China Staves Off Devaluation

China Staves Off Devaluation Introduction China has come to the forefront of the international finance scene following the East Asian financial crisis for two reasons. First, the post reform Chinese economy closely resembles the other East Asian countries. China experienced significant levels of growth led by exports, with a rapid expansion in labor-intensive exports in its early stage of development. Rapid growth was accompanied by a rapid increase in domestic savings and massive inflows of …

…performance versus that of crisis-affected countries was the degree of liberalization immediately prior to the crisis. Capital account controls have efficiency costs, but they helped to protect China’s vulnerable financial sector from instabilities in the international capital market. Additionally, capital controls were an important contributor to other advantageous conditions, such as the large foreign exchange reserves and the dominance of foreign direct investment in total capital inflows that helped China avert a currency crisis.