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tv   Discussion on Asian Economies  CSPAN  January 14, 2016 9:22pm-10:50pm EST

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ins and way ins and all of the elements that entered the struggle have been patterned a great deal afghan day. >> for the complete schedule, go to >> now, a discussion about the challenges facing asian economies, including asian populations, infrastructure needs and lack of diversification in the financial sector. from the brookings institute, this is an hour and a half. >> good afternoon, everybody.
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at the occasion of presenting a very, very interesting look on the asian financial system. >> i think it's the ability to have a solid financial system is a necessary condition. though it may not be su efficient. previous advisor to the managing director and he was the deputy of the bank of china. so there's few, i think, in the world who knows more, certainly, about the chinese financial district and now about the whole
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world financial system than our friend who makes us an honor to come to brookings for this event. i will seat the floor to him. after his remarks, i will introduce the panel and we will have some further remarks from our own and i will then launch discussion where we will go from a panel discussion first to then having some questions from the floor. please and thank you again. again. [ applause ] >> thank you for your kind words and also for your warm hospitality.
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>> i thought brookings was a very good place for a copy of the book. it's always a part of budget con strants. but i realize that the book show is there. i cannot afford to get everybody a book. but i can probably afford with a certain degree of discount of the book. and hopefully, once again, thank
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you very much for coming to the sessions. >> the real authors will discuss the whole issues. now, about the asia financial market. >> this is a very big challenge.
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you will see that asian financial sectors with the whole of asia 28% of the global financial effort. and the process is very impressive. but, overall, 28% of steal below the asian gdp%, which is 33 pnt. and then you'll also see the base structure you eel see it
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with asia's 3%. so there's the asia financial factor. it will really grow strongly. 18%, china, from 2% to 10 pnt today. looking further the whole financial sector with very strong growth still below asia's gdp share. there's a still rule to continue a strong growth.
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with asia in the global picture, it's very interesting. asia is a test of asia. in 2005 to 2010, asia's exposure increases dramatically. roughly asia exports came 10 years ago. to have international structure. most interesting, is here.
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how much asia captures, and that is close to $5 trillion. so the next asia exports are larger captive to the whole world. but that's also a very interesting challenge. asian exposure increases dramatically in the 10 years. >> i've been asked to not step away from the podium. okay. usually, i tend to move around. brookings is much more difficult a place. okay, i will stay here. asia export and so far, $4.35 trillion to the whole world.
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and questions of asia can utilize for the argument. . i think that's also a big issue. and, because of that, asia exposed to the international stayovers. from roughly an advancing economy is quite high. roughly from 50% to roughly 50%. it's also particularly featured for the markets, as well. now, looking for china with the 3% share to 10% of the global
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share for the region, as well. we compared -- i cannot move, i'm sorry. and it's the u.s. contrary for the region. and it's roughly august episodes of the financial impact on china. if you compare the two things, you will see there's malaiysia. you will see on the currency side, china has part of the impact of the reading to the united states, particularly on equity side. the equity size and china will then compare to choose the 13s. now, that also becomes a new feature of the whole financial factors.
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now, the more challenge is coming from the real economy. the whole region changes in a very dramatic way. you will see the red line is for japan. japan has people ageing over 65 -- from 60% to 32%, doubled in 30 years. so we're looking to the soft career, which is the blue line. you will see the next 10, 15 years, roughly from 6%, 70%, increase to 24%. so four times ageing increases. absolutely stunning.
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looking for china from 6% increase to 60 pbt. that is for the whole world. asia is getting older. faster. and stronger. when you're getting older, you're comparing the financial structure. they provide enough product to fill the asian people. this is performed while shaping the asian financial market and structure. in the future.
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it's really moved fast in the past. and a huge financing gap in asia. this is u.n. calculator to meet sbg. last year, the year of developments were because of the year replacing mdgs for fun. best to the region, we realize every year, asia has $6 billion to feed the cap for ending education health care. another $323 billion for the people under $2 per day. and, you know, $718 billion for construction. helping to mold by the resources from public to private to the $1
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trillion challenge for one year in asia who needs the fdg pocket. there's a big challenge for asia financial sectors. meanwhile, if we're looking further, there's even more of the region facing. we call it the full measure challenge. take a career case because it's clear. contributing roughly from 3 1/2% to roughly 51/2. china kept contributing to job growth. particularly modular return jobs.
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also, productivity contributed to growth. also, you will see the back lines of the career. you will see the increase in the past 10 years all the way down goes down roughly 1%. in japan, productivity remains high, less than 3%. and the productivity becomes behind the innovation. what does it tell us? that facing fundamental challenges to raise the
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productivity to raise the potential growth also, to support a service particularly in the region with the economies. it's a part of service in which the key challenger and the financial sector to shift could play a very important role in this area. but i have to say, this is not easy. this is not easy things. but the latest is to support innovations, to support with a top of things, to support the growth, to support sustainable growth, that's a real challenge. last, not least, the inclusion issues in asia.
