Author: Timo Henckel

The Australian bank guarantee (officially the ‘wholesale lending guarantee’)—effective since November 2008 to prevent local financial markets from following the rest of the world into a tailspin—is being withdrawn in April. In his announcement of the withdrawal earlier this year, Treasurer Wayne Swan argued that the need for further government guarantees had been overcome as Australian banks had successfully weathered the storm sweeping through the global credit markets.

The guarantee underwrote the large funds (well in excess of $100 billion) which Australian banks have routinely received from overseas capital and money markets and which enabled them to have loan/deposit ratios greater than 100 percent. Read the rest of this entry »

Author: GE Anderson, UCLA

Just when you think you have it all figured out. The Bank of China, one of China’s Big Four state-owned banks, has been busy funding auto companies this week.

The Bank announced this week that it has approved a 20 billion yuan ($2.9 billion) line of credit for Beijing Auto Industry Holding Corp (BAIC). Some are speculating that this money may be used by BAIC in its continued pursuit of an overseas purchase, most likely Saab, or at least some of its assets.

BAIC is owned by the local Beijing government, so the fact that Bank of China is providing funds should not come as a big surprise. Bank of China and BAIC are both state-owned.

But BAIC is not the only Chinese auto company to get funding from Bank of China this week.

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Guest Author: Milan Zavadjil, IMF Indonesia

By now it is well known that Indonesia is weathering the global financial crisis (GFC) better than most countries. This is usually explained by lower dependence on exports, as well as the stimulus provided through fiscal and monetary policies.

Nonetheless, there is another reason behind Indonesia’s strong performance. Cautious policies by Indonesia’s government, banks, corporations and households over the past decade have resulted in low debt levels and limited refinancing needs. This served the country especially well in late 2008 and early 2009, when liquidity tightened around the world. Read the rest of this entry »

Author: Suman Bery, NCAER

The concept of Asia has ever been fluid and elusive, for outsiders as much as within the region. The Romans invented the name to refer to the lands beyond the Mediterranean explored by Alexander. Asia Minor, Rome’s ‘near abroad’, is current day Anatolia in Turkey.

In the medieval era, it would have been more appropriate to talk in terms of Muslim, Chinese and Indian spheres of influence rather than a common Asian consciousness. Read the rest of this entry »

Guest Author: David Gruen, Australian Treasury

Reading The Great Crash of 2008 by Ross Garnaut with David Llewellyn-Smith encourages reflection on all the outrageous things that went on in the world’s major financial markets in the lead up to the Great Crash. You cannot read the early chapters of the book without a rising sense of anger at the self-serving and ultimately destructive behaviour on show. More importantly, the book underlines the changes needed to reduce the chances of the events of 2008 being repeated.

But my role here today is to discuss instead the book’s perspectives on macroeconomic management. I will comment briefly on three aspects of that topic: Australian exceptionalism; the consenting adult’s view of the current account; and asset price bubbles. Read the rest of this entry »

Author: Andrew Sheng, China Banking Regulatory Commission and Qatar Financial Centre Regulatory Authority

The Global Financial Crisis (GFC) has shattered conventional wisdom about global governance.

Governor of the Bank of England Meryvn King’s dictum that global banking is global in life, but national in death, characterizes complex financial institutions that are larger than sovereign nations, are ineffectively regulated at national levels, and lack global laws. Their demise means that national governments have to pay for the global banks’ mistakes, but ultimately the whole world pays in the form of higher inflation, taxation and lost jobs. Read the rest of this entry »

Author: Gary Hawke

Most economic historians attribute the severity of the Great Depression of the 1930s more to mistaken policy responses than to the initiating behaviour of market participants.

An even stronger consensus among economic historians is that absence of international co-operation exacerbated the Great Depression.

What are the implications for our current circumstance?

Current discussion of fiscal stimulus assumes implicitly that government spending will be financed by borrowing. That is a welcome endorsement of the lessons of recent decades – we do not want another general inflation. But we should also note it means that people must be willing to hold government bonds.

