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Lessons for China and Asia

By Andrew Sheng (chinadaily.com.cn)
Updated: 2008-11-17 10:23

Special Coverage Exclusive: An Asian view of the global financial crisis

Contents:  Preface  A historical inflexion point  The macro question  The micro origins  Lessons for China and Asia  Back to basics  One world, three paths  Status quo  The rise of regional markets  Romance of the three regions  Conclusion

The speed at which the entire financial system in the US and Europe began to unwind showed how networked the financial systems have become as a result of two decades of deregulation.

There is every likelihood that global deleveraging will continue until the excesses are worked out. But the real sector adjustment has only just begun. At the heart of the adjustment is the US savings deficit, manifested in its current account deficit.

If it were to adjust back to 3 percent of GDP, it would cut back exports to US to the order of roughly $320 billion annually or roughly 13.5 percent fall in imports. This will have its negative multiplier effects on Asia.

Whilst the amount of subprime related paper held by Asians is limited, the amount of financial paper denominated in US dollars and Euro by official reserves, banks and sovereign wealth funds remain substantial.

Hence, Asians will not only be hurt by the global financial crisis through the trade channel, as well as through the wealth loss from either currency devaluation or fall in asset prices.

In addition, those countries such as Korea and others that relied heavily on global inter-bank borrowing will be subject to tighter liquidity and higher borrowing costs.

There are many lessons to be learnt, but I feel six deserve highlighting because of their significance.

To be continued...

The author is chief advisor at the China Banking Regulatory Commission and former chairman of the Hong Kong Securities and Futures Commission.