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you will see, yes, increase from 2011 to 2014 to 46%. but, still, only 46% with asia and not have a banking acount. and even in east asia, 30% still don't have a banking account. the financial inclusion is very important for sustainable growth. you will bring the product and supportive growth. so a few recommendations that we're looking for the future.
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and we'll see enhancing finance deeper. and also strerngt in the regions. this is very broad. what i'm trying to say here, number one, the asia factor is included very strongly. 3% to 10% in the region roughly to 38% and 10%. so really strong growth. and the rule for the future is still, the financial asset social security below that gdp shares in the whole world. and then, structurally, still remains banking and neither develops on the market.
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and the raging $4.35 trimmon and $70 trillion, which is a huge international exposure. so that's the financial sector. the big one with the infrastructure increasing day-by-day. and, also, the construction moving through the more innovative, more service product connectivity that is more and more important and still has a whole gap to fill in the future financial system for asia. has to meet these challenges. we found this study and tried to understand what is asia financial structures. tries to understand what area
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came to which is able to catch up. and what is needed for the region after 3 1/2 years. so that's the one. we don't mind tiger money. so, thank you, once again, for coming to this session. hopefully, you will enjoy the book and will buy the book. thank you very much. [ applause ]
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so we will first compliment the remarks followed by lin. the assistant director, asia pacific department. previously served as the deputy commissioner of financial sfrss agency fr the government of japan.
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canada is one of the successful financial countries, i guess, right? >> you can always get better. she has had 13 years in the market department of the irs where she worked on financial crisis. tools to assess financial risk. she is known for working on the effectiveness in many ways of micropotential policies, which you know is one of the big topics in financial markt analysis these days. and we're up to sharing with cornell university and he's much more from the mentally anchored at brookings.
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he's an associate of dmbr. and he was with the financial studies division and head of the ims china division. i think we couldn't have hoped for a better time. which one of you wants to start? >> i think it's going to be me. >> okay. all right. >> thank you very much, mr. dirvish. good afternoon and welcome to this seminar. mr. chu has given you a very nice overview of the book. i would like to pick up on one important message. that is asia's financial sector still has continued to grow.
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that's before infrastructure financing or managing a higher volume of cross border trade. so it is very likely that we will see asia financial sectors become bigger, more complex, and more interconnected. now, in my next five to ten minutes that i've been given, i would like to talk a little bit about the importance that asia anticipates and prepares for these changes. and i will speak from a regulatory perspective. understanding new products, new markets and new risk will help asia build. so how can asia best do this? how can it best prepare for the changes that are coming?
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what are asia's strengths. asia has strong and well capitalized banks. it has relatively large provisions. asia has good compliance. no central banks have the framework. asia has the crisis management training. so these are all very good. there are areas that asia still needs to work on. so i'm going to leave you with a top ten list of recommendations from the book. honefully, this will entice you to go out and buy a copy of the book. so i'm going to go through the list. first, asia needs to reduce the
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large role of government in financial intermediation. i'm just going to go through what are the key recommendations. first, asia needs ore inforce staff and technical capacity. of supervisory agencies. once you have the supervisors, uch to give them the operational independence to make decisions and to enforce compliance. so they need to have authority and willingness to act. or, asia should continue to improve its list of microcredential supervision. and here is the importance to be clear about the assignments of acountability. since the financial institution
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has become more complex, asia needs the consolidated supervision, to monitor funding risk and also to monitor connective lending. asia could strengthen its framework in a more timely manner. financial institutions that are no longer viable should be allowed to fail. asia could improve the availability, time limits and quality of financial sector data, including the collection of information of nine banks. acounting rules and practices should be closer to international spenders. and, finally, number 10, that
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should be greater cross border and collaboration to share information and coordinate crisis revolution. so this is the top ten list. li. as you know, asia has done a lot of in the decade after the asian financial crisis in 1997 to improve financial supervision and to improve resilience. we think that continuing to work on these financial sector reforms will be important for asia to preserve financial stability as it transitions to a new growth model. as you know, any transition will always have a few bumps along the road. good macroeconomic management and financial policies will go a long way to reducing the size and frequency of these bumps. that's all i have to say thank you. >> thank you very much. that was succinct and of course long menu and said very
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forcefully in a short time. thank you very much. >> thank you very much, mr. dais. thank you for much for allowing us to be here. this is the interlinkage. this is the national sector. don't blame us. this is what our designer said. this is a considered to be the financial centers of the world. and this red thing is an interlinkage between it. we are not trying to bind the thing. now, let me add something to the chairman's comments. she is if the monetary and capital market department or that's where she used to work. i'm from the asia and pacific department and this is a collaboration of the two departments in the imf so we at the asia-pacific department look at the countries and she -- the amc looks at the financial
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sector globally so this is a sort of horizontal versus vertical assignment and then she mentioned pretty much the financial sector of the global asia -- i mean, the asia in general. then our -- this book also contain the macroeconomic related chapters like asia's demographic challenges and the infrastructure needs or the asean association of southeast asia nations. financial integration. and analysis of factors behind the capital flows. so among these i found that the asean financial integration chapter is particularly popular among the region's policymakers because it has includes the lessons learned of europe, you know, something went well, something went not so well and
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then what are the things we should be looking at when you're going ahead with a financial integration. this is the thing the policy advice is behind our work. we intend to provide in this book. so this is the 300-page book. it's reasonably thick and lots of regression and model so this is the more academic book but then we editors tried our best to make it easy to read so it has a conclusion that -- i mean, the topics or main key takeaways of the chapter at the outset of each chapters and also conclusion at the end of each chapter so you can just read it, this short places if you're sort of time pressured. but having said that, imf, at the imf we are not in the publishing business so we are to make policy advice to the member
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countries. so what is more important for us is to make the findings of this book into something tangible, something that policymakers can use in making their own policies. and each countries are specific circumstances. so what we are doing, let me talk about since the dmdz gave you sort of broader overview of the book and then just supplemented it with some detail so let me talk about what we are planning to do with the book from now on. basically, we are planning to make our imf country teams to learn about the findings of the book and then make them -- i mean, use them in their annual consultations with each country.
