few quality goods with reasonable prices and too many goods are of low quality with only low level price competition. High quality products, including houses, can still sell very well. The problem for firms perhaps is not the market but their products and services.

Moreover, a legal system for business operation has been established and improved these years. Laws and regulations on patent, copy right, trade mark, etc. have been enacted, which is especially beneficial for foreign investors who are used to operating under a legal framework.

V Concluding Remarks: What China Will Be Next?

When talking about China, we must keep in mind that on the one hand China is still a developing country in East Asia, so it has similar problems as those in other East Asian countries/regions; but on the other hand China is also a country like Russia transforming from a planned economy to a market economy.

As for financial crisis, though China has been somewhat affected, there is little possibility that China will be the next falling into the crisis. The reason is that the crisis seems to be over even in other East Asian countries/regions and there are signs that those economies are turning better now. But even other countries/regions did not turn better, China would not easily fall into crisis, because the key factor is that China has not opened its capital account and Renminbi is not freely convertible yet. Of course, there is devaluation pressure on RMB and the black market rate is already lower than the official rate, but China has successfully maintained the official rate since 1997. Besides, there are other factors indicating that conditions for China to fall into a financial crisis do not exist. First, China has large foreign exchange reserves and successive trade surplus since 1994. We know that one of the important factors for East Asian countries/regions to fall into the crisis is that they have relatively large current account deficit in years just before the occurrence of the crisis. Secondly, China has relatively small foreign debt and a reasonable debt structure: China has more governmental loans than commercial loans, and more long-term loans than short-term loans. For example, in 1997, loans from foreign governments and international financial organizations accounted for 30.13% and 13.57% respectively; foreign commercial loans only accounted for 25.53% while other forms such as bond issue accounted for 30.77%.31   By the end of 1997, China's total foreign debt stood at about 130.96 billion US dollars, in which 86.1% were long-term loans and only 13.9% were short-term borrowing.32   Whereas in other East Asian countries/regions, we saw relatively large foreign debts, especially short-term commercial loans. Thirdly, because of the inconvertibility of Renminbi, China's banks and financial markets have been kept apart from the world markets since 1949 and people in China have no idea about the seriousness of financial and banking problems, so they will not run banks even there are a lot of bad loans. Lastly, since the whole financial sector is controlled by the government, and people have confidence in government, problems in financial sector will not cause panic and trigger crisis.

However, even it is not likely that China will fall into a financial crisis, it is clear that there are many domestic economic problems. Perhaps China is more likely to fall into some serious problems as Russia has today. We know that what Russia did is the so-called "shock therapy" and what China has done is a gradual reform. But it is said that what China has done is only to postpone the hard nuts to be cracked in future. This is to a certain extent true. The hardest nut is the reform of state-owned enterprises. Premier Zhu Rongji is determined to solve the problem within three years. With the reduction of workers and restructure of enterprises, some big and medium-sized enterprises seem to turn better. However, it is hard to say that SOEs have been fundamentally changed. Even for those "better" enterprises, it is still too early to say that the mechanisms of self-development have been established and they can go on by themselves. If SOEs cannot be reformed into real market entities, the future development of China will be hampered. But what China is better than Russia is that after twenty years of development, a relatively large non-state sector has grown up. The non-state sector now contributes for over 50% of GDP and 70% of gross industrial output, so even the reform of SOEs failed, the problem might not be as serious as in Russia.

On the whole, China's problems can be looked at in two perspectives. One is development and the other is reform. For development, the short-term problem is the slow expansion of effective aggregate demand, so the Central Government is employing fiscal policy and monetary policy to stimulate demand, which seems to gradually have effects. But perhaps a more important long-term problem is the quality of population and the expenditure on education. China now has too many unskilled labor who can only produce labor-intensive products. However, with the increase of labor costs and the competition from other low-income developing countries, the production and exportation of labor-intensive products can no longer sustain the high growth rate as in previous twenty years. The Central Government is fully aware of this and starts to emphasize the importance of education and technology. However, the public expenditure on education is still low (less than 4% of GDP) even compared with many developing countries. So to raise the quality of the population is a very important task for future development.

As for reform, the short-term problem seems to lay in the financial sector. The Central Government has taken many measures in 1998 and will still take some measures in 1999 to restructure and regulate the financial sector. This is of course very important, but the long-term reform of SOEs might be more difficult, because this is a task no country in the world has really succeeded.

Appendix A Measures to Promote Exports in 1998

1. The Ministry of Foreign Economic Cooperation and Trade decided to establish a perfect import and export management system.

2. The Ministry decided to reform the quota allocation method, increasing bidding for export quotas.

3. The Ministry decided to directly allocate 15% of textile quotas to well-performed production enterprises rather than to state-owned trade companies to let them export by themselves.

4. The Ministry decided to reduce the range of products subject to quota and licensing, eliminating the quota and licensing requirements for twenty-seven products since April 1.

5. The Ministry decided to increase the number of production enterprises to have export and import rights. The approval system of trade rights will be gradually changed to a registered system.

