Global Financial Risks and Asia’s Response
Co-hosted by Asian Bureau of Economic Research (ABER) and Japanese Centre for Economic Research (JCER)
2019 October 15

Key messages
Asia faces a dangerous combination: heightened global financial risks in the context of serious regional financial and economic vulnerabilities combined with an inadequate global financial safety net. This confluence of risks requires urgent cooperation among Asian economies to minimize risks, strengthen balance sheets and bolster the global financial safety net. Financial risks are elevated. They include short-term risks in ensuring adequate liquidity in financial markets, the financial shocks emanating from the trade war, challenges in shadow banking and the growing bifurcation of the global financial system. These risks occur at a time when financial vulnerabilities have risen. The weak balance sheets of firms, households, banks, non-bank financial institutions and governments in many economies mean a reduced ability to withstand shocks should financial risks materialize. These vulnerabilities, combined with the current period of increased financial risks, mean more countries may find themselves relying on the global financial safety net. But the safety net is inadequate. Although the safety net grew significantly after the global financial crisis, this growth has come at the cost of increased fragmentation and remains too small to deal with widespread shocks. Urgent cooperation is required. In the current political environment, successfully reforming global institutions, particularly the IMF, appears unlikely. Asia must show leadership. Using the G20, APEC, ASEAN and other regional forums, Asia’s economies must strengthen regional financial safety nets to ensure that crises can be responded to quickly and effectively. Economies must invest in the capacity of the ASEAN+3 Macroeconomic Research Office and ensure the Chiang Mai Inititiative Multilateralisation is both operationally and politically workable. Ensuring the CMIM is effectively integrated with other regional safety net institutions (including development banks), bilateral institutions (including non-CMIM currency swap arrangements) and global institutions (including the IMF) will be critical. Economies must seek to address financial vulnerabilities by supporting balance sheet repair and ensuring risks such as currency and liquidity mismatches are minimized. Regional challenges require regional solutions. Without a redoubling of efforts at cooperation, financial risks will continue to pose a serious threat to the living standards of Asia’s populations.

Opening welcome
Kazumasa Iwata (President, JCER), explained the timeliness of the symposium against the backdrop of worsening global uncertainties in the global financial sector, welcoming Rintaro Tamaki (President, Japan Center for International Finance).

Keynote address
Global Financial Risks and Asia’s Response
Rintaro Tamazaki spoke about 3 primary global trending affecting the financial system: demographic aging, digitisation and disruption, and decarbonisation. Developing countries, whose economic and financial systems are not yet fully modernised, have more room to create an economy that is less dependent on carbon.

Panel 1: On Global Financial Risks

[Panel 1] Hiroshima Ugai, Managing