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so that's what we're doing. one of the findings in the book is asia's economy weathered the global financial recession reasonably well but that was because the starting point was solid. asia has suffered from the asian financial crisis ten years earlier so they were very much -- did their best to make the books in order. and then, when the global financial crisis hit, asia's economy was relatively better positioned with relatively conservatively managed the books of the banks so we didn't have toxic assets too much so that resulted in relative resilient of the asian region in general. but then during the years that pursued in the very, very easy
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monetary conditions and the very historically low interest rates, asia's corporate sector has accumulated quite a bit of debt and leverage along the way. now, last december, that very easy money was reversed in one of the major -- the largest advanced economies. and then what happens from here? so that's kind of thing. we will be looking at in the great earnest. and the tricky thing is that the corporate leverage or corporate liability average doesn't say much. well, if a country "a" is suffering our struggling country "b" has large cash buffers, i mean, it doesn't -- on average it should be okay. right? not really. you know? even if on average the banks corporate sector is okay with repaying the debt, but it's not
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average. it is individual country that has to meet the financial regulations so we are trying to get how much of the percentage of the corporate sector is vulnerable. this kind of thing we are employing and we are trying to specifically forecast on -- going forward looking at this each country, each situations and another thing is that the macro proconvenience shl is utilized in the context of incoming capital flows. asia has received quite a lot of capital flows. in the process, the capital flow went in to the real estate and the real estate price went up so in many of the jurisdictions used the policy to combat this asset price inflation in the context of the increasing or incoming capital flows but now with possibly the reversal of this risk sentiment and possibly the region will be facing
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outflow of capital instead of inflow of capital and at the same time we are facing with a bit of a softening of the economy so if the economy softens we loosen the monetary policy but if you loosen the monetary policy, then the asset price inflation may be stoked so that -- what we -- what are we going to do with this monetary policy, conduct of monetary policy? you have to on the one side combat the demand management. you have to loosen to accommodate the economic activities and same time you have to make sure that doesn't stoke the asset price and it becomes very important. and thirdly, you know, capital inflow would be somewhat more -- how shall i say precious in the future. in the past years we have abundant inflow into the region.
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now we are not so sure that the capital inflow continues to be that, you know, lax. so in the years to come we need to think about more effective use of the capital inflow to perhaps assure the capital into more productive rather than throw them at some super flous unproductive investment. so how are we going to do it? many country has its own structure, reasons or historical reasons. certain alignment of incentives for certain country because they wanted to encourage house ownership. they may have certain bias toward buying a house rather than saving. so these kind of things may have certain impact on the choice of
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investment into productive versus nonproductive investments so these are kind of things basically what will be looking to within this umbrella of future wages of finance project. we'll be looking at in the context of each of the member countries. thank you very much. >> thank you very much. peshawar? looking forward to your comments and -- >> finance has become the life blood of modern economies. unless you get finance right, you don't get growth right and you gate lot of volatility in return. so for the most dynamic region in the world right now, despite recent bumps in the road which is asia, i think taking a close look of what's happening and what is needed in financial systems is a very valuable service which this book does very nicely. so my remarks that build upon the previous three panelists let
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me talk about when's been happening on the ground in asia which in many ways is intriguing. then talk a little bit building on the themes of the book about what is needed for financial systems to work well. and then talk about one specific example that i think drives home many of these issues and assuming some interest in china, i'll draw that into the discussion. if one thinks about what happened after the global financial crisis there was a sense that finance had gotten too far ahead of itself. interestingly, the year after the financial crisis hit india introduced an instrument that had not been seen there before. credit default swaps. two years after this, china introduced or opened up its foreign exchange derivative markets. at one level these might seem like foolhardy moves.
