Protecting Asia From the West's Financial WMD

♠ Posted by Emmanuel in , at 8/17/2010 12:08:00 AM
Liberalize, privatize, and deregulate your way to almost paradise; that was the message the West propagated during the height of the Washington Consensus era. Like many other Asian countries, however, China did not heed this call, preferring to stay away from securitization in a big way. Instead, China's recent financial problems are more prosaic and involve large government-run banks being compelled to lend to state-owned enterprises with sometimes limited regard for their ability to repay these loans. This trope was prominent in the middle part of last decade, and has resurfaced during recent times as the PRC once again made state-owned banks (SOBs?) lend to spur investment. Critics often say that investment in export-geared enterprises is the last thing China needs at this point, but we have yet to see another massive wave of defaults.

Anyway, back to today's story. The LSE house journal Global Policy has an interesting feature from the chief advisor to the China Banking Regulatory Commission (CBRC), Andrew Sheng, on how China was able to avoid the worst effects of the financial crisis. Aside from prudent regulation, another important task was shielding the Chinese economy from aftershocks emanating from the subprime capital of the planet and other bastions of financial innovation. It's a different world we live in when China--now the second largest economy in the world which I'll have more about soon--gets to lecture the West on such matters. With nearly $3 trillion in foreign exchange reserves, I guess China has many reasons not to take any £$%^ from Westerners wanting to ply their market open without reflecting on how their practices have impacted the economies of their home countries. What follows are the abstract and key policy implications:

Asia was not directly or significantly hurt through financial channels by the global financial crisis, but rather was hurt through trade channels. This article reviews the current regulatory reforms of global financial markets and how these affect Asia. The current crisis has exposed many weaknesses in the existing financial architecture, including the fragmentation of regulatory jurisdiction at the national and institutional levels. What is required is a system-wide and global view of market behaviour. The article uses a network perspective to analyse the issues and to propose solutions. The globalisation of finance and its fragmented regulatory oversight is a collective action problem that easily slips into a tragedy of the commons. Given the fact that there is no unanimity of views on how finance should be structured, there are differences in approaches to the reforms. Because Asian financial institutions and structures are less sophisticated, Asia is still struggling with how to make the financial system more efficient and responsive to real sector needs. The article suggests that Asia needs to identify its financial needs and can develop its markets through greater regional cooperation. Identifying the need to see financial markets as ecosystems through diversity, the article suggests that Asia can evolve through simpler but more robust financial systems.

Policy Implications

• As a matter of priority, Asia needs to strengthen domestic capital markets according to international standards.
• The Asian approach will tend to be more pragmatic, focusing on simpler rules more effectively enforced. Financial innovation should be encouraged with an emphasis on functionality for the real sector, rather than leverage for the financial system.
• Using the network approach means that Asians should build financial markets on a modular basis, ensuring that failure of one module will not destroy the whole system.
• Since it is recognised that global problems cannot be solved at national levels alone, Asia can increase its voice in the international arena through regional subsets of the Financial Stability Board, central bank grouping within the Bank for International Settlements (BIS), and the International Organisation of Securities Commissions (IOSCO) to help push implementation and enforcement according to global standards and to have regional input into global policy decisions.
Its a common theme that should resonate with reasonable-minded folks: financial practice should map closely to the real economy instead of being used to create virtual economies whose basis of and reason for existence is hard to determine.