As investors ponder a re-run of the GFC, Reserve Bank officials were last week warned of the potential for another AFC - Asian financial crisis.
Distinguished Peking University economists, Yiping Huang and Bijun Wang, presented a paper at the bank's annual closed-door conference that assessed Asia's economic performance over the past decade and looked ahead to the prospects for the next 10 years.
The good news is they expect Asia's economic ascendancy to continue. But they warned the next 10 years or so could be bumpier than the past 10.
"It is quite possible that Asia or China will experience a new financial crisis in the coming decade or two," their paper concluded.
The AFC in 1997-98 devastated many economies. Financial markets went into free fall as investors fled the region. Currencies were sharply devalued and growth collapsed.
The crisis didn't end Asia's economic "miracle", thanks mainly to the emergence of China and India which both avoided serious damage. Those two Asian giants were not even grouped with the ''high performing Asian economies'' featured in a landmark 1993 World Bank report entitled The East Asian Miracle.
But the shadow of the AFC still hangs over the region. Today investment rates in south-east Asia are still 10 percentage points lower, on average, than pre-AFC levels.
Huang and Wang point out that the AFC influenced regional economic developments in the 2000s that continue to have big implications.
Maybe the most significant are the emergence of large current account surpluses, the accumulation of "giant" foreign exchange reserves and the export of capital from the region. The AFC was marked by Asian governments responding to the mass exodus of foreign capital during the crisis by making special efforts to promote current account surpluses and the accumulation of foreign exchange reserves. Before the AFC most Asian economies were capital importers but now they are huge capital exporters. Asia's foreign reserves totalled $US878 billion ($843.5 billion) before the AFC but reached $US6.2 trillion after the GFC.
As a result, Asian savings are being deployed to finance the budget deficits in the North Atlantic. That's costly for Asian economies, which need capital to promote their own development, and it's contributing to dangerous global imbalances.
Another spin-off from the AFC was an attempt to forge greater trade, financial and economic cooperation across the Asia. Individual countries were not seen as strong enough to withstand the crisis alone. However, success has been limited.
Huang and Wang say the GFC, which hit a decade after the AFC, showed that Asian economies, including China, had made "limited progresses" in limiting financial and macro-economic risks.
"Chinese policymakers used fiscal and monetary policies to boost economic growth during the GFC," they said. "But these policies have backfired in terms of high inflation, high local government debts and possibly large non-performing loans. It is almost impossible for the Chinese government to repeat what it did during the GFC."
And now many Asian countries are at an important "juncture" in their economic development and in need of major structural reforms. Some of these relate to responses to the AFC.
Imbalances and distortions are building up in the Chinese economy. Chinese authorities are responding but the rebalancing process could be destabilising.
While India is growing rapidly, it faces the challenge of providing employment for an enormous number of unskilled workers. Meanwhile, some south-east Asian economies must overcome the "middle-income trap" by upgrading their industrial structures, fostering innovation and reducing inequality.
Huang and Wang warn of "uncertainties" surrounding the growth prospects of China, India and south-east Asia. Given the structural challenges they say "it might be difficult to completely avoid a crisis in the coming decade, which could start off the world's next recession."
Astute economic management helped Australia survive the AFC relatively unscathed. But since 1997 Australia's fortunes have become tightly bound to Asia. The next AFC will be much more of a challenge.
Source: http://www.smh.com.au
Distinguished Peking University economists, Yiping Huang and Bijun Wang, presented a paper at the bank's annual closed-door conference that assessed Asia's economic performance over the past decade and looked ahead to the prospects for the next 10 years.
The good news is they expect Asia's economic ascendancy to continue. But they warned the next 10 years or so could be bumpier than the past 10.
"It is quite possible that Asia or China will experience a new financial crisis in the coming decade or two," their paper concluded.
The AFC in 1997-98 devastated many economies. Financial markets went into free fall as investors fled the region. Currencies were sharply devalued and growth collapsed.
The crisis didn't end Asia's economic "miracle", thanks mainly to the emergence of China and India which both avoided serious damage. Those two Asian giants were not even grouped with the ''high performing Asian economies'' featured in a landmark 1993 World Bank report entitled The East Asian Miracle.
But the shadow of the AFC still hangs over the region. Today investment rates in south-east Asia are still 10 percentage points lower, on average, than pre-AFC levels.
Huang and Wang point out that the AFC influenced regional economic developments in the 2000s that continue to have big implications.
Maybe the most significant are the emergence of large current account surpluses, the accumulation of "giant" foreign exchange reserves and the export of capital from the region. The AFC was marked by Asian governments responding to the mass exodus of foreign capital during the crisis by making special efforts to promote current account surpluses and the accumulation of foreign exchange reserves. Before the AFC most Asian economies were capital importers but now they are huge capital exporters. Asia's foreign reserves totalled $US878 billion ($843.5 billion) before the AFC but reached $US6.2 trillion after the GFC.
As a result, Asian savings are being deployed to finance the budget deficits in the North Atlantic. That's costly for Asian economies, which need capital to promote their own development, and it's contributing to dangerous global imbalances.
Another spin-off from the AFC was an attempt to forge greater trade, financial and economic cooperation across the Asia. Individual countries were not seen as strong enough to withstand the crisis alone. However, success has been limited.
Huang and Wang say the GFC, which hit a decade after the AFC, showed that Asian economies, including China, had made "limited progresses" in limiting financial and macro-economic risks.
"Chinese policymakers used fiscal and monetary policies to boost economic growth during the GFC," they said. "But these policies have backfired in terms of high inflation, high local government debts and possibly large non-performing loans. It is almost impossible for the Chinese government to repeat what it did during the GFC."
And now many Asian countries are at an important "juncture" in their economic development and in need of major structural reforms. Some of these relate to responses to the AFC.
Imbalances and distortions are building up in the Chinese economy. Chinese authorities are responding but the rebalancing process could be destabilising.
While India is growing rapidly, it faces the challenge of providing employment for an enormous number of unskilled workers. Meanwhile, some south-east Asian economies must overcome the "middle-income trap" by upgrading their industrial structures, fostering innovation and reducing inequality.
Huang and Wang warn of "uncertainties" surrounding the growth prospects of China, India and south-east Asia. Given the structural challenges they say "it might be difficult to completely avoid a crisis in the coming decade, which could start off the world's next recession."
Astute economic management helped Australia survive the AFC relatively unscathed. But since 1997 Australia's fortunes have become tightly bound to Asia. The next AFC will be much more of a challenge.
Source: http://www.smh.com.au
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