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it was markets and in particular derivatives like credit default swaps that caused much of the turmoil in global finance. but this speaks not to the folly of these countries but to the sense that financial market regulators had that there was genuine demand for financial products. in many of these countries. and one might think about credit default swaps as having gotten ahead of themselves as toxic overly sophisticated financial products but there is a good reason. the economies like to talk about completing financial markets. that is, allowing for financial products that allow for insurance against all the states of the world possible. if we don't get to complete financial markets and the problem is that on the transition to complete financial markets many instruments if you have the wrong incentives, if you have the wrong regulatory frameworks in place can cause a lot more trouble than the
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benefits they bring. but i think what we are likely to see is at some level a convergence between where finance was in the western world before the financial crisis and where the emerging markets were before the financial crisis with very underdeveloped financial systems. ideal meeting point is somewhere in the middle, a much more well developed set of financial markets but perhaps not to the extent that we saw in the western world before the crisis. and this book very nicely lays out the path. so what are the key attribute that is are necessary for finance to work well? i'd argue that there are three. breadth, depth and inclusiveness. and all of these are touched upon in the book. breadth refers to the scope of financial markets. as mr. minchu pointed out in the presentation, asia remains very largely bank dominated and i think having a very broad set of
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financial markets can serve a variety of purposes, not only does it provide more competition and discipline to the banking system and itself but in addition, it gives savers opportunities to diversify their portfolios other avenues and i this this competition is ultimately going to be working towards much better financial system. and as mr. sumi pointed out, if you have good bond markets in particular, they're not only very good in terms of intermediating domestic finance but also foreign finance towards longer term productive projects. if you take many countries in asia, india being a primary example, there is a crying need for finance in india. but what is crucial is that there be ways for foreign investors to participate in the india growth story but in a way that also serves india's
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long-term growth needs which can be done through bond market development. but you also need depth in these markets because if you have shallow markets ultimately you get a fair bit of volatility and these markets don't work very well. so the amount of liquidity, the amount of turnover in these markets is important. and here i think the part, many of the countries in asia have taken towards opening up the capital accounts more. does play a useful role. much has been said about how premature opening up of accounts tb a problem and there's certainly truth to that but i think there's a different perspective that opening up of the capital account in a facarel and cautious way can generate what i referred to in some of my research of collateral benefit. that's foreign investors, exp expertise their money and better assessment of risk and so forth. in addition, you don't need to have the financial system reach
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a large part of the economy. if one thinks about the fact that growth in many economies in asia has been somewhat unbalanced and if you think about the fact that structural reforms have a variety of sorts have not gotten much traction, part is related to the political economy. in many of these countries, it is a very viable and important argument that many of the benefits of reforms ultimately go to the political and economic elite who are very well connected, able to benefit from the reforms while the short-term dislocations often end up having cost that is are born by those who are not well tied in. and tying in ends up being very closely related to financial inclusion because if you're not well tied in to the financial system it becomes difficult to participate in the economy more broadly and to participate from the benefits of growth. so i think that is not only a macro-based but also political
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economy based argument that makes inclusion a very important imperative and we have seen again in many countries in asia, china, india and so on, the government recognizing this and taking significant steps to improve financial inclusion. so then let me come to the last part of this discussion. and i think china's a very good example of what i think is necessary beyond financial market liberalization and capital account opening. in case you've been watching the news, you have noticed things have been happening in china for the last few weeks an months. my view is that this is not the result of policy mismanagement by china alone. although certainly things could have been managed a lot better. i think the signals actually proceeding in the right direction. you might say, what the heck do i mean? i think what china has been trying to do is, in fact, to let markets work well. the problem that china faces is that if you try to liberalize
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financial markets without the supporting frame work things don't go well. what do i mean by the supporting framework? the book refers to needing a better regulatory framework and volatility in the stock market, why is it so volatile? you don't have the good institution framework to support it. better governance, better aud itting standards, better transparency. if you don't have those, what happens is even retail investors become momentum traders because they don't have enough information about the corporations they're investing in so they tend to get pulled along when the stock market is going up and pulled down when the stock market is going down. and, of course, when the government has as its only tool heavy handed government intervention, which looks very haphazard and the strategy not clear, that makes things worse. so there's been a great deal of
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criticism. some of it i think misguided. some of it i think is perhaps more right and the government making things worse by trying to intervene directly in stock market or currency markets but the fundamental issue is for financial markets, equity markets, currency markets, bond markets to work well you need a better supporting framework. here again i think the book alludes to these issues but this is really going to be the core issue. not that you need to hold back on financial market development or capital account opening but make sure that the other reforms in the economy, both real side reforms and institutional reforms in parallel. perhaps waiting to take place before moving out on financial market reform would be waiting indefinitely but i think that's where these economies are going to have to go. so i think the book makes a very valuable contribution in terms of honing in on what china
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really needs which is better financial markets and also pointing out what else is needed to support good finance in asia. thank you. >> thank you very much, eswar. let me ask one or two questions and then go to the floor. one question i have to the group and you can decide maybe imf colleagues will have the first kind of go, either one or both and then eswar, also. but it's very hard to separate financial sector management from exchange rate management. it is not the same topic but they're deeply linked by the balance sheets of the corporate sector, by many other factors. and is it a problem that the capital stock or the financial assets stock adjustment that may be happening with liberalization in china, particularly, in other words, more capital outflows
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starting, as opposed to inflows, which is, you know, an asset diversification maybe trend, maybe other things, at the same time as the -- while the current account surplus is not at the highest levels it's been but i just saw yesterday that the trade surplus with the u.s. is at an all-time high for china. so, that on the one hand you have, you know, a capital outflow that will the end to depreciate the exchange rate and a lot of confusion in the, you know, in the kind of non-specialized press as to what really should be the exchange rate movement. anyway. and on the other hand there's that big surplus and the depreciation, other things held constant might increase that surplus. how do you look at that problem?
