Riding the wind of rebirth

"...In the 1970s and 1980s, Latin American countries experienced severe inflation, including Mexico. In order to maintain economic gains, the Mexican government introduced a 'nominal anchor' system, using a peg to the US dollar as a monetary policy."

"This system has indeed curbed inflation to some extent, but it has created another problem: the peso has been severely overvalued and its ability to automatically adjust to external shocks has been limited."

"This problem also exists in my country's RMB-USD exchange rate system. The parallel operation of cash and foreign exchange is actually a temporary solution to address this issue. This solution also has many problems, which we will not elaborate on here."

"Returning to Mexico, starting in the 1940s, driven by both the 'import substitution industrialization' development model and the 'oil boom,' Mexico was once regarded as a benchmark for developing countries due to its long-term leading economic growth rate. This led to excessively rapid growth in the tertiary sector, mainly commerce, services, and finance, while the secondary sector experienced low growth and its export sector had low industrial linkages with other domestic production sectors. The primary sector, on the other hand, was in a state of stagnation for a long time, with insufficient food production."

"On the export side, Mexico mainly exports light industrial products and agricultural products, which are not competitive in the international market. It imports a large amount of intermediate products and science and technology from developed countries. These products are numerous and expensive, but they have not been converted into production capacity in time. Similarly, they have little export and international competitiveness, resulting in a huge trade deficit and foreign debt."

"This situation began to deteriorate rapidly during the instability of the oil crisis in the 80s, which alternated between formation and relief. The Mexican government's foreign exchange expenditures increased significantly, and the problem of international balance of payments imbalance became more and more prominent. The government was unable to repay its international debts on time, so it could only borrow new money to repay old debts. The transmission and superposition of problems derived from the debt crisis led to the outbreak of the debt crisis."

"In the external environment, the Fed's interest rate hikes dealt another heavy blow. Starting in April 1994, due to concerns about the overheating of the US economy and rising inflation, the Fed adopted an aggressive approach to address its problems, raising interest rates by 50 to 75 basis points each time, until February 1995, when the federal funds rate rose to 6.00%, with a total of 300 basis points raised in 7 times."

"The Federal Reserve's rapid interest rate hikes triggered a structural financial crisis worldwide, and major stock markets around the world suffered a downturn, with even the Hang Seng Index in Hong Kong falling by a third."

"And since 70 percent of Mexico's capital is short-term international capital, there has been a significant outflow, which has led to an even more substantial devaluation of the peso."

"When Mexico's foreign exchange reserves plummeted from $280 billion at the beginning of 1994 to $60 billion by the end of the year, such reserves were far from sufficient to maintain the severely overvalued peso. With the decline in Mexico's foreign exchange reserves and the increasing pressure of foreign debt, the Mexican government could only adopt two options: first, to allow the peso to depreciate by 12%, and second, to raise the short-term interest rate from 15% to 32%, hoping to attract capital inflows."

"However, when international investors lack confidence in Mexico's economic prospects and political stability, exchange rate pressures accumulate rapidly, and Mexican banks continue to lose reserves, with another $64 billion flowing out in just one week."

"On December 22, 1994, the exchange rate system completely collapsed, and Mexico finally gave up resistance, deciding to abandon the previous 'dollar exchange rate peg system' and begin to implement a free exchange rate."

"By March 1995, the peso-to-dollar exchange rate had plummeted to 7.66:1. Social wealth, especially the monetary wealth held by residents, shrank by half in just a few months, leading to a sudden increase in the number of people living in poverty, exacerbating social unrest, and turning the country into a slaughterhouse for international speculative capital and domestic financial giants."

"The lessons of the Mexican financial crisis are profound. In retrospect, we believe the main causes were threefold: first, the financial market was opened too quickly, leading to an over-reliance on foreign capital; second, political instability undermined investor confidence; and third, the correlation between the foreign exchange market and the stock market was ignored, resulting in a misalignment of financial policies." "There are also two lessons worth learning: first, it is crucial to correctly grasp the pace of financial liberalization."

“I believe that Mexico’s financial liberalization process accelerated the formation and outbreak of the financial crisis in at least two ways: First, after the privatization of banks, the government did not establish a formal credit supervision agency in a timely manner, and banks provided a large increase in credit to private non-financial enterprises. In 1988, this bank credit accounted for only 10% of GDP, but by 1994 it had increased to more than 40%. The proportion of bad debts also continued to rise.”

"Secondly, after the capital controls were lifted in 1989, a large amount of foreign capital, including speculative short-term capital, poured into Mexico. From 1990 to 1993 alone, it amounted to US$910 billion, accounting for more than half of the total foreign capital flowing into Latin America during the same period."

"While these foreign investments offset the current account deficit, they also increased the value of the peso, which to some extent weakened the competitiveness of Mexican exports and made the current account deficit more difficult to control."

"Therefore, given the imperfect operation of the international capital market and the lack of effective management and coordination mechanisms for the flow of international capital, developing countries must treat financial liberalization with caution and appropriately control the speed of the financial liberalization process." Li Laosan paused here, looking at the people in the front row below the stage whom he usually had to respectfully look up to: "China is also a developing country. The problem that Mexico just mentioned, which lurked in its economic development and eventually triggered a financial crisis, also exists in China."

"As far as I know, the five major banks now have loans totaling four trillion yuan, of which eight hundred billion yuan are non-performing loans. This has already exceeded the 20% red line. Banks with such a heavy burden are actually very vulnerable when dealing with rapid changes in the financial market. It can even be said that their survival is difficult to guarantee."

Zhou Zhi looked around the meeting room with concern and found that there were no cameras. It seemed that this was a high-level meeting that was not open to the public. Fortunately, thank goodness.

If Li Laosan's words were to get out, they would likely cause considerable controversy. For example, local governments are currently making great efforts to attract foreign investment, and there aren't many people in these areas who have the necessary understanding of international financial markets. However, they wouldn't necessarily think it's because of their own incompetence; they would more likely believe that Li Laosan's opinion, at best, "damages the environment for attracting investment" and "ruins the hard-won favorable situation," and at worst, it's a case of "using someone and then discarding them" and "settling scores later," which could easily trigger a backlash.

Besides these concerns, Zhouzhi also has another worry: "offending his peers."

Where does chaos come from? To put it bluntly, all the chaos in human society is caused by the ugly behavior of those who have vested interests. Many things are not that people who are interested don't understand, but that they pretend to be ignorant, or even don't pretend at all and just take advantage of the situation.

Do you think people will believe you're genuinely concerned about the country and its people? They'll just see you as a newcomer at the dinner table trying to get a share of the food. In that situation, it's extremely difficult to reach a consensus.

Now, as the conversation progresses, it's even starting to accuse several major banks, which is quite arrogant. (End of Chapter)