Wu Xiaoling: Lessons we should learn from the Asian financial crisis
Remarks by Ms Wu Xiaoling, Deputy Governor of the People's Bank of China, at the
International Seminar on the Tenth Anniversary of the Asian Financial Crisis, Beijing,
21 June 2007.
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Ladies and Gentlemen:
Good morning.
It is a great pleasure for me to attend the International Seminar on the Tenth Anniversary of
Asian Financial Crisis jointly hosted by the Financial Research Institution of the People's
Bank of China, Institute of World Economics and Politics of Chinese Academy of Social
Sciences, and the China Business News. Please allow me, on behalf of the People's Bank of
China, to welcome the distinguished guests from the World Bank, the International Monetary
Fund and other international institutions, and countries and regions including Japan, Korea,
Thailand, Malaysia, and Indonesia, etc. and experts and scholars from domestic government
agencies and institutions.
This year marks the tenth anniversary of the Asian financial crisis. The world economy has
undergone tremendous changes over the past ten years. It is of significance to conduct
indepth discussion on policy-making and reform strategies in China's financial opening-up
against today's backdrop of global economic imbalance, excess liquidity and increasingly
changing financial market.
1. Lessons we should learn from the Asian financial crisis
In July ten years ago, the attack on Thai Baht by the international hot-money triggered a
large scale financial crisis, which severely damaged the economies of Thailand, Malaysia,
Indonesia, Japan, Korea, and China's Hongkong SAR and Taiwan province, and pulled
Asian countries into an economic and social turmoil.
Reflecting on the reasons behind Asian financial crisis ten years later, we find lessons in
many aspects.
(1) A country's financial opening-up must suit status quo of its financial system. Sound
domestic financial system and healthy operations of the enterprises are the micro
basis to forestall external shocks, thus we should effectively combine the processes
of opening-up and internal reform. An orderly opening-up will help foreign and
domestic financial institutions to influence and learn from each other. Inefficiently
managed opening-up and a fragile banking system will undermine financial stability.
(2) More efforts should be made to intensify monitoring on cross-border capital flows, in
particular, short term capital flows. The abnormal flow of short-term speculative
capital may lead to financial crisis. Relevant countries should adopt exchange rate
regime best suited its local characteristics. Rigid and inflexible exchange rate regime
will be an easy target of international speculation. Rapid increase of asset prices
due to large inflow of foreign capital will not sustain, and the fall of asset prices is
always correlated with capital flight and depreciation of local currency, thus we
should keep alert to excess investment of foreign capital in domestic assets.
Relevant countries should make more research on monitoring of cross border
investments by the hedge funds.
(3) An appropriate crisis management mechanism is the guarantee to prevent crisis and
reduce loss from the crisis. Relevant countries should establish crisis management
mechanism adaptive to its own financial system. Meanwhile, the increase of cross
border financial cooperation has a bearing on preventing the spread of crisis and
reducing loss from the crisis. International institutions should improve rescue
methods by adopting prompter countermeasures suitable to specific condition of the
rescued.
2. The role and contribution of China, as a responsible big country, in Asian
financial crisis
In order to mitigate the impact of Asian financial crisis and help crisis-stricken Asian countries
walk out of the plight, then China's Premier Zhu Rongji promised, on behalf of the Chinese
government, to the world that the RMB would not depreciate, followed by a series of active
measures and policies.
(1) China made vigorous efforts to participate in the IMF's rescue operations to help
related Asian countries. After the outbreak of financial crisis, under the arrangement
framework of the IMF, the Chinese government provided a total of over US$4 billion
assistance to Thailand, as well as export credit and emergency free medicine
assistance to Indonesia and other East Asian countries, although China had
inadequate foreign exchange reserves at that time.
