When the financial crisis unexpectedly hit the high-performing East and Southeast Asian economies in mid-1997, it was widely believed that the People's Republic of China (PRC) would be the next domino to fall. This chapter argues that China's handling of the crisis, and in particular, the country's ability to withstand the crisis, must be understood within the context of its domestic political economy. An important lesson of Mexico's peso crisis of 1994 and the Asian financial crisis was that a sound banking sector is the single most essential element of a healthy financial system. The State Administration for Foreign Exchange (SAFE) approval requirements and the related limitations on foreign participation in PRC equity markets had translated into low levels of portfolio investment. The Chinese authorities significantly intensified the enforcement of exchange and capital controls and moved to reduce circumvention.

This chapter discusses some of the core areas of debate, consensus and disagreements on the new International financial architecture. To critics, the International Monetary Fund (IMF) is a Bretton Woods relic incapable of playing a constructive role in the building of the new International financial architecture. While its harshest critics want the IMF altogether abolished, others are prepared to live with a severely restricted institution with limited powers and resources. Despite the fact that the IMF made mistakes in dealing with the Asian crisis, this should not invalidate the rationale for having a universally representative institution to oversee the implementation of collectively agreed rules. The Asian countries hardest hit by the crisis had all pursued dive. During the height of the Asian crisis, the Malaysian government dramatically challenged the prevailing wisdom and imposed capital controls by bringing the issue to the forefront of economic policy debates.

In the aftermath of East Asia's spectacular economic collapse in mid-1997, even the most optimistic predictions gave at least a decade before Asia could fully recover. Although it was expected that the growing intra-Asian trade and demand from the European Union would help to fill the void, there was little doubt that Japan's recovery was crucial to the region's recovery. Most Asian countries experienced a sharp economic slowdown beginning in the last quarter of 2000. The problems of a deteriorating external environment due in large part to the downturn in the US economy were exacerbated by the September 11 terrorist attacks. The single greatest push for East Asian regionalism had been the Asian financial crisis. It was clear that the Asian governments agreed that they must reduce their dependence on the G-7 countries and multilateral financial institutions like the International Monetary Fund (IMF) and the World Bank.