Title: The Travails of Current Macroeconomic and Exchange Rate Management in China: The Complications of Switching to a New Growth Engine
Reference Number: 1081
Publication Date: September 2003
JEL Classifcation:

Wing Thye Woo
University of California at Davis


Frequent bank recapitalization is the biggest threat to China's fiscal solvency and macroeconomic stability. Our calculations conclude that the forthcoming second recapitalization since 1997 is the last one that China can afford. Even then, fiscal solvency and macroeconomic management requires that the state continues keeping interest rates artificially low in order to avoid reducing the present fiscal stimulus to accommodate the servicing of the bonds issued for the bank bailout. In short, China faces a difficult tradeoff between the maintenance of fiscal stimulus to keep growth on track and the promotion of financial market development via recapitalizing the state banks, splitting them up and privatising some of them, liberalising the establishment of private financial institutions, improving prudential monitoring and enforcement, and deregulating interest rates.


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Last modified: 02/07/2004