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>> generically, you know, in the imf we have this -- the external balance assessment and then we look at each country's current account deficit and surplus and positions. and then, try to explain it from the fundamentals and desired policies. and then we in each of the countries surveillance we come to explain. suppose country "a" has a country of 4% of gdp. but then that is explained by certain factors and then what is the residual with ch cannot be explained by this fundamentals and long-term desired policies? then we say that look at
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these -- the country specific issues and try to come to -- into more balance for that particular country. but i -- i'm not in charge of china. and i sort of -- somewhat reluctant to go into china specific issues as the china team's currently now in china for the freer schedule stuff visit and they will be talking with the authorities probably as we speak. but each of the country cases we do look at the -- what makes that current account surplus as it is. as opposed to what we think the fundamentals of the economy and the desired policy would dictate a current account level to be somewhat different. what are the differences and why is it happening? and then, we usually ask the country authorities to think about why this is diverting from the norm and what can they do to
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reduce that? so i'm -- i know i'm not answering your question in the way you like but that's how we sort of -- >> i mean, let me rephrase. maybe for eswar. you know, i mean, when you have a system where which is liberalized on both the capital side you get a lot of volatility but in china and parts of -- other parts of asia, you had a capital account that was pretty managed and maybe the goods account more liberalized. and you have a fairly sudden or at least rapid relaxation of capital account management. i mean, and therefore a stock adjustment on the capital goods side and will that stock adjustment be a challenge to macro prudential policy or, you know, let's say corporate balance sheet. banks can be very well capitalized but if the corporate
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sector has an open position vis-a-vis foreign exchange, that may not mean very much. >> 'em no the saying that's the case but i mean, how's the kind of change in capital account policies of china and of other countries impacting financial sector both analysis and policy? do you have any views? >> i think it's important to remember that since the asian financial crisis in 1997 asia's as a whole has cut down significantly on its external debt so there's a lot liabilities on the books of the corporate sector than it was in the past and this actually allowed many asian countries to adopt a more flexible exchange rate and you saw that that flexible exchange rate served asia extremely well during the 2008 crisis. it acted as a very effective shock absorber. so i think from an exchange rate policy perspective, we have seen
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a sort of a very nice transition from largely managed exchange rate regimes to a more flexible exchange rate regimes and this has served asia well. from a macroprudential policy perspective and for those who don't know the term, macroprudential policy, i think the imf we forget sometimes people don't know these terms. but it's essentially not supervision of individual financial institutions but supervision of the financial system from an aggregate perspective. you look at the financial system and you see where are the risks coming so, you know, it may be that individually financial institutions may not be at risk. but on aggregate, if there's significant exposure to the real estate sector, for example, that could pose systemic risk. from a macro prudential
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perspective, i think it's important also to keep in mind that it is different from exchange rate management. macro prudential policy is to address systemic risk in the financial system. if there are significant capital inflows into asia as we saw right after the 2008 crisis, then macro prudential policy would be the useful tool to use to address exposure of the financial system as a whole, to real estate prices or to some other asset class. now, in the event of capital outflows, macro prudential policy could also be loosened in the event that buffers have already been built. if there are buffers not built then it's important to make sure that macro prudential policy remains where the vulnerabilities or the exposure of the financial sector remain
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manageab manageable. this might be a long-winded way of saying that i think asia has a sound exchange rate policy. it's a much more flexible exchange rate regime to absorb shocks. it has, most central banlgs have a framework for macro prudential supervision and asia, in fact, has led the world in terms of implementing macro prudential policies address systemic risk in the financial system. >> i mean, let me force one more time and then i'll stop but with eswar because he's written so much on the international monetary system but we do have a -- i think a little bit of a strange situation in the world now from a macro point of view and links up with the financial sector. i mean, we have two countries which have very large surpluses. china was reduced but it's going up again.
