China: Julia Leung, ‘The Tides of Capital’Posted: January 26, 2015
Edited from an interview with William Kazer
Julia Leung has spent two decades engaged in financial policy work for the Hong Kong government. During her time as an official, she’s seen the city’s economy whiplashed by the 1997-1998 Asian financial crisis and again by the global crisis a decade later. She has also witnessed the territory’s increasing economic links to mainland China.
In her new book The Tides of Capital, Ms. Leung examines the origins and response to financial crises of the 1990s and 2008 that shook economies across Asia and the world. The former Hong Kong Monetary Authority official and ex-undersecretary for financial services and the treasury (who also had a decade-long stint with the Asian Wall Street Journal) contends that emerging economies need a greater voice in global financial governance. China Real Time caught up with the reporter-turned-policy maker to talk about the financial challenges facing emerging nations, as well as China’s own financial and economic reforms.
In your book you conclude that the IMF and the U.S. offered up the wrong prescriptions in the Asian crisis of 1997-1998. Where do you see policy leadership headed in the future?
Twenty years ago, the world was divided between the core and the outlying periphery….Financial crises only happened in the periphery, and the core dished out advice. In 2007, financial crisis erupted at the core and rippled to the periphery. Between 2008 and 2013, the size of China ’s economy doubled in dollar terms. The U.S. grew 14% during the same period, while Europe including the U.K. still falls short of the peak reached before the crisis. Combined GDP of emerging markets now make up more than 50% of global GDP, compared to one-third in 1990.
There will have to be considerable give-and-take between the country that is still the world’s leading economy and the other important players, especially China, that are assuming a progressively more important role. In view of the economic stagnation and political infighting besetting Europe, that continent will not be playing a full part in developing and policing a series of better standards for world economic and financial governance. The world will rely ever more on a U.S.-Asian tandem for policy leadership.
You say the U.S. Congress is standing in the way of reforming International Monetary Fund quotas that would give more say to emerging markets. What will happen if there’s no reform?
The IMF is ideally positioned to provide policy leadership, particularly at times of crisis, but its effectiveness is undermined by its shareholding and governance structure, which has not kept pace with the shift in economic power to emerging markets. It is not surprising that developing countries have shown considerable frustration and exasperation with this imbalance, leading to new regional financing facilities, such as the Asian Infrastructure Bank and the New Development Bank.
When the core of the old world order continues to write rules that don’t take developing countries’ interests into account, the “peripheral” nations will use their own vast resources to start a new core…and write their own rules.
You say Asia needs to speak with a more coordinated voice. How much progress do you see here and what steps are still needed?
Even if Asia has a coordinated voice, it’s hard for it to be heard in the councils of the world power when the governance of these councils is slow to reflect shifting power.
Good progress has been made on the crisis management front. Asian countries have been driven by the experience of the last two crises to work together. The Chiangmai Initiative, which was set up after the 1997-1998 Asian financial crisis as an alternative to IMF financing, started as a series of bilateral swap arrangements among the Asean-5 countries – Indonesia, Malaysia, the Philippines, Singapore and Thailand – and the “Plus Three’ countries- Japan, South Korea and China. The political will to multilateralize the bilateral swaps and expand the Chiangmai Initiative was greatly enhanced after the outbreak of the 2008 turbulence.
You say that huge forex reserves are not a defense against big capital swings. Should China – with nearly $4 trillion in reserves — be worried?
Countries in Asia have built up their foreign reserves as a means of self-insurance. It is a smart and necessary move. But accumulating foreign reserves is like taking steroids – it would toughen your body’s defense system but with serious side-effects….(read more)
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