Asia’s Financial System in Transition |

Asia’s Financial System in Transition


Andrew Sheng - Lecture

Asia will soon be the largest economy in the world. But how will its financial system cope in a global landscape fraught with uncertainty and risk? Economist Andrew Sheng, former deputy chief executive of the Hong Kong Monetary Authority, provided some insights into this question at a talk on 26 January at the Lee Kuan Yew School of Public Policy (LKYSPP), as part of the Hong Siew Ching Speaker & Seminar Series.

 Dealing with an uncertain world

 The first thing to understand is that the world now is very different from the one in the last century, he noted. It is multi-polar, which implies a greater potential for conflict, and countries are facing the stresses of climate change and aging populations. Financially, there has been unprecedented monetary expansion in the last seven years, and companies and governments are being buffeted regularly by disruptive technologies, including in the financial industry.

 All this means that today’s world needs to be viewed through a new frame of reference said Mr Sheng. “We are currently looking at the 21st century, in a world of great change and confusion, with 20th century glasses. And that’s very dangerous,” he said.

 Moving away from debt-fuelled growth

 One risk in particular is how much economies have come to rely on debt for growth, noted Mr Sheng. Recalling an epiphany he had while travelling in Dunhuang, a city along the ancient Silk Road, he said the caravans on that trade route only succeeded because they had been financed by equity rather than debt. No one would have been willing to loan the money as the risk of losing everything – such as to robbers – was too great.

 Yet, instead of following that same principle and banking on equity, the world today is wading deeper and deeper into debt. According to consulting firm McKinsey, global debt has increased by US$57 trillion since 2007, outpacing global economic growth. This trend needs to be reversed before it spirals out of control.

 Silver linings for Asia and China

 In Mr Sheng’s view, compared to the rest of the world, Asia is better able to shift the balance of financing from debt to equity as the region is a net lender, not a net borrower. Though debt levels are high in countries such as China, it is just the “right hand owing the left hand”, he explained. When both a bank and the enterprise it finances are state-owned, a debt contract can be turned into an equity contract overnight. “[We] need to think beyond the conventional way of thinking through this issue,” said Mr Sheng.

 During the question-and-answer session, LKYSPP Adjunct Professor Yeoh Lam Keong, who chaired the talk, asked if Asia’s financial system might descend into a crisis before the brave new world painted by Mr Sheng materialised.

 In response, Mr Sheng said he does not think the situation in China is as gloomy as many people make it out to be. Having conducted a study of the country’s national balance sheet, he sees many options for dealing with the country’s problems – especially since much of its debt is merely a matter of the left hand dealing with the right hand.

 Fielding another question from the audience about whether the shadow market in China could cause problems. Mr Sheng replied that although there has been some fraud in the shadow sector, it serves needs that are not being met by the regulated market. It also provides a space for financial innovation. He also said he remains optimistic about the bigger picture for China because its growth has not been based on borrowings from other nations, which was what caused problems for regional countries during the Asian Financial Crisis.

Mr Andrew Sheng, distinguished fellow of the Asia Global Institute at the University of Hong Kong, has had extensive experience as a central banker and financial regulator. He has served as chairman of the Securities and Futures Commission of Hong Kong, and was a central banker with the Hong Kong Monetary Authority as well as Bank Negara Malaysia. He is the author of the 2009 book, From Asian to Global Financial Crisis: An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s. Mr Sheng is currently chief adviser to the China Banking Regulatory Commission, a board member of Khazanah Nasional Berhad, a member of the international advisory council of the China Investment Corporation, the China Development Bank, the China Securities Regulatory Commission and the Securities and Exchange Board of India, and an advisor to the United Nations Environment Program Inquiry into the Design of a Sustainable Financial System.

Written by the External Affairs department

Thursday, 04 February 2016

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