Assessing Systemic Issues: Regional Initiatives and Way Forward

1. Assessing Systemic Issues: Regional Initiatives and Way Forward Stephen Yan Leung CHEUNG City University of Hong Kong

2. Contents • Update on Asian economies • Regional Co-operations • Way forward

3. The 1997-8 revealed the weaknesses • Corporate sector • Financial institutions • Exchange rate management

4. Table 1: Causes of the East Asian Crisis, 1997-98

5. Table 1: Causes of the East Asian Crisis, 1997-98

6. Table 1: Causes of the East Asian Crisis, 1997-98

7. Table 1: Causes of the East Asian Crisis, 1997-98

8. Economic Growth Indicators (I) Region • Impressive growth rate since the crisis • Major set back in 2003 Q2 • Recovered strongly • Example: HK grew at 3.35 at 2003 and is expected to grow at 7.5%

9. Table 2: Economic Growth of some selected Asia Economies during 1996-2003

10. Economic Growth Indicators (II) • Asian region is expected to grow at a faster pace • Funds needed to sustain high-tech economic growth • What reforms needed to further enhance our regional capital makrets

11. Table 3:Overview of the World Economic Outlook Projections (Annual percent change unless otherwise noted)

12. Table 4: Market Capitalization of Listed Companies (as a % of GDP) in Selected Asia Economies, 1997-2003

13. Box 1(I) • At the end of 2003, 1,307 companies were listed in Hong Kong. • Total funds raised rose 91.6% from the preceding year • The market capitalization rose 54% • The daily turnover was HK$10.4 billion

14. Box 1(II) • Mainland companies accounted for 43.4% of market turnover • 27.4% of the new listings • 25% of total equity funds raised • More important role • Bank financing plays an important role in ten region • Bond market is underdeveloped

15. Asian Crisis • Currency mismatching • Maturity mismatching A high –quality bond market with sufficient market depth could have long-term economic development and reduce the probability of future crisis

16. Table 5: Financing Structure of Asian Economies and Selected Countries in 1995 and 2003

17. Box 2 The Hong Kong government has just completed its first securitized bond issue. The HK$6 billion worth of bonds issued are backed by the net revenue from five tunnels and a bridge owned by the government. The issues were over-subscribed; almost half are now owned by the general public with an oversubscription rate of 2.13 times and the rest by the institutional investors with an oversubscription rate of 3.1 times. In order to enhance the bond’s liquidity and promote retail participation, the issues were listed on the Hong Kong Exchange on 10 May 2004 with the board lot size of HK$50,000, which is around US$6,410.

18. II. Financial Market Reforms • Monetary and exchange rate policy • Bond market • Equity market • Risk management of banks

19. Monetary and Exchange Rate Policy • Asian Monetary Fund • Chiang Mai Initiatives - currency swap lines arrangement between ASEAN+3 • arrangement between ASEAN+3 • swap network, regional surveillance, monitoring of capital flows, and training of personnel Observation: the amount of money is small relative to the reserves and the liquidity of the markets

20. ASEAN’S surveillance system to Encourage the Coordination of Macroeconomic and Financial Policies • Early warning system??? • The nature of crisis is changing • Hard to use historical pattern to predict future crisis Observation: whether governments in the region can ‘really’ share sensitive economic information.

21. Bond Market Development (I) • EMAP – ABF1 and ABF2 • ASEA+3 – New securitized debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, local and regional credit-rating agencies • APEC – Development of Securitization and Credit Guarantee Markets

22. Bond Market Development (II) Observation: Efforts in overlapping areas. Interdepartmental coordination needed between Central Bank, Ministry of Finance and Securities Commission for local market.

23. Equity Market Development • Institute of Directors of East Asia network was formed • The guideline of good corporate governance practices was endorsed by APEC ministers 2001 • Future projects • scorecard on corporate governance • training initiative

24. Non-Performing Loans • Dispose of the assets directly • Set up AMCs • Private estimates: NPLs amounts to US$2 trillion (30% regional GDP)

25. Box 3 • China has a serious NPL problem. During the past ten years, Chinese government has established four asset Management corporations (AMC) using 10 billion RMB (US$ 1 = RMB 8.2); China Hurong, China Great Wall, China Orient, and China Cinda. The government has transferred 1.4 trillion RMB of NPLs to the AMCs.

26. AMU (I) • Monetary and exchange rate stability- Asian Monetary Union Pros: • Boost up trade volume • Insulated from speculative attacks • Collective discipline on monetary stability, open capital markets, and fiscal prudence • Eliminate competitive depreciation • Enlarged, unified financial markets

27. AMU (II) Cons: • Loss of monetary autonomy for national interests • Loss of autonomy to operate capital control

28. AMU (III) • AMU may not too far and may not be the only solution • strengthening the CMI arrangement • developing further the bond markets in the region • extending free trade agreements • cooperating in the pursuit of exchange rate stability

29. Capital Market Development • Legal and regulatory framework • Information transparency • Market infrastructure • Corporate governance • Credit agencies • Investor education • Cooperation and alliance of stock exchange

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