(2) China actively cooperated with relevant parties to participate in and advance
regional cooperation. At the sixth ASEAN informal leaders' meeting, then China's
President Jiang Zhemin unveiled three proposals of strengthening regional
cooperation to refrain the crisis from spreading, reform and improve international
financial system, and respect self-selected measures of relevant countries and
areas to overcome financial crisis. At the second informal ASEAN+China, Japan
and Korea leaders' meeting and the informal ASEAN+China leaders' meeting, then
Vice President Hu Jintao emphasized that East Asian countries should vigorously
engage in reform and adjustment of financial system, with the most pressing need to
intensify the management and supervision over short-term capital flow. He called on
the East Asian countries to strengthen exchange on macroeconomic issues such as
financial reform, have dialogue between deputy finance ministers and deputy
governors of central bank, and form expert team at appropriate time to launch
indepth research on specific measures on managing short term capital flow. The
above measures adopted by the Chinese government received positive response
and support from most crisis-stricken countries.
(3) China promised that the RMB would not depreciate. Being a highly responsible
country, the Chinese government made the decision of no depreciation of the RMB
with an aim of safeguarding regional stability and promoting development, which
played a pivotal role in maintaining economic and financial stability of the Asian
countries and the world at large, as well as Asian countries' economic recovery and
regaining of rapid growth in later years.
(4) China implemented policies to boost domestic demand and stimulate economic
growth. While sticking to no depreciation of the RMB, the Chinese government took
a wide range of measures to boost domestic demand and stimulate economic
growth, which safeguarded health and stability of domestic economic growth,
mitigated difficult situation in the Asian economies, and fueled recovery of Asian
economy.
The adoption of these measures by the Chinese government embodied that as a part of
Asia, China had a full awareness of collective interests and responsibility and has made its
due contribution to the rapid recovery and regaining of growth momentum of the Asian
economy.
3. Expedite financial system reform to enhance capability to withstand financial
crisis
In the wake of the Asian financial crisis, China attached great importance to financial stability
and financial safety by taking a mix of measures to improve sound operation of the
microeconomic financial entities, reinforce the role of market mechanism in the allocation of
financial resources, push forward the reform of foreign exchange management system and
foreign exchange rate regime on a sequenced manner, intensify monitoring and control of
financial risks, and enhance the capability to prevent and forestall financial crisis.
(1) Prudential financial regulatory system was improved. The occurrence of a series of
financial crises, such as Latin American debt crisis and Mexico financial crisis, led
us to the conclusion that fragile financial regulatory system was the main reason
behind financial crisis in many countries. Given under-fledged financial regulatory
system, China intensified the building of financial regulatory policies after the Asian
financial crisis. Following the establishment of securities regulatory commission, we
set up insurance and banking regulatory commissions to materialize separated
operation and regulation with a view to strengthening regulation on various financial
institutions.
(2) Reform on property right system was introduced in state-owned commercial banks.
The Asian financial crisis made us realize that inefficient operation of state-owned
commercial banks had become the main obstacle to the stability of financial system,
with bad loans cumulated over the past years and inefficient banking governance
structure putting China's financial system into a more vulnerable situation. To deal
with the problems of low capital adequacy ratio in state-owned commercial banks
and weak risk prevention capability, we took a wide range of measures to reform the
state-owned commercial banking system and enhance their risk prevention
capability. In 1998, we made 270 billion yuan worth of recapitalization to
stateowned commercial banks and transferred 1400 billion yuan non-performing loans
from these banks. The top priority in the following years was the reform on
stateowned commercial banks. We ushered in the reforms on ownership structures of
these banks with the successful listing of the Industrial Commercial Bank of China,
the China Construction Bank, and the Bank of China. Governance structures of
state-owned commercial banks saw fundamental changes owing to the listing of
these banks, corporate transparency enhancement, and supervision based on
international accounting standards and external audit requirements. Although facing
huge accumulation of foreign exchange reserves, China insisted on introducing
foreign strategic investors, encouraging overseas listing of commercial banks, and
increasing inflows under capital account during the reform of state-owned
commercial banks. It was our hope to break constraints hard to remove under
China's current system and promote banking governance structure with the help of
international experience and market pressure.
