1. China: From the Asian Financial Crisis to the Global Financial Crisis

Impact of the Asian financial crisis

It is widely thought that the Asian financial crisis of 1997–98 had no substantial impact on China, due to the fact that China did not have capital account convertibility. In fact, China was highly vulnerable to financial contagion, which entered the Chinese domestic system through Hong Kong, and made its impact upon neighbouring Guangdong province.

During the course of China's economic reforms the economies of the Pearl River delta and Hong Kong became more and more closely interconnected. In the mid-1990s, a speculative ‘frenzy’ developed over the prospects that the region offered for capital from both within and outside China. Behind the speculative boom lay the lure of explosive growth rates in Guangdong province, especially in the Pearl River delta. Foreign investors who bought into ‘red chip’ companies in Hong Kong, supported by mainland state ‘parents’, bought bonds of ‘government-backed’ mainland companies from Guangdong and provided them with commercial loans, as they considered that these investments offered a virtually risk-free method of achieving high returns. From within China also, capital poured into the region attracted by the ‘concept’ of local-governmentbacked investment vehicles in townships and cities in China's fastest-growing and most capitalistic province.

‘Moral hazard’ was involved in most aspects of the crisis. There was moral hazard in relation to the deposits made by Chinese investors in the non-bank financial institutions in Guangdong, which were thought to be supported by the local government.