Asiaweek October 23, 1998
OVER THREE RECENT WEEKS, Hong Kong Financial Secretary DONALD TSANG YAM-KUEN has visited financial capitals in Europe and the U.S., defending the Hong Kong government's intervention in the currency and stock markets in August. He has also been campaigning among central bankers and financial regulators for a coordinated effort to monitor speculative hedge funds and limit their access to capital. On the sidelines of the recent World Bank-IMF conferences in Washington, Tsang spoke with Asiaweek contributor Sam Gilston. Excerpts:
How did the Hong Kong government decide to intervene in the markets?
It was a very secret decision taken among four people: myself, the chief executive of the Hong Kong Monetary Authority [Joseph Yam Chi-kwong], the secretary of financial services [Rafael Hui Si-yan] and Chief Executive C.H. Tung. We agonized over it for almost two weeks. It would not go away. We knew that if we intervened in the market, there would be a great misunderstanding. But we knew also that if we were not able to remove the incentives in the securities market [where speculators were making money with which to attack the Hong Kong dollar], it would be a futile exercise to fight the speculators off just in the currency market. Another thing we could do was to slap on exchange controls. That was not permissible under our Basic Law and was also against our belief in free trade.
Can the intervention happen again?
As long as there is no double play, nobody to speculate using the leverage of our securities market to attack our dollar, as long as nobody is using the leverage of our dollar exchange rate to attack our securities markets, we would not go into the market again. If there was some extreme action, in other words, some double play, of course, we might. But that situation might not easily return, because of several reasons. First of all, I have put in a lot of small measures. The monetary base has been enlarged many fold. So anyone who wants to attack our currency in order to create arbitrarily a high interest rate, one has to use a lot more money. It has changed from a monetary base of less than HK$2 billion to something like maybe HK$100 billion.
About tracking capital flows and a "new architecture" for capital markets? How might these ideas work in reality?
There are a number of things we could do. Particularly with these huge hedge funds, no single monetary authority has a true picture. Some monetary authorities like ourselves don't even collect information on their positions. The United States collects this data but gets only half the picture of the transactions being concluded in the United States.
So we need an agreement on the sort of information and details we should collect. There must be some formula worked out under the aegis of the Bank of International Settlements together with the IMF, a collection of central bankers, as well as private-sector fund managers, on the sort of data we should collect.
This data should be compiled and submitted by individual hedge funds to the regulators, the central banks, discretely. I am not talking about capturing each and every tiny transaction. I'm talking about the huge positions . . . above a certain size would have to be reported. Central banks would then exchange information and try to aggregate the liabilities and exposure of these hedge funds worldwide and monitor that flow. Way beyond that I do not want to advocate [anything more]. I do not think it's a matter of control. It would be very dangerous with what is happening to slap on control measures.
IT SOUNDS LIKE A long-term international financial process that might take two years to work out among central banks.
It might take a few weeks. Banks move very quickly. It's not architecture. We don't have to use big words. We just have to decide what kind of information we should collect. Such a meeting should last half an hour. I wouldn't say a few weeks, maybe I'm exaggerating, but by the end of the year it could be done. The U.S. [Federal Reserve] is already collecting information. There are very few markets we need to worry about, because these guys operate through financial centers. All we have to integrate are the markets in New York, Tokyo, Hong Kong, Singapore, Sydney, London, Frankfurt, Paris, and perhaps Toronto. That would do it. We need to involve just a handful of regulators.
So hedge funds are to give information to central banks, which would share it with other central banks?
Yes. There is another question on which we have agreed and that is the lending operations by financial institutions to hedge funds. That will need to be controlled, because the excessive leverage [such loans] have allowed is certainly destabilizing. There has to be some code or guidelines on lending to hedge funds. There must be some limit to it. When you and I arrange a mortgage, they empty our pockets to see how much money we have. I want to put in these measures as soon as possible, but I don't want to put a deadline on when it will be done.
At the World Bank-IMF meetings, is there a sense that central bankers are ready to share this information?
