Asia's Lurking dangers
SCMP October 21 2008
Asia's economies are in better shape than most, but they are still
Of course most of Asia is in far better condition than the US and
Europe and will suffer less - but still a lot - from the financial
crisis. Yet it is still more vulnerable than it should be, weaknesses
partly attributable to itself, partly to the global financial architecture
and partly to the apparent cultural bias of western financial and media
After the Asian crisis, governments made public commitments to increase
co-operation among themselves to guard against financial contagion.
The most specific of these was the co-called Chiang Mai Initiative,
which led to agreements on currency swap arrangements to enable countries
whose currencies came under sudden and untoward pressure to acquire
reserve currencies from better-positioned neighbours.
With this crisis, however, regional co-operation has been conspicuous
by its absence. For sure, only the Korean won came under direct attack,
but others weakened and wobbled despite apparently favourable national
balance sheets as the phrase 'emerging market' was pinned indiscriminately
on them by the investment houses and their media mouthpieces.
Korea asked China and Japan for a regional meeting to help stability
but nothing happened. The region remains too frozen by Sino-Japanese
rivalry. There was not even an attempt at co-ordination. Responses
to the crisis, such as Hong Kong's guarantee of bank deposits, were
aimed at local markets - in Hong Kong's case more to protect smaller
banks against a shift of deposits than out of concern for the currency.
Events were also a reminder that while much of Asia has few foreign
exchange controls, there is still very little cross-border bond investment
and local currency bond issuance that would reduce reliance on US dollar
funding, which can be hostage to the prejudices of dealers in New York
In other words, Asia has failed to make much effort to reduce the
imbalances in a global financial system in which the dollar and European
currencies account for 90 per cent of global reserve assets - a privilege
which enables them to bail out their banks simply by printing more
of their own currency. Part of the problem lies with Japan. At one
time the yen held promise as a trading as well as reserve currency.
But neither Japan nor China have been keen to encourage that - Japan
because it fears currency appreciation, China because it wants to limit
Japan's international role. While it is now widely recognised that
the global financial architecture needs radical reform, Asia's lack
of coherence on the issue is preventing the region playing the role
that its economic power suggests it should.
There is also the issue of cultural bias, which has been very evident
in the case of Korea. Alarm bells have been repeatedly rung by the
ratings agencies - despite their low reputations for credibility -
and the likes of Financial Times about the supposed foreign debt crisis
of Korea and its banks that helped trigger the dramatic fall of the
won. Much emphasis was also placed on Korea's current account deficit.
Whilst Korean banks have been over-reliant on wholesale funding the
fact remains that overall Korean net foreign debt is almost nil and
its currency reserves of more than US$200 billion are almost half those
of the whole Euro region. Its 2 per cent of GDP current account deficit
is both new and modest.
Contrast Korea's black image with the coverage of Australia and New
Zealand. Australia, with an economy smaller than Korea, owes the world
US$400-plus billion, has for years had a current account deficit in
the 4-6 per cent range despite high commodity prices, and one of the
highest household debt levels in the world!
Although much of its foreign debt is in Australian dollars, the net
foreign currency debt of Australian banks alone may well exceed the
nation's foreign reserves - a paltry US$29 billion. But will the cosy
English-speaking club even question whether the Australian government
has the assets needed to fulfil its guarantee of Australian banks'
liabilities? Can it admit the situation of Australia and New Zealand
is far worse than that of the Asian upstart?
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