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and germany. okay? both of these countries are embedded in regions. china in asia and germany in europe. but they resemble each other in terms of trade position quite a bit. and yet, both of these countries have exchange rate that is are depreciatin depreciating. whereas in a kind of global imbalances sense you would hope that they would appreciate. any thoughts, eswar? >> so in china is from that traditional framework a bit of a conundrum. the chinese trade surplus relative to the levels before the global financial crisis has v come down a lot and then three quarters gone up to 6% of gdp which is high but the current account under the macro and china experiencing capital outflows so there is that complex that's being dealt with right now and the chinese
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currency is still managed quite actively against the u.s. dollar and dollar has risen sharply in the last year or so, at least until last summer. so in china, you had an expanding trade surplus at the same time that currency was appreciating. a large part of that was decline in imports, not so much import volumes but import prices because the prices of a lot of china's imports especially commodities have been very weak so the configuration is not easy to map into the traditional sort of configuration that we might think about. in chi in's case as your initial question pointed out, i think there are some significant challenges. china has been aggressively opening up the capital account not only to inflows but to outflows and in the midst of all the turmoil, the official capital account opening continued although china started
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to tighten up on administrative requirements to limit seepage through what it sees as unofficial channels. the timing is not ideal. they have very good reasons because after all there are about 170% of gdp worth of deposits in the chinese banking system. half of which is by households. about half by corporates and 10% by the government. and it makes good sense to take some of that money out of the banking system for diversify case reasons and it would provide some competition for the banking system, as well. the problem is that the unofficial capital flows as reflected in the net errors and admissions started to creep up at the same time of the capital outflows for the right reasons. you have diversification outflows compounded with exacerbated of concerns of the economy and possibly anti-corruption drive and
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creates very unstable capital flow dynamics which i think the government is contending with so i think as was referred to earlier the notion of asia as a whole shifting towards more flexible exchange rates which is good for the region i think is a story that continues for this day. china's trying to move towards that but again without the right supporting framework in place it just creates a lot of turmoil. so i think what is going to be needed to pull things back is not anymore direct intervention in the financial markets or in the equity markets and really this broader complex of reforms and policy that is are going to be needed to stabilize expectations. >> one more question and then we'll turn to the audience. i do remember the london g-20 meeting. and one of the big issues which was partly because of political and partly real, partly
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political messaging, was tax havens and information exchange in the financial system. i think it's becoming more and more important issue. from two point of view. i mean, i think there is much more decisiveness in the world to fight against illegal tax evasion. and it's large. estimates are very large. and, second, there's also now increasing, you know, decisiveness on dealing with legal tax avoid dance issues. a lot of these are financial sector issues. one sometimes has the feeling that in asia there's a lot of reluctance to open up the information exchange and to end
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whatever tax shelters that may still exist. any views on that? >>. >> well, i think it would be fair to say that the imf has done a lot of financial sector assessments for the asian countries. one component of those financial sector assessments is an assessment of the money laundering infrastructure. what you call tax havens. and so on. and i think by and large the results have been relatively robust. there are areas for improvement. absolutely. but i don't think that the findings for asia are any different from other regions of the world. i think globally, you know, we need to do more to combat illegal transfers of money. and as well as anti-money
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laundering. i don't think it's specific to asia alone. >> anybody wants to add something? no. okay. i hope -- i mean, there is, of course, that international movement but i think if you look at the last five years, particularly with the oecd in the lead and also some governments there is a much more decisive move on that and i think it would be welcomed if various asian jurisdictions also joined in that movement. it's one of the typical international public goods that if the large part of the world doesn't cooperate then cannot really eradicate the disease so that's why i'm asking question. okay. let's go to the audience now and take a few questions at once. and then we'll -- yeah. there was one who immediately raised their arm in the back there. please do identify yourself
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before you ask the question. not work? >> i can ask in a loud vis. >> your voice is pretty good. >> from the "wall street journal." i wonder, one, we were talking about trying to look over the longer term trends, but we can't get to the long term if we don't get through the short term. and it seems to me that i think the imf who estimated that the over investment capacity of china something like 25% of gdp. if there are a -- cascading
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series of defaults in china that slows down near-term growth, does it not? and causes a massive spillover throughout the rest of the globe. how does china deal with that without causing a nosedive in growth? one. and two, how does beijing manage the damned if you do, damned if you don't on the rmb valuation? depreciating it is greater flexibility and sending signals growth may be worse than they're letting on. >> okay. we'll take -- yes. uh-huh. >> lou gagliano. markets react to reporting in numbers. let's assume that the quality of the numbers in china in particular aren't very accurate. how does that affect some of these projections in terms of the financing need that's
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required? and there's a big difference if the bogey and difference of reality and what the numbers are being reported as 10% opposed to being bigger than 10. i'd like the hear your thoughts on that. >> i do want to remind all of us, though, that this is on the topic of the book and not, you know, completely straying away into daily affairs and daily press reports so while i mean we can interpret that broadly, i would appreciate if we tried to ask questions that, you know, more directly relevant to the actual presentation. yes? first, then -- both of you in turn. please do identify yourself. >> kelsey ross, master student at american university. you touched on this a little bit talking about asean and i was wondering sort of the big ten of ways to improve the asian financial system. how do you expect countries to
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work together on these or do you expect these reforms and improvements individual country made? and if so, how will those then work in a broader financial system? >> linney logie with the simpson center and wondering if you could comment on the 20 to 30-year perspective for hong kong and singapore. >> maybe one more? yeah. >> peter wogert from the german institutes of global studies. you mentioned briefly issue of increasing debt. i wrote an article asia was obviously in percent of gdp the clear master. all countries, malaysia, china, you name them where substantially above 150, 200% in total private sector debt. obviously, we just said external