Yes. They're anxious too, because they are operating in the dark. We haven't tackled the nitty-gritty yet. There's no need to publicize the information. We have to isolate the components involved. We [can] have several levels of disclosures. The disclosure to the central bankers and disclosure for sharing for international purposes and disclosure to the public. These levels of disclosure have to be worked out.
You've talked about "rogue" hedge funds and legitimate ones. How do you identify them in advance?
It's not easy, but the transparency I'm talking about would certainly make it a lot easier to distinguish them. There are those that are doing general hedging. That means they have investment in Country A and are hedging against those investments. There are those who do arbitraging between markets according to a technical formula when there is a major disparity. That is also feasible and likely to reduce market volatility, so it is not objectionable. What I think we have to watch out against is those funds - and there are not many - that would attack the currency of an economy in which they have no significant investment. That is the problem we face. The attack can take place when the economy is weak. It doesn't mean there are structural problems. It may just be in a recession or going through an adjustment process. So these funds we need to guard against. We have to track them.
Do central banks have the wherewithal to do that?
The central banks don't, but under a cooperative umbrella, we can do it much more effectively.
Was there anything at the meetings directed at Asia that will help it in the short run and boost confidence?
We have to be confident in ourselves. Asia has gone through a bloodbath, a purification, a baptism of fire. From Korea right down to Singapore, each of us has been affected. Some have been reduced to bearing with starvation of our people. This is the worst that could have happened to us. If there is any movement in Asia, the only direction is up. So we have to have confidence in ourselves.
We have the hardest working populations on earth. We are pragmatic and well educated, with strong work ethics. Now we have a stronger and purified economy. I am sure that Asia will remain the engine of growth in the first part of the 21st century. We are much better equipped to do that now than any other region on earth.
The question is Japan. There is better confidence that a banking bill will be passed. [The Diet's lower house approved it Oct. 14.] That is a major milestone. Then there is some hope for an economic stimulus package and tax cuts next year. With these two together with a strengthened yen to provide greater liquidity in the Asian markets, I am optimistic. This [World Bank-IMF] meeting gives a very good sense of assurance. It gives us a consensus to track hedge-fund capital flows, and the assurance that we will arrest the situation in Brazil, so the whole thing will not ricochet back to Asia again.
'COUNTRIES MUST DECIDE'
Singapore DPM Lee says no cures are painless
DESPITE THE CRISIS, Singapore continues to open up its financial sector in its trademark cautious style, but the regional turmoil has only confirmed its conviction that safe is better than sorry. In the hot seat is LEE HSIEN LOONG, deputy prime minister and head of the Monetary Authority. He spoke with Asiaweek's Andrea Hamilton.
What is your take on Malaysia's decision to impose currency controls?
What they did is not the conventional wisdom on how to turn around a bad economic situation. The Malaysians, having thought it over carefully, have decided not to adopt the IMF approach. Nevertheless we hope that Malaysia succeeds, because if they don't, we will be badly affected. The sooner the Malaysian economy turns around, the more scope there is for Singapore and Malaysia to work together on a "prosper-thy-neighbor" basis.
Are there circumstances that might justify other countries following Malaysia's lead, or policing capital flows?
The countries which are under the IMF - Thailand, Indonesia - are very unlikely to do this unless they can persuade the IMF that it's a good idea. They might be forced into exchange controls in an extreme situation where the economy is almost collapsing, but I don't think any of them will choose this. Their problem is not to stop money leaving the country, but to encourage money to come back.
How you assess the IMF record? Is it time to try something else?
There is no painless solution or magic cure. [In badly hit countries] a severe crisis has already taken place - the economy has crashed, confidence has evaporated, the financial system has been shown to be unsound or has become unsound. A large amount of funds has already fled the country. There will always be dissenting views on IMF policies, but the IMF has competent professionals. The IMF formula has been to hike interest rates temporarily, exercise fiscal restraint, and implement reforms to restore confidence and restabilize the economy. It has not always worked, because this depends on the circumstances faced by the country. Sometimes the problems are not economic but social and political, and beyond the IMF's competence.
Do you feel the international community should be doing more to help? What would you like to see done?
