This page intentionally left blank FROM ASIAN TO GLOBAL FINANCIAL CRISIS is is a unique insider account of the new world of unfettered nance. e author, an Asian regulator, examines how old mindsets, market fundamental- ism, loose monetary policy, carry trade, lax supervision, greed, cronyism, and nancial engineering caused both the Asian crisis of the late 1990s and the cur- rent global crisis of 2007–2009. is book shows how the Japanese zero inter- est rate policy to ght deation helped create the carry trade that generated bubbles in Asia whose eects brought Asian economies down. e study’s main purpose is to demonstrate that global nance is so interlinked and interactive that our current tools and institutional structure to deal with critical episodes are completely outdated. e book explains how current nancial policies and regulation failed to deal with a global bubble and makes recommendations on what must change. Andrew Sheng is currently the Chief Adviser to the China Banking Regulatory Commission and a Board Member of the Qatar Financial Centre Regulatory Authority, Khazanah Nasional Berhad and Sime Darby Berhad, Malaysia. He is also Adjunct Professor at the Graduate School of Economics and Management, Tsinghua University, Beijing, and at the Faculty of Economics and Administration at the University of Malaya, Kuala Lumpur. Mr Sheng was Chairman of the Securities and Futures Commission of Hong Kong from 1998 to 2005. A former central banker with Bank Negara Malaysia and Hong Kong Monetary Authority, between 2003 and 2005 he was Chairman of the Technical Committee of IOSCO, the International Organization of Securities Commissions, the standard setter for securities regulation. He is a colum- nist for Caijing Magazine, the largest and most widely read nance journal in China. He edited Bank Restructuring: Lessons from the 1980s (1996) and holds an honorary doctorate from the University of Bristol. From Asian to Global Financial Crisis An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s Andrew Sheng CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK First published in print format ISBN-13 978-0-521-11864-4 ISBN-13 978-0-521-13415-6 © Andrew Sheng 2009 2009 Information on this title: www.cambrid g e.or g /9780521118644 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Published in the United States of America by Cambridge University Press, New York www.cambridge.org Pa p erback Hardback is book is dedicated to my mother, Chuen Mo Jhen, and my wife, Lim Suan Poh, whose innite patience, encouragement and support made this work possible. vii Contents List of Figures page ix List of Tables x Acknowledgements xiii Introduction 1 1 ings Fall Apart 21 2 Japan and the Asian Crisis 44 3 e Beam in Our Eyes 71 4 Banking: e Weakest Link 86 5 Washington Consensus and the IMF 109 6 ailand: e Karma of Globalization 126 7 South Korea: Strong Body, Weak Heart 159 8 Malaysia: e Country at Went Its Own Way 187 9 Indonesia: From Economic to Political Crisis 218 10 Hong Kong: Unusual Times Need Unusual Action 253 11 China: Rise of the Dragon 278 12 From Crisis to Integration 303 13 e New World of Financial Engineering 325 14 What’s Wrong with Financial Regulation? 350 15 e Global Financial Meltdown 375 viii Contents 16 A Crisis of Governance 396 From Asian to Global Crisis: Chronology of Notable Events 411 Abbreviations and Acronyms 429 Bibliography 433 Index 465 [...]... (2008) 26 18 From Asian to Global Financial Crisis How is all this linked to the Asian and ongoing global credit crisis? The Asian crisis is fascinating because it was a test of Asian governance as the region emerged into the borderless world of large capital flows, complex derivatives and changing world order The crisis revealed the total nakedness of policymakers and financial regulators, trapped... marvel to wonder at From 2001 to 2007 global GDP increased by 75.8 percent from US$31 trillion to US$54.5 trillion.9 Over the same period, global bonds, equities and bank assets grew by 53.1 percent from US$150 trillion to US$229.7 trillion In contrast, the notional amount of outstanding contracts of global over-the-counter (OTC) derivatives market rose 536.5 percent from US$111.1 trillion to US$596... the Asian crisis by senior Asian officials who were in place during the crisis Perhaps we had neither the time nor the inclination to write about our perspectives and experiences Since we had no good theories to explain the Asian Miracle, we had even less incentive to explain the Asian bust But for posterity’s sake, the Asian side of the story deserves to be told Introduction 3 At the outset I need to. .. was set for the most serious financial crisis since the Great Depression It is illuminating to note that Hong Kong suffered a similar bubble from 1994 to 1997, but the banking system survived the financial crisis because the banks and the Hong Kong Monetary Authority together lowered the loan -to- value ratio to cushion the banks from the property bubble, despite huge protests from the property developers... attempt at unravelling the Rashomon of financial crises When I first saw Japanese director Akira Kurosawa’s film as a 3 4 1 2 See Fukuyama (1998) Data from www.bea.gov Data from www.ustreas.gov/tic/mfh.txt Data from www.ustreas.gov/tic/shl2007r.pdf 4 From Asian to Global Financial Crisis student in the 1960s, I realized that there are many sides to truth The story is about a nobleman and his wife... Loss in Stock Market Capitalization from Peak to Trough during the Asian Financial Crisis 12.2 Japan: Loss in Stock Market Capitalization from 1998 Trough to 2003 Trough 12.3 Selected Asian Economies: Inflation (Annual % Change) 12.4 Crises Economies: Human Development Index, 1997–1999 13.1 Global Financial Assets, 2007 (US$ Trillion unless Noted Otherwise) 14.1 The SPISSPER Process Cycle of Financial. .. (RM Billion) 8.11 Selected Asian Economies: Stock Market Collapse 9.1 Indonesia: Selected Real Economy Indicators 9.2 Indonesia: Selected Currency and Current Account Indicators 9.3 Indonesia: Stock Market Indicators 9.4 Indonesia: Financial Structure (% of GDP) 9.5 Indonesia: Selected Financial Sector Indicators 9.6 Selected Asian Economies: Average Corporate Leverage (% of Total Debt over Equity) 9.7... decided to immerse myself in the theory and practice of regulatory work in China, working as Chief Adviser to the China Banking Regulatory Commission Here I began to appreciate the complexities of institutional change in a continental economy that was both old and dynamic In order to communicate better with my students at the Tsinghua Quoted in Plender (2008), 12 25 16 From Asian to Global Financial Crisis. .. might be able Wolf (2007a), 15 For an overview of Complexity Economics, see Beinhocker (2007) 6 7 8 From Asian to Global Financial Crisis to examine only at ground level Hence one must also have a grasp of the complex issues at the micro-institutional level of what led to the crisis This book starts from the premise that markets are an essential part of social institutions that have a symbiotic relationship... Modelling of Financial Markets: Agent-Based Behaviour 15.1 Global Real Money and Credit Growth, 1984–2008 ix page 17 42 50 52 53 54 60 69 95 100 243 290 333 337 344 377 Tables 2.1 Selected Asian Economies: Net International Investment Positions 4.1 Selected Asian Economies: Financial Structure (% of GDP) 4.2 Selected Asian Economies: Pre -crisis Conditions of Banking Sector, 1997 4.3 Selected Asian Economies: . doctorate from the University of Bristol. From Asian to Global Financial Crisis An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s Andrew Sheng CAMBRIDGE UNIVERSITY PRESS Cambridge,. blank FROM ASIAN TO GLOBAL FINANCIAL CRISIS is is a unique insider account of the new world of unfettered nance. e author, an Asian regulator, examines how old mindsets, market fundamental- ism,. Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK First published in print format ISBN-13 97 8-0 -5 2 1-1 186 4-4 ISBN-13 97 8-0 -5 2 1-1 341 5-6 ©