10 - Learning to live without the Plan: financial reform in China

Summary

There was a time, not that long ago, when the leadership of the People's Republic of China (PRC) would have viewed international financial crises with a sense of glee and vindication – a sign of the vagaries of the global capitalist system and perhaps an indication of its impending demise. But contemporary China is no longer isolated from the global economy and wholly insulated against external shocks. A crisis in Mexico was of little more than academic interest to China's elites, but the crisis on China's doorstep in 1997 had immediate and direct significance.

This significance was primarily through the impact of the secondary or responsive stage of the crisis. The collapse of demand in Japan and other regional states, the dampening of international investment activities, and enhanced competition for export markets combined to jolt the efficacy of China's export-led growth strategy after 1997. But while inward investment and export strategies had become more and more open and integrated, the Chinese financial system remained relatively closed and protected in 1997. And it was this relative lack of liberalisation that helped protect the Chinese economy from the worst excesses of the 1997 crisis.

Nevertheless, the pressures to reform the financial structure, which appeared to serve national interests so well in 1997, are enormous. These pressures partly come from without, most notably in the shape of meeting WTO standards and criteria. But they also come from a complex interplay between domestic and external forces as China incrementally reforms itself away from socialism.