(3) Greater efforts were made to develop and foster financial markets. Under-developed
Asian financial market led to insufficient channels and mechanisms to divert risks,
as well as Asian countries' failure to handle financial crisis. Only with the help of a
wider open financial sector, game rules in the international market, and diversified
and flexible financial instruments can we defeat crisis.
Over the past decade, China has gradually established a financial market system
comprised of money, bond, securities, foreign exchange, gold and futures markets
featuring multi-layered bourses, diversified products and varied mechanisms. In
addition, we embarked on non-tradable shares reform to advance reform of financial
systems so as to lay a solid foundation for overall mechanism transformation and full
play of the role of capital market. Besides, we made strides in developing bond
market by improving assets structure of capital market to address the problems of
simple market structure and mismatch of market size between securities market and
bond market so as to facilitate optimal assets management of listed companies and
portfolio of investors.
(4) Reform of the foreign exchange management system proceeded smoothly. The
Asian financial crisis made us realize how important a flexible exchange rate regime
and foreign exchange rate management system to economic growth was. Therefore,
after the full convertibility of RMB under the current account in 1996, we made
continuous efforts to push forward the reform of foreign exchange management
system by simplifying procedures of RMB convertibility under the current account,
gradually lifting restrictions on foreign exchange uses under the capital account,
meeting appropriate demands on foreign exchange, followed by a series of reform
measures on the foreign exchange rate regime based on market demand and
supply. On July 21, 2005, the RMB exchange rate against US dollar was adjusted to
8.11 yuan, and the exchange rate policy featuring a peg to the US dollar was
changed to an arrangement with reference to a basket of currencies. From May 21,
2005, the band of trading prices of the RMB against the US dollar on the interbank
foreign exchange spot market has widened from 0.3 percent to 0.5 percent, which
meant that daily trading prices of the RMB against the US dollar on the interbank
foreign exchange spot market could float within a band of 0.5 percent around the
central parity released by the China Foreign Exchange Trading System.
Taking into consideration of economic and financial situations both at home and
abroad, the PBC will keep regular floating of the RMB exchange rate based on
market supply and demand with reference to a basket of currencies so as to keep
the RMB exchange rate basically stable at an adaptive and equilibrium level,
facilitate broadly balanced BOP, and safeguard the stability of macro economy and
financial market.
(5) Major progress was made on the building of financial legal system, regulatory
mechanism and infrastructures. Around 1998, China had enacted or revised a series
of laws and regulation to provide stronger support for regulating market activities
and safeguarding market order, such as the Securities Law, the Company Law, the
Law on Enterprise Bankruptcy, the Law of Anti-money Laundering and the Property
Rights Law. Thanks to effective coordination and risk monitoring by the financial
market regulatory agencies, such as the PBC and the China Banking Regulatory
Commission (CBRC), a full-fledged regulatory framework on financial market has
taken shape. Infrastructures building made major achievements featuring better
systems for transaction, custody and settlement and more efficient interaction of
markets.
(6) Adjustment on economic structures was intensified. It was the most important reform
measure we adopted following the Asian financial crisis. One of the reasons behind
the crisis was the inappropriate economic structure and weak capability to forestall
crisis. Presently, China is confronted with dual challenges of global economic
imbalance and domestic economic imbalance. The appreciation pressure of the
RMB came from the twin surpluses of China's BOP and was also the reflection of
economic structure imbalances.
Without a sense of urgency to expedite structure adjustment, China's economy will face
severe difficulties in the years to come. Fully understanding this challenge, Chinese
government has pursued a mix of measures to adjust economic structure, including
improving foreign exchange management to enhance flexibility of exchange rate, adjusting
foreign trade policies of encouraging export and limiting import, enhancing efficiency of
foreign investment, improving resource and factor price formation mechanism by intensifying
energy conservation assessment in line with stricter environment protection standards,
improving fiscal policies, and encouraging consumption, etc.
The purpose of reviewing the Asian financial crisis a decade ago is to prevent occurrences of
a new crisis. China is willing to join hands with relevant countries and regions to safeguard
the stability of regional and global financial systems.
Thank you.