By Tian Hui, Research Institute of Finance, DRC

Research Report, No.131, 2020 (Total 5875) 2020-5-29

Abstract: In 1997, a severe financial crisis broke out in South Korea. Before the crisis, South Korea’s macroeconomic performance was sound, and some nonperforming indicators did not arouse adequate attention. However, serious risks already lurked in the corporate sector and the financial system, the breeding ground for crisis outbreak. In 1995, the US dollar performance turned from weak to strong which triggered off the crisis in South Korea. The crisis gradually evolved into a systemic crisis through three transmission mechanisms including the transmission from domestic Chaebol to domestic financial system and from non-bank financial institutions to banking system, as well as cross-regional infection. In face of the crisis, the South Korean government took two measures to deal with it. Internationally, it sought help from the International Monetary Fund and the United States to get through the liquidity crisis; domestically, it announced and implemented major financial reform and opening-up measures and strived to address fundamental flaws to avoid making the same mistakes. The experience and lessons of South Korea are worthy of our vigilance and reference, and we need to be always on alert against potential risks and properly handle the relationship between growth and stability. Extra caution needs to focus on the liberalization of capital account, supervision and crisis countermeasures.

Keywords: financial crisis, inspirations, South Korea