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debt seems to have decreased. is in the book statistic showing that the internal debt increased because the private sector debt did not look very good to me. >> all right. i think we can now take a turn. why don't you start? >> okay. just to address the question and financial sector reform, i think this is the reform agenda for individual countries. but there is significant scope for asian countries to work together and they have various forums in which supervisors and regulators get together and exchange information and analysis and one of the recommendations gnat imf make is that these supervisory what we call supervisory colleges should do that on a regular basis and exchange information that's pleeningful and they should do this regularly in normal times and not just crisis times when there's a problem and then you
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scramble. if you have a framework in place during normal times it is much easier to coordinate when there's pressure in the financial sector. >> you can pick which ones you're particularly would like to answer. >> let me answer the question about the asean. of course, the asean is comprised of ten countries and then usually tiered into two. asean 5 and then cmlv. but even within each of these groups, they're very, very different. in terms of the degree of, how shall i say, the financial deepening and others. so in the first instance, they think about their own financial markets and then to come up with the solutions which best fits their, you know, specific circumstances. but on top of it, especially among the asean 5, like the more advanced countries, we have this -- they are engaged in this
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initial difficult asean bond market initiative or abmi for short and then adb is helping them coming up with certain collaborative approaches to develop the bond market and also cross listing of the asean countries with the various stock exchanges. so these are -- these regional initiatives are proceeding with the asean -- we call it asean plus 3. china, japan, korea. each coordinating to form late this financial sector mostly technical assistance. so these are ongoing. and then the debt, we do notice
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that one of the thing we find encouraging is the development of the local currency denominated bond markets. it used to be so-called -- original sins or mismatches of which resulted in asian financial crisis is a mismatch of currency and duration. they tended to borrow short term in u.s. dollars and then flip it over and lend to a long-term, long dated assets. denominated in their own local currencies. so when the banks have to refinance their borrowing, they cannot call back the long-term assets, local currency so they were squeezed to come up with the u.s. dollar to repay it so that was a basic cause of the asian financial crisis so
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learning from it are since that time they have increased the instruments to borrow in local currency and then, well, it's not entirely the result of a bona fide effect. some of it is a result of the institution -- international investors pursuit of yield. they wanted to have a higher yield so -- and the u.s. dollar denominated rates are so low and investors worldwide scrambled for the asean country denominated debt which has normally higher rate an they thought that their currency should appreciate a little bit vis-a-vis the u.s. dollar. so in the context of like a 2010, somewhere around that -- just after the global financial crisis, there was an influx of money into the local currency
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denominated bond. that increased the size of the local bond and many corporations took advantage of cheap financing available in that market. that contributed to the increase in the corporate leverage. again, aggregate number is important but then in order for us to look at the financial stability issues, aggregate issue, number is not that pertinent as i explained earlier. so what percent of the firms have accumulated how much debt and therefore how much of the -- how large a portion of the corporate sector is vulnerable should interest rate go up by this much and should earning generally goes back down like much. so this is a kind of stress testing we will do and then we are, of course, we are cautious about this general trend of
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increase in the corporate sector debt and will be looking at it in the very -- quite carefully in each country's situation. >> anything on singapore and hong kong? anything else, eswar? >> well, yeah, i was mission chief for singapore but then they're very nicely run country. tightly run countries and then hong kong is not exactly a country but then hkma has a very strong -- i mean their capacity wise they're very strong in looking at the economy and noticing any changes. so i mean, 30 years is a long time to project but then judging from the quality of the people there, i have no -- i have no reason to doubt that they will be successful in the coming years. i may be too diplomatic.
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>> i have no doubt that he does care about the imf's views of chi ma but not mine and i'll take a bullet for my former imf colleagues. on the currency issue, i think what the bboc indicated it planned to do august 11th of last year to move toward a more flexible exchange rate is good for china. the initial step was not very well executed and at this stage i think it makes a lot more sense for china to use the flexibilities, more aggressively. the issue again comes back to managing expectations in a very turbulent environment because at this stage, with the government still intervening on and off in the markets, both on the onshore market and offshore market i think makes things potentially somewhat worse. when's a good exit strategy? i'm afraid there the answer is a complex one and goes back to what i talked about earlier and in the book.
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if you think about exchange rate policy or monetary policy in a vacuum, it does not work very well because you need things working well in the economy and concerns of the china's economy and what do you need to stabilize expectations? mix of macro policies, monetary, fiscal, preferably more fiscal policies and active steps taken to reform the real side of the economy. confidence building measures it is a difficult struggle. on the issue of debt -- again, there tends to be a lot of focus on gross debt in the chinese economy and the mckenzie numbers for instance. 300% of the gdp in china sound scary and one has to look behind the debt, look at what the financial system is that's intermediating that debt. what the maturity structure of the debt is, who's taken the
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debt and the activities it's financing and i recommend the book to you to get a better sense of what is behind the debt numbers so i think that the issue for many of the countries, again, having good, vibrant debt markets, bond markets in particular is potentially a very good thing for the financial systems in the economy. gives you a breadth i spoke about as a top ten list and commit three lists and the key characteristics one should think about. so in the context of many of these economies in asia, again, the level of exposure to external debt although there is concentrated exposure of corporates and certain sectors, overall it is not a cause for panic as yet. although it does constrain many corporations and macro economic policies in some of the countries and although again not to the extent before the asian financial crisis. and i think the issue here is
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about developing better regulatory frameworks to make sure whatever debt we see in the economy does not necessarily portend significant problems when conditions like interest rates or exchange rates change so i don't think it's a huge concern yet but in a country like china, the level of debt and the fact it's intermediated through a financial system that's not been great at intermediation and most of the debt is bank debt, that's a suggest of an economic price to pay. not in my view a crisis but certainly a price to be paid. >> thank you very much. okay. we have time for -- yes. you and -- the gentleman there in the back later. >> hi. my name's -- i'm a student out of american university. i have a question because mr. eswar talk about the chinese market and my question is regarding the macro mechanisms.
