Will the Asian Financial Crisis break out again?

UPDATED: 17:07, June 14, 2007

Ten years ago, starting in Thailand, the Asian Financial Crisis swept throughout the entire region of Southeast Asia, and continued on to affect the whole world. Ten years have passed, so how can the Asian financial market shrug off its inner mistakes and continue on a healthy path?

People's Daily held a forum with guests, including Jiang Ruiping, Professor of International Economics at the China Foreign Affairs University; Ding Zhijie, Professor of the Financial School of the University of International Business and Economics; Xia Bin, Director of the Financial Institute of Development and Research Center of the State Council; and Fan Xinyu, research fellow of the World Economics and Politics Institute of the Chinese Academy of Social Sciences.

Q: The Asian Financial Crisis broke out in 1997, and American economists said that the crisis would take place every ten years. Looking back at the past ten years, are there any lessons that we can draw from past experience?

Ding Zhijie: It's a miracle that Asia could come out of the financial crisis. Looking back, one will notice two things. First, people must objectively recognize the role that international capital played in the crisis. Today, developing countries have become a place for unstable, idle international funds. Once the economic situation and market confidence change, the floating direction of the fund will change and crisis will be inevitable. Second, when the economy is experiencing good momentum, people must avoid becoming over-confident, and face the existing program head-on, so as to be prepared for any accident or emergency.

Jiang Ruiping: There are many lessons. First, Asian countries must improve their domestic financial markets, in particular, speed up the development of the security market, and avoid making the financial market overly dependent on the banking system. Second, one must strengthen financial supervision, and prevent and restrict the influx of idle international funds. Third, do not rely heavily on international financial organizations.

Some people think that one of the main reasons for the Southeast Asian financial crisis was that assistance from the International Monetary Fund came too late, and when it did come, the IMF imposed harsh reform conditions as well.

Xia Bin: I think the important thing is to recognize the difference between financially weak and strong countries. If everyone plays by the same rules, weak countries will fail. So the weak countries must remain clear-headed. To be more specific, although China's GDP ranks the 4th in the world, China is still a weak country. Since we are weak, we must have our own accepted ideas; we cannot simply go along with the Washington consensus.

Q: Some experts hold that in 2007, the international financial price index is developing in leaps and bounds; there is a hidden danger of a financial crisis breaking out. Do you think that there are some economic factors that will possibly induce a future crisis in the Asian financial market?

Ding Zhijie: Currently the Asian economy is flourishing, its dependence on foreign investment has been alleviated, and it is experiencing a new wave of capital flowing in after the crisis. According to the American Financial Research Institute, over the past two years, there have been $200 billion dollars flowing into Asia. But people cannot ignore that the direction of this flow of capital can reverse itself. Capital has made Asia and the world achieve closer ties than that of ten years ago. The financial market is more open, and once the crisis begins, it will spread quickly.

Fan Xinyu: The mode of Asian economic growth, which is dominated by exports, has not changed. As soon as American and other outside markets have any problems, it will still be very damaging to Asia. The abnormal development of the credit market in East Asia, and the immaturity of the capital market, have made many enterprises overly-dependent on indirect commercial bank co-financing; while banks are overly-dependent on government assurance. This leads to an over-expansion of bank credit and largely bad accounts. These problems should arouse the attention of various countries in Asia.

Jiang Ruiping: Currently, the scale of international idle funds is even bigger than before, and lacks effective supervision. The only change that occurred was ten years ago: due to international idle funds, currency was depreciating in value, and now East Asian currency is appreciating in value. Security market development is still slow and the financial market is still overly-dependent on the banking system. Due to the sharp increase of foreign exchange reserves, the East Asian market has more floating surplus funds than American and European markets. Overall, the global economic imbalance makes East Asia become a weak link in the international economic network.

Q: Analysis shows that western countries will enter a recession period in the following years, which will allow large amounts of hot money to leave the region. Could this cause a new round of crises and have a great impact on the newly emerged Asian capital market?

Fan Xinyu: We have to look at the issue from two perspectives: on the one hand, the possibility of risk is increasing compared to ten years ago, because Asia is more open than ever before. This process of globalization is full of risks. On the other hand, the possibility of a new round of crises is decreasing because Asian countries have taken the necessary measures to improve their financial systems; debts from enterprises have been readjusted, and excessive investment has been cleared out as well. The capability of preventing financial crisis has increased.

Xia Bin: As a dollar issuing country with the huge multiple deficits, if the US still wants to maintain an economic growth rate of 3%, it is truly a kind of threat to the economic stability of other countries. 'Hot money' is a byproduct of American government policy. Whether or not Asian countries will be affected is determined by these countries' policies and systems. Taking China as an example, in order to avoid such an impact, China must maintain a guard on its financial door, and open up to the outside world according to its current domestic situation.

Ding Zhijie: Dependence on exports and foreign investment has shown Asia's weakness in resisting the impact. Therefore, American recession and policy readjustment will become a sword dangling over the head of Asian economies.

The US dollar policy change will put Asia in a dilemma. Both depreciating and appreciating values will cause a change in the direction of monetary flow and instability in the financial market. If the US takes on a strong dollar policy, and after a period of unrest in the market; the capital will flow back into the US, worsening the economic situation for countries like China.

Q: The stability of the financial market is decided by the government and capital strength. In order to avoid another round of financial crises in Asia, what kind of measures do you think China and other Asian countries should take?

Xia Bin: The stability of a country's financial market is determined by the government and capital strength at a certain stage and to a certain extent. For Asian countries, the more important decision is to make appropriate policies which are adaptable within their own situations. In order to stabilize the regional market, Asian countries should strengthen cooperation. They should cooperate not only with Asian countries, but also with African and European countries to maintain stability within trade.

Fan Xinyu: Countries including China, Japan and South Korea want to deepen and speed up economic structural reform, implement proper macro-economic policies, and promote and expand domestic demands in order to improve their strength in avoiding financial risks. They should strengthen cooperation in financial sectors such as establishing the Northeast Asian International Development Bank, a payment liquidation system, and a currency exchange mechanism.

Jiang Ruiping: East Asian economic entities should improve their own financial systems; especially by strengthening risk supervision systems, so that they will not rely too heavily on the banking system. They should further promote financial cooperation on the regional level, and establish regional financial risk supervision systems. Progress has been made in establishing a currency exchange mechanism with an overall scale of $80 billion dollars. The recently concluded ASEAN 10+3 Finance Minister's meeting in Tokyo has substantially promoted a multilateral process. In addition, they should jointly promote the development of the Asian Security Market.

By People's Daily Online

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