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Special Author: Suman Bery, Director of NCAER, New Delhi

The recession now present in advanced economies seems set to continue for a while yet.

The annual Neemrana conferences on the Indian economy provide a valuable opportunity to take stock of the state of the US and world economies, and the implications of global developments for the Indian economy.

The conferences are held annually at the Neemrana Fort Palace hotel in Rajasthan. They are co-hosted by NCAER and ICRIER. International (primarily US) participation is organised by the NBER, arguably America’s most respected network of academics engaged in research on issues of economic policy. The format is designed to encourage informal, off-the-record discussion on a range of current issues in economic policy.

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Author: Suiwah Leung

After Pakistan and Sri Lanka, Vietnam is reported to be the third country in Asia at risk of a credit-rating downgrade by Standard & Poor as global recession deepens, and the country’s banking system is cited as being the major concern. In May this year, Standard & Poor lowered Vietnam’s BB long-term foreign currency ratings outlook to negative as macroeconomic turbulence intensified. Since then, tight monetary and fiscal policies, as well as administrative measures and falling world demand, have managed to cool the overheating of the economy, but now, the country’s banking system is coming under scrutiny.

From a situation where the banking system was overwhelmingly dominated by a few state-owned commercial banks, Vietnam’s banking sector has diversified quite rapidly. Currently, Vietnam has four major state-owned commercial banks (plus a fifth, smaller one) which control around 55 per cent of banking sector assets; 37 joint stock banks occupying another 30 per cent of the market share, with the remaining 15 per cent spread amongst 37 foreign bank branches and five joint-venture banks. Whilst credit growth last year amongst the state-owned commercial banks was relatively modest (a little over 20 per cent), credit growth amongst the joint stock banks reached almost 100 per cent, raising concerns about credit quality.

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Author: Luke Nottage

In Japanese banking, the big boys are back, as I explained last week: The Economist now confirms it. Indeed, the latter suggests that “if Japanese banks have any unique skill, it may well be in coping with crisis”. Not an obvious point, as evidenced by the collective dithering after Japan’s financial markets collapsed in the early 1990s or the almost completely unexpected 1995 Kobe earthquake. But I suppose the Japanese can be very good at responding systematically, once they establish the broad parameters of the problem.

Photo: Robert Gilhooly/Bloomberg News

Anyway, Mitsubishi UFJ has now proceeded to take 21% of Morgan Stanley, and is now considering further integrating its securities subsidiary (involved in US$18.3b of M&A advisory work involving Japanese companies in 2007) with Morgan’s Japanese arm (which did $17.9b). This would challenge Nomura, which did $34.2b (“Aiming to Rival Nomura”, Asahi Shimbun, 4-5 October, p 25); but the latter has also snapped up Lehman’s operations in Asia (mostly Tokyo), hoping to retain many staff to grow its own business.

And on Friday, the US government finally agreed on a public bailout plan for up to $700b, which I reviewed critically earlier in the week. Along with $85b for AIG and $29b for Bear Stearns, this amounts already to 5.8% of GDP, “well above the 3.7% of the savings-and-loan bail-out in the late 1980s and early 1990s” and significantly less than the 24% of GDP committed by Japan after 1997.

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Author: Ryan Manuel

Albert Edwards, Societe Generale’s global strategist, has recently issued a ‘China alert‘, urging investors to ‘dump shares of banks exposed to the Far East’. Now, we have pointed out a number of problems in China’s development lately, with public finance being top of the hit list.

But dumping shares of banks “exposed to the Far East” is completely ridiculous. Recent events have seemed to support the argument for China’s macroeconomic situation being stronger, rather than weaker. Foreign trade and FDI now account for less than 20% of China’s recent growth – this is important, as China is somewhat insulated now from adverse international trends, although not completely protected (eg. see impact of higher international petroleum, commodity and food prices on China’s inflation rate in the first half of this year). Yes, the World Bank recently predicted that Chinese economic growth (GDP) for this year would probably come out at above 9% p.a., down from over 11 % last year. But this is a necessary slowdown, as 12% p.a. is widely recognized as being unsustainable and inflationary.