For measures of tariff and tax preferential treatment, please see Appendix C.

Source: Policy Trend, 1998 various issues.

Appendix B Monetary Policy Measures in 1998

1. January 1. The People's Bank of China lifted its control on loan quota for state-owned commercial banks, which had been practiced for about 50 years.

2. Late January. The People's Bank of China issued 78 billion yuan loans to commercial banks to guarantee their payments.

3. Early February. The State decided that the guidance plan for loans in 1998 was 900 billion yuan, 81 billion yuan more than the previous year.

4. March 21. The required reserve ratio for commercial banks decreased from 13% to 8%, which allowed commercial banks to increase loans by 70 billion yuan.

5. March 25. The People's Bank of China decreased interest rates for deposits and loans. On average, deposit rates decreased by 0.16 percentage points and borrowing rates decreased by 0.6 percentage points. This is the fourth reduction of interest rates since 1996.

6. April. The State decided to increase planned loans on capital investment from 270 billion yuan at the beginning of the year to 370 billion yuan to support infrastructure construction.

7. May. The State issued "Notice on the Increase of Loans on Residential Construction and Consumption" and "Measures of Individual Residence management" to support the construction and consumption of houses.

8. May 26. The People's Bank resumed its buy-back business of bonds to meet the financial demand of commercial banks.

9. May 26. The State increased 20 billion yuan of loan plan for the National Development Bank.

10. July 1. The People's Bank again decreased interest rates for deposits and loans. On average, deposit rates reduced by 0.49 percentage points and borrowing rates reduced by 1.12 percentage points. Loans for export credits decreased by 1.98 percentage points.

11. July 1. The People's Bank issued 'Guidance Directions on Improving Financial Service and Supporting National Economic Development" to support the increase of loans to irrigation works, infrastructure, and science and technology; to support the development of state-owned enterprises; and to support the establishment of residential system etc.

12. July. The People's Bank specified the contents of reestablishing financial order to prevent financial risks. The Bank also issued "Opinions on Further Improving Financial Services for Small and Medium-Sized Enterprises".

13. Early august. The People's Bank issued "Opinions on Further Promoting Foreign Economic and Trade development" to promote exports.

14. August. The People's Bank issued an emergent notice to financial institutions to support the production after the severe floods.

15. October 27. The People's Bank decreased interest rates on US dollar deposits and loans.

16. November. The management system of the People's Bank of China was restructured, removing all the provincial branches and establishing nine big branches across provinces.

17. The People's Bank decreased interest rates the third time in 1998. The rates on deposits and loans reduced by about 0.5 percentage on average.

Source: International Finance News, December 16, 1998.

Appendix C Fiscal Policy Measures in 1998

1. January 1. Exemption of import tariff and VAT at import stage for equipment used in both domestic and foreign investment projects that encouraged by the State.

2. February 20. The Treasury started to issue 1998 treasury bonds. The planned issuance was 125 billion yuan.

3. February 20. The State increased its investment in agriculture by 900 million yuan.

4. Mid-April. The Treasury raised the rebate rate of VAT for textile exports from 9% to 11%.

5. May 18. The Treasury issued 45 billion yuan of seven-year special bonds for non-solely state-owned banks to increase their capital.

6. June. The Treasury issued 45 billion yuan of treasury bonds.

7. July 2. The Treasury decided to decrease the interest rate for all the bonds bought after July 3. The rate for five-year bonds decreased from 7.86% to 6.42% and the three-year bonds decreased from 7.11% to 5.85%.

8. End of July. The Treasury published four kinds of criteria for debt restructure, income, investment, and construction contracts.

9. August 18. The Treasury issued 270 billion special treasury bonds for the four big state-owned commercial banks, which are Industrial and Commercial Bank, Agricultural Bank, Bank of China, and Construction Bank, to increase their capital.

10. End of August. The Treasury issued 100 billion ten-year long-term bonds for increasing budget expenditure in 1998 and 1999. The fiscal deficit of the Central Government increased from 46 billion yuan at the beginning of the year to 96 billion yuan.

11. October. The Treasury again issued 30 billion yuan of treasury bonds.

12. January 1, 1999. The Treasury further raised the rebate rates of exports. The rate for electronics and machinery increased to 17%; the rate for textiles, shoes, watches and clocks, steel products, cement, etc. increased to 13%; the rate for chemical materials, plastic products, toys, sports and travel products, and cases, etc. increased to 11%; exports originally with the rate of 6% can enjoy a rate of 9%; the rate for agricultural products increased to 5%.

About the Author:  Dr. Yin is Professor and Vice Chairman of the Department of World Economy, Fudan University, Shanghai. He earned an MA and Ph.D. degrees from Fudan University. Dr. Yin has specialized in international theory and development economics and in recent years, he has done research on China's foreign trade reform and development. His recent publications include The Process and Effects of China's Foreign Trade Reform, The Effects of Tariff Reduction on China's Economy: Theory and Practice.