At the early stages of the crisis, international support was very useful. It was right that Indonesia went for the IMF package last October, and that Singapore, the U.S., Japan and Australia offered second-line financing. But the IMF package didn't succeed because [former] president Suharto's government did not implement it wholeheartedly. Support and advice from the IMF and the World Bank continues to be useful, especially for countries like Thai land and Korea. The main issue now is not a lack of aid. It is that the countries must decide for themselves whether and how to recognize and tackle their problems, whether it's Japan, Indonesia or Malaysia. Then solutions will follow. It's not possible for the IMF or wise men to do this for them.
There has been a lot of talk of a new financial infrastructure. What would Singapore like to see?
We need to find ways to improve transparency, stability and accountability. The U.S. has taken the lead in this, but there is no easy solution. After the Bretton Woods system of fixed exchange rates broke down the world switched to floating exchange rates, hoping that stability would ensue because exchange rate adjustments would now take place gradually, imperceptibly and automatically. But that hasn't been the case. No system can totally prevent periodic panics and crashes. These are integral parts of free market capitalism. The idealized model is rational players arriving at decisions independently of each other, and hence unlikely collectively to go out of joint. But the reality is that herd behavior does exist. People get carried away, en masse, and the system becomes volatile.
Singapore maintains certain curbs on its currency. Will you ever fully internationalize the Singapore dollar?
We see no reason to do that. The old conventional wisdom was that a country should completely remove capital controls, let money slosh in and out freely, allow people to short-sell it, take positions and speculate. The view was that if a speculator made a wrong judgment, he would be punished by the market, and the government did not have to impose any further penalties. After the Crisis, fewer people still believe this is really so. Sometimes an exchange rate can move for no fundamental reason, and cause the situation to spiral out of control, to create real and serious problems for the economy. That's why we have never taken a doctrinaire position that we will open up our Singapore dollar fully. We will develop and adjust our policy gradually and pragmatically.
THE SEARCH FOR STABILITY
Soros says regulation is imperfect but needed
GEORGE SOROS, since the start of the currency crisis, has been the hedge fund manager Asia loves to hate. The head of the Quantum Fund profits from the free market but worries about its side effects. He spoke recently about the global financial crisis with Asiaweek's Washington contributor Sam Gilston:
What is your reaction to the growing acceptance in Asia of capital controls and other forms of interventions?
If I'm saying that markets are inherently unstable, I'm also saying that imposing market discipline means imposing instability. Markets are imperfect, but regulations are even more imperfect, so we have to be very careful what kind of regulations we introduce. Some restraints on capital movements would have been very useful in protecting countries against the onslaught of the attacking world. I don't think it is the right thing now because money is flowing out [of Asia], and to impose capital controls on inflows would be like building a Maginot Line after the First World War. But looking forward, I think that obviously the totally free flow of capital is not advisable, so you need to create some mechanism for introducing stability.
What will be the fallout from the imposition of capital controls and the jailing of Anwar Ibrahim in Malaysia?
It shows the danger - if you close off your market, you can do all sorts of things behind that curtain. What [Prime Minister] Mahathir is now doing is outrageous. But . . . having a strong political base, he may be able to get away with it. In the short run, it allows him to pump up the stockmarket, he can pump up the economy by issuing more money, he can bail out his own supporters. So in the long run the economy suffers terribly, but in the short run, it may look very good.
Are there any Asian economies doing the right thing?
Thailand is really moving, but none of them have really done enough in restructuring their economies. The basic problem remains: too much debt and not enough cash to support it. It's a problem for China also. It's a structural problem that none of them have really properly tackled yet, although Thailand has done more than most.
South Korea has been following the IMF's prescriptions, but its economy isn't getting better.
I will tell you exactly what is wrong. You've got companies with 500% to 600% debt-to-equity ratios and not enough profits. Until that problem is solved, Korea will be depressed.
What do you think about Hong Kong's recent intervention in the stock market to protect the dollar peg?
I think that they managed to dissuade speculators from being in the Hong Kong market because they managed to inflict some losses. Did they do the right thing? That is very questionable, but I can't really disapprove of what they did.
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