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WASHINGTON: The American financial crisis is expected to delay
capital market reforms in China and other developing Asian economies
stunned by the colossal damage unleashed by complex financial
contracts on the United States, experts say.
Flush with cash reserves, many developing Asian
nations have been prodded by Western financial institutions to
deepen their capital markets by introducing sophisticated financial
derivatives to hedge against various risks.
But as derivatives tied to housing
mortgages-backed securities were blamed for the American turmoil
whose losses could reach $1 trillion, Asian economies would tread
more cautiously in adopting complex financial trading contracts, the
experts said.
“I think that is going to be the takeaway by
the bank regulator in China, for example,” Asian expert Nicholas
Lardy of the Washington-based Peterson Institute for International
Economics told Agence France-Presse.
“I think they are going to say to themselves,
‘We were right to resist the opening up of our financial system to
Western financial institutions that wanted to add in supposedly more
sophisticated products into our market,’” he said.
China has not introduced any of the
risk-carrying exotic derivative products, such as the unregulated
credit default swap contracts, which are at the center of the
current American financial chaos.
These private contracts allow companies to trade
bets on whether a borrower will default.
A top new player in the swaps game was troubled
American insurance giant American International Group, bailed out
last week by the central bank following a similar rescue of two debt
ridden mortgage giants Freddie Mac and Fannie Mae.
Top investment house Lehman Brothers however
filed for bankruptcy in the biggest corporate debt default in
history, sending global markets reeling.
“The sudden downfall of several prominent
global institutions has authorities concerned about ripple effects
and is prompting a reassessment of the pace of China’s financial
sector reforms,” Jing Ulrich, chairman of China equities at J.P.
Morgan, wrote in a report last week, according to the Washington
Post. The reforms were meant to give market forces more sway.
Asian economies were alerted to the risks of
derivative trading way back in 1995 when a British trader’s wrong
bets in Japanese stock futures in Singapore led to the high-profile
collapse of British bank Barings.
Two years later, the region plunged into a
severe financial crisis resulting from a currency meltdown blamed by
some on hedge funds.
The US crisis has exposed systemic missteps by
banking overseers, securities regulators, the US Congress and
corporate executives—all of whom underestimated the risks of
leveraging and now are paying the price, the Washington Post quoted
securities officials as saying.
“What is unique is that during that time,
there was a sense that a well regulated financial system, like the
US, would never experience a kind of trouble that Asia experienced
in the 1990s and unfortunately that has proven to be the case,”
Brad Setser, a former US Treasury official, told Agence France-Presse.
“Maybe the US system wasn’t as well
regulated as many thought and certainly it has taken on an enormous
amount of risk and sees enough in ways that have uncomfortable
parallels to the Asian crisis,” said Setser, now with the Council
on Foreign Relations, a US think-tank.
The Asian crisis roiled banks, which took
enormous risks by financing high level of investments often using
foreign currency denominated loans. It forced governments to take
over the institutions by injecting public money to keep the banking
system from completely collapsing.
Rather than venturing into complicated financial
products with hidden risks, Asian nations should give priority to
adopting key financial reforms vital to fueling their rapidly
growing economies, experts said.
In China, for example, financial reforms such as
interest rate liberalization, a more market determined exchange rate
and a more developed “plain vanilla” domestic bond market are
critical, Lardy said.
“I think the main lesson for everybody is
leverage is risky,” he said. “People had forgotten that,
especially with the low cost of money in the last few years.”
-- AFP
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