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you can only buy long and not buy short in the market and buy today only sell tomorrow and comparing to the western markets. they are free. you can sell to companies that not as efficient and not earning money and what happens in the beginning 2014 the slowdown in chinese economy bring down lot of manufacturings from the exporting economies. and these financial capital flow into the financial markets. after the slowdown in the economy. so even these companies who are not as efficient, not making money, their stock price still keep going up and that was the -- do you think the environment would be less riskier if the chinese government would make the market freer instead of being restricted? >> thank you. last question over there. yeah. >> okay. my name's demi tri. thank you very much. very interesting.
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i read your book recently. i thought it was a great book. thank you very much. if i remember correctly in the book you describe inefficient but stable e quibly ri yum with the $at the middle do you think this is something better? headed in the right direction in terms of this situation with the dollar's role in the global economy? thank you. >> thank you. maybe -- one more. that's the last -- okay. >> hello. i just want to ask how do you think the asia investment bank will influence the asia economic market or environment later. thank you. >> okay. maybe i can add one last thing also that you may want to comment on. one big debate in the financial supervision regulation financial stability board and all that is the banks are claiming that after the crisis the regulators
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kind of have a tendency to overdo it in terms of capital cushion, leverage, constraint and others claim not enough is done. maybe you can say one or two words in the asian context about this debate as well as anything else. why don't we start with you? >> to answer your question, i think the other questions were for my other panelists. i like to think of it as the story about goldilocks and the three bears. and i would say that the global regulatory reform agenda has it generally right. the porridge is not too hot, not too cold. you know, we're going to have lobby groups who will say, you know, it's going to increase the lending -- the borrowing cost of banks and then pass the costs on
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to consumers. we actually in the book did a study on this to see whether or not the impact of the global regulatory reform actually caused lending rates to increase in asia, in asian banks and i think this is chapter 11 in the book. and we actually saw minuscule effect. maybe 10 to 25 basis points but it wasn't something to write home about. so we think as the imf that the global reform agenda has made the global financial system safer and stronger. >> very good. good to hear. mr. sumi? >> i used to work for the japanese fsa and i have my personal opinions but i reframe from it. talking about the aaib, answering your question. as we have explained that infrastructure investment need
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is huge. simply huge. and then, infrastructure investment is very productive investment and then it has the potential of crowding in private sector investment for -- so developing countries usually lacks that funding mechanism for that needed infrastructure investment. so in that sense, any help to increase that infrastructure financing would be a nice thing. except that if you -- if one borrower -- i mean one lender lends to the existing borrower, in a way that sort of not commiserate with other lending, other lenders standards in terms of the credit worthiness or the,
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say, the integrity of the project, then the entire -- existing borrower may become at risk. right? so in a sense that if you make an investment decision, that has to be made in a transparent way that reflects the shareholder's governance structure which is, i mean, the shareholders of aaib, many of them are the same as the shareholders of the world bank and, you know, other regional development banks. so if -- we can pretty much see the collaboration. we're looking forward to the collaboration with aaib which is run in sort of a nicely -- with good governance and good sort
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of -- how shall i say? selection of transparency, selection of the protransparency of the project and so on. we want to address the vast, vast need to upgrade and solve the infrastructure bottleneck which is constraining that growth on the supply side at the moment. >> thank you. eswar? >> let me preface the concluding remarks and the book. you care about asia's finance and clearly an interesting and dynamic region and very good book for the policy wonks among you but as mr. sumi pointed out, there's a cliff notes at the beginning of the chapters of the gist of the book trying to convey and i think ultimately getting finance right is important for any country but especially in asia given the impact that china and the region is having on the world.
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in a repons to a couple of the questions that came up, i think the issue is ultimately there's not much of a choice now that the economies have started on the road to more open capital accounts and caught in the middle of the road with some degree of market liberalization and the expectation that the government will intervene when things go bad, if you don't have the right supporting framework, you have a lot of volatility and none of the benefits of market libberization and i think the book lays out the part of the objective and defining the objective ought to be in terms of different aspects of financial market development and getting there in a very good way. i congratulate the colleagues for an excellent and timely become. >> very good. and we thank you for being here, for sharing the thoughts with us. and for coming to brookings. thanks a lot. [ applause ]
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he said to him, you know, we have college-age kids covered here in alabama but it's really the kids in the elementary schools that are suffering. they're just not -- the african-american kids are getting poor education, horrible build,. just not -- separate and not equal. >> sunday night, aviva kempner talks about "rosenwald" and the partnership of the african-american communities in the south to build schools and bring elementary education to children in rural america. so


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