Friday, December 13, 2013, 06:51
Asia Weekly: In search of Asian financial model
By JENNIFER LO in Hong Kong

Forum grapples with issues such as region’s need to diversify from banking as a credit source

Asia Weekly: In search of Asian financial model
Victor Fung, chairman of the Fung Group and Fung Global Institute, speaking at the Asia-Global Dialogue held in Hong Kong on Dec 5 themed Towards a New Global Economy: What Next for Jobs, Opportunity and Growth? The rise of the yuan as a global currency was one of the topics debated at the event. (Provided to China Daily Asia Weekly)
In a region as diverse as Asia, there can be no single perspective, as Victor Fung, from the Fung Global Institute has pointed out. For this reason, pushing forward financial reforms and seeking a financial model unique to Asia remains a daunting task.

Fung, who is chairman of global sourcing and logistics firm the Fung Group as well as founding chairman of the institute, a Hong Kong-based economic think tank, was speaking at the Asia-Global Dialogue, organized by the Fung Global Institute.

During the event, he used the US Federal Reserve’s plan to end its quantitative easing program as one example of a big question for Asia.

“How long can a global financial architecture that is now so dependent on massive quantitative easing, long debt and short equity prevail?” Fung asked. “How would an Asian financial architecture be different, and where should Asia look for inspiration and role models?”

The conference in early December was held for the second time in Hong Kong with the theme, Towards a New Global Economy: What Next for Jobs, Opportunity and Growth?

It attracted some 400 business leaders, policymakers and scholars from around the world to discuss trends that are transforming the global economy. These included the yuan’s effect on intra-regional trade, evolving roles of financial regulators, and mapping of Asia’s future financial structures to better serve the real economy of manufacturing, trade and job-creating activities.

Panelists at the event agreed there was no easy answer to Fung’s question. Stuart Gulliver, group chief executive of HSBC, said a single regulatory framework across the globe will not suit Asian banks, which already have conservative balance sheets and funding positions.

Caution is the new norm in the aftermath of the 2008 global financial crisis, which resulted in tightening of banking rules. Currently, Asian banks have to comply with the Basel II banking regulations on capital requirements in order to meet international standards.

Pending post-crisis regulations in Basel III and the lack of clarity about capital requirements means banks have to hold more capital than they lend out to stimulate credit creation.

“Meeting that requirement will make it difficult for local banks to deliver the kind of support (needed by) the real economy,” Gulliver said, stressing that the capital requirement for trade and small and medium enterprises (SMEs) lending would have an adverse impact on Asia’s economic growth.

Heavy reliance on banking as a source of finance is an issue, noted Andy Haldane, executive director for financial stability with the Bank of England.

In Asia, financing from banking accounts for about 60 to 80 percent, a level similar to that in Europe. That figure is just 20 to 30 percent in the United States, which has a more robust non-banking sector. Not surprisingly, Asia accounts for little more than 10 percent of non-bank financial institutions worldwide, well short of its global GDP share.

The different recovery stories of the eurozone and the US after the global financial crisis are great lessons, according to Haldane.

“One reason why the US is stronger is because of a second financing cylinder from non-banks and capital markets,” he said. “When one cylinder is down, you still have other channels to stimulate growth.”

So what would it take to develop vibrant non-bank channels in Asia?

“It will mean much greater cross-border cooperation, coordination between securities regulators. It will mean thinking about harmonizing listing rules… and homogenizing legal structures,” Haldane said. “That is a long list, very ambitious list. It is something Europe has been working on over the last 20 years.”

On the hot-button issue of a more internationalized yuan, experts unanimously agreed that intra-Asian use of the yuan as a trading currency was growing.

HSBC’s Gulliver estimated that the yuan would be the second or third most-used (not just traded) currency in five years’ time, saying that the central government would ensure it appreciated continuously within a “safety net”.

Statistics show the yuan is second only to the greenback in terms of value and use in settlement. Some analysts say the yuan will share a slice of 30 percent of intra-regional trade finance by 2015.

Ha Jiming, vice-chairman and chief investment strategist with the China division of Goldman Sachs, also noted the rising importance of the yuan as a global currency. While predicting that the yuan would appreciate by up to 2 percent next year, he said some roadblocks needed to be cleared to make way for its internationalization.

Ha said two conditions had to be met before a currency could truly become global: First, a large economy; second, a strong economy. China has met the former but not the latter. “Size is not everything,” Ha said. “There are still certain fault lines in the Chinese economy.”

The significant imbalance in China’s investment-led and weak consumption economic structure remains an obstacle. Investment still accounts for up to 50 percent of GDP — a figure even higher than peak levels of 40 percent in Japan in the 1970s and South Korea in the 1990s.

“Fifty percent is too high for China,” Ha added. “If this is not corrected, downward adjustments could be quite painful.”

Others agree that the yuan is a long way off becoming a viable global currency.

Despite China being part of the global supply chain, many SMEs in Asia lack understanding of what the yuan means in trade and, moreover, yuan transaction might be restricted by local regulation, noted Simon Constantinides, head of global trade and finance receivables for Asia Pacific at HSBC.

Also part of the concern is that there is currently limited means for investors to effectively utilize their yuan holdings.

A truly global currency offers economic value for all stakeholders: Investors, importers and exporters. Building one leg of the stool — yuan as a vehicle currency for intra-regional trade — is far from sufficient.

“For yuan to become an international currency for investors and exporters … it has to be more convenient, cheaper, safer, faster and better than other currencies,” said Patrick de Courcy, deputy chief executive for the Asia-Pacific region with SWIFT, the Society for Worldwide Interbank Financial Telecommunication, a global transaction services organization.

Meanwhile, SWIFT data shows the yuan overtook the euro in October to become the second most-used currency in trade finance, with a share of 8.7 percent versus 6.6 percent for the euro. China, Hong Kong, Singapore, Germany and Australia were the top five users of the yuan in trade finance.

Stanley Fischer, former first deputy managing director of the International Monetary Fund, cautioned against a rush to choose the yuan as a reserve currency without first ensuring a flexible and robust financial system in China.

“But the yuan will no doubt be used in a lot of transactions,” said Fischer, also former governor of Bank of Israel and former vice-chairman of Citigroup. He predicted that the ratio of dollar transaction would be significantly lowered to 50 percent, from today’s 65 percent, when the yuan becomes fully convertible.



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