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Author: Yiping Huang

Perhaps it’s not accidental that China’s equity price index has tumbled more than 60% since October 2007. It was certainly true that, by late 2007, when the average price-to-earnings ratio reached above 70 times, the Chinese equity markets had already become overvalued. But the market dived further every time when major negative news hit the U.S. markets, including failures of Bear Sterns, Freddie Mac and Fannie Mae, Lehman Brothers, AIG etc. We can forget about the so-called “decoupling” thesis, at least for now. This was perhaps why the People’s Bank of China (PBOC) announced an emergency cut of lending rate by 27 basis points and reduction of reserve requirement by 1 percentage point on September 15, a public holiday in China, when news about Lehman bankruptcy and Merrill acquisition began to spread in the international market.

Chinese financial institutions, especially large banks and insurance companies, already lost hundreds of billions of dollars during the current crisis. More importantly, the State Administration of Foreign Exchange (SAFE) invested at least 60% of its $1.8 trillion foreign reserves in the U.S. dollar assets and, therefore, already incurs far greater losses, at least on the book. The good news is that China still maintains relatively strict capital account controls and the state still owns majority stakes of large financial institutions. Therefore, there is little risk of financial collapse. Read the rest of this entry »

Author: Peter Drysdale

Harold James, Professor of History and International Relations at Princeton University, writes that only China has the firepower and capacity to rescue the international financial system from the threats from America’s financial meltdown today (Project Syndicate, September 2008). This is not just a financial and economic crisis, he suggests. Rather, like the financial and economic shocks that led to the Great Depression through the 1920s and 1930s, it is a drama that must play out on the world geopolitical stage.

Sound a little over-stretched? Perhaps. But there is no doubt that China’s response to the events that are unfolding in America will be pivotal to how readily the global economic and political system digests their impact in the medium and longer term.

China is today’s America, claims James. When the 1920s and ’30s crisis hit, America alone had the capacity to take the big public sector action at home that was needed to stem the panic and economic collapse and the reserves to save Europe and the rest of the world from massive contagion. Andrew Mellon, US Treasury Secretary of the time, resolutely stood back, determined to let markets collapse and ‘purge the rottenness out of the system’. The collateral economic and geopolitical damage from that adjustment path through the markets was well and truly done before Roosevelt’s New Deal was put in place. Then, and now, a globalised world means that the solution to such crises spans borders. Read the rest of this entry »

Author: Suiwah Leung

With an inflation rate running at 27% pa, current account deficit forecast at 9.2% of GDP, and a widening of the dong/dollar exchange rate between the official and informal markets (at times in excess of 7-8 percent), the Vietnamese government, whose emphasis had traditionally been on stability, is facing its first significant macroeconomic turbulence since opening the economy to international trade and investment almost 20 years ago.

Paradoxically, Vietnam’s success in attracting capital inflows over the last couple of years is behind the current problems. This has revealed some of the limitations of its reform process over the past five years.

The origins of the current macroeconomic problems stem principally from the failure of the State Bank of Vietnam (SBV) to sterilize the surge of capital inflows (which took the form mainly of foreign direct investment and remittances from Vietnamese living abroad) whilst keeping a rigid exchange rate peg in 2007. This left the banking system awash with liquidity, fuelling credit growth of over 50% by the end of last year. Macroeconomic management has been complicated on the one hand, by a ‘young’ banking system inexperienced in pricing risks and, on the other hand, easy access to bank credit on the part of state-owned enterprises (SOEs) eager to expand investments into real estate, financial services, and other non-core activities. Easy credit, coupled with a nascent and poorly regulated stock market, also fuelled a spectacular boom and then bust which is currently dampening investor sentiments.

To make matters worse, 10 days ago, the SBV banned third currency trading by banks (the so-called ‘grey market’) in an effort to curb arbitrage and enforce the official exchange rate. Read the rest of this entry »