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CESifo Economic Studies Advance Access published online on May 19, 2006
CESifo Economic Studies, doi:10.1093/cesifo/ifl005
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© The Author 2006. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Original Papers

The Chinese Conundrum: External Financial Strength, Domestic Financial Weakness

Brad Setser *

* To whom correspondence should be addressed.
Brad Setser, E-mail: brad_setser{at}msn.com


  Abstract

China's recent investment boom looks much like the investment boom in the Asian tigers of the 1990s. Both were marked by a surge in bank credit to the private sector, a real estate boom and questions about the quality of domestic financial intermediation. Yet, China has few of the external vulnerabilities that marked the Asian tigers. Its current account surplus is rising, and its reserves far exceed its short-term external debt. However, China's external strength is unlikely to allow it to avoid future banking trouble and a new round of costly non-performing loans. The trigger for the next generation of bad loans in China, though, will not be sudden withdrawal of external credit (JEL classification: F32, G21).

Director of Research, Roubini Global Economics, Research Associate, Global Economic Governance Programme, University College, Oxford.


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