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International Financial Crisis and my country’s Response Strategies

Abstract: With the increasingly obvious trend of global economic integration, the international flow of capital The importance of international capital markets and international capital markets to China's economic development has become increasingly prominent, but the accompanying financial risks are also growing. How to deal with this challenge and seek advantages and avoid disadvantages is an important issue facing China's financial community and government. This article proposes a series of response strategies based on analyzing the causes and consequences of the financial crisis.

Keywords: international capital flow, international financial crisis response strategy

International capital flow refers to the flow of capital between different countries or regions within the international scope. The balance of payments can be used The capital account of the balance sheet reflects that capital flows are divided into two types: capital inflow and capital outflow. International capital flows can take many forms, the most common of which are international direct investment, international financing and international liabilities.

Since the 1970s, the international flow of capital has become increasingly active and has become a key influencing factor behind many major economic events. This is closely related to the development and improvement of the international capital market. These situations are actually nothing more than a very simple balance between demand and supply. From a demand perspective, firstly, the increase in the elderly population in developed countries has promoted the gradual expansion of pension scale, and the international capital market has become the main place for investment and value-added income; secondly, the middle class population has increased and their economic strength is strong. The demand for investment is strong, and they understand and are willing to take higher risks in order to obtain higher investment returns. Therefore, their income savings flow from traditional bank savings to the higher-yield stock market, thus promoting the development of mutual funds. In addition, the regulation of major financial markets in the world has been gradually relaxed since the mid-1980s, which has objectively promoted the rapid development of international capital markets, especially the derivative financial product market.

The current situation of the international capital market

The capital market consists of two aspects: market participants and market products. 20 years ago, commercial banks formed the main part of the entire financial market. Today, although banking institutions are still the users and main managers of the clearing system, their asset size is far lower than that of investment institutions, such as Pensions and government funds, etc.

For China, although it is still in the primary stage of socialism, the degree of openness of the capital market is very low and the market size is small, the ripple effect of changes in the external market has been very clearly felt. As China joins the World Trade Organization and becomes more involved in global economic integration, capital flow barriers and protective walls will gradually reduce and eventually disappear, and the impact of these fluctuations will become more direct and obvious. Therefore, the problems that may arise from international capital flows should attract our great attention from now on.

The international financial crisis and its causes

International capital flows and international capital markets have made great contributions to promoting global economic development and promoting the rational allocation of capital and technology among various regions. contribution, but the resulting volatility and the resulting risk of an international financial crisis are also increasing. The international capital flows of globalization, networking and informatization are mainly characterized by sharp fluctuations in the global financial market. The price fluctuations of financial assets are so large and the scope of transmission is unprecedented. This violent fluctuation and its attendant consequences are unprecedented. The diffusion effect is the root cause of the international financial crisis.

International financial crises generally manifest themselves in three forms. A currency crisis refers to a country's currency facing large-scale selling pressure in the foreign exchange market, which leads to a sharp devaluation of the currency, or forces the monetary authorities to spend a large amount of foreign exchange reserves and significantly increase interest rates to maintain the current exchange rate; a foreign debt crisis refers to a country's currency crisis. Unable to repay the principal and interest on maturing external debts, including private sector debt and government debt; banking crisis refers to the phenomenon of large-scale runs on deposits by individuals and companies due to loss of confidence in the banking system.

The international financial crisis is not far away from China. Historically, the end of the last century has been a period of frequent financial crises: from the earliest European financial crisis in 1992 to the Mexican financial crisis in 1994, and then to the Asian financial crisis in 1997; the most recent one is the South American financial crisis in 2000. Among them, the Asian financial crisis that broke out in 1997 has the most characteristics of an international financial crisis, and of course its destructive power is also the most global in nature.

As the blood conduction and transportation system of the modern economy, the safety and efficiency of the international capital market are of great concern. The Asian financial crisis and the global market turbulence it triggered caused huge damage to the world economy, and its impact continues to this day. This is enough to show that the financial crisis caused by international capital flows should arouse our great attention. Research on its causes and countermeasures is a major issue related to the economic stability and development of the country and the world.

If the causes of the international financial crisis are simply listed, they can be attributed to the following points: overproduction caused by economic overheating; huge trade balance deficit; excessive inflow of foreign capital; inflexible exchange rate system and inappropriate exchange rate level; premature financial opening. But in practice these factors often work together. Taking the Asian financial crisis as an example to analyze in detail, it is not difficult to see that it was the combined effect of multiple internal and external factors that led to the overall outbreak of the financial crisis.

The specific reasons can be summarized as follows:

Economic development is overheated, the structure is unreasonable, and resource efficiency is poor. The economies of Southeast Asian countries have taken off one after another since the 1970s, growing rapidly. However, years of rapid growth have also accumulated serious structural problems. These countries have focused on promoting a new round of economic growth and neglected to solve structural problems.

After the "real estate bubble" burst, banks' bad debts were serious. Real estate prices in Southeast Asian countries have skyrocketed during the past decade of rapid economic growth, attracting banks to invest heavily in real estate. The increase in bank bad debts has greatly affected the stability of Southeast Asia's financial system. Some financial institutions were on the verge of bankruptcy before the crisis.

From an external perspective, other capital markets, such as the recovery of the Japanese stock market and the continued strength of the US dollar, have caused some of the foreign capital that originally flowed into Southeast Asia to withdraw, putting strong pressure on the currencies of these Asian countries. Under this situation, the high liquidity and high speculation of huge amounts of international capital finally stirred up this unprecedented financial turmoil.

The international financial crisis has extensive and huge impacts. Take the Asian financial crisis as an example. It has had varying degrees of negative impact on various countries. Due to the Chinese government's proper regulation and management during the transition to a market economy, the Asian financial crisis did not have a direct impact on China. But no matter what, our country still feels the indirect effects of the Asian financial crisis.

my country's strategies to prevent future financial crises

Six years later, the impact of the Asian financial crisis has weakened a lot, but the aftermath has not been completely eliminated, and the international economy is still struggling for success. Efforts to escape recession and return to prosperity. On the other hand, the volatility and unpredictability of the international capital market still exist, the imbalance of regional development, and the financial, economic and even political shortcomings of different countries may lead to the outbreak of the next financial crisis. For China, which has successfully withstood the direct impact of the Asian financial crisis, we can get a lot of useful inspiration from analyzing its causes. At the same time, how to seize the opportunity to adjust the structure and formulate strategies to prevent or even resolve the next financial crisis in advance is also an important issue for the future development of my country's financial industry.

In order to promote further economic development, China's integration into the global market is a historical necessity. How to enjoy the benefits brought by the international capital market and the free flow of capital in this process while preventing and resolving the resulting financial crisis risks has become a major issue that China's financial community and even the government need to pay attention to. It has given China's financial Institutions, central banks and governments have raised many policy challenges. In this regard, only preparing ahead of time is the correct strategy to deal with challenges. By formulating correct policies and measures, the author believes that China will be able to achieve greater economic development healthily and smoothly.

Reference materials:

1. Jiang Boke, "New Edition of International Finance" third edition, August, 2001

2. Fred Hu (Fred Hu), "Stimulating economic growth and structural reform go hand in hand", Asia Wall Street Journal, August 5, 1998

3. Fred Hu, "China - Asia's safe haven", " Brompage Financial Magazine, September 1998

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