Is China Heading for an Economic Crisis?

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Since the economic reforms in 1978 the Chinese economy has shown remarkable growth rates. The countries in East Asia all had very high growth rates before they were hit by the economic crisis in 1997. Could the same thing happen to China? The aim of the thesis is to investigate if China is heading for an economic crisis. Based on theories and empirical studies of other economic crises we study the following variables for China; exchange rate, current account, foreign exchange reserves, capital inflows, investments, the banking system and financial market liberalization, international market conditions and the political situation. We find that in a broad perspective China’s economy as a whole is in a healthy state. At the moment the country is neither at the edge of a currency crisis nor a financial crisis. However, there are serious flaws in the banking system. The problems need to be resolved immediately, or else they could very well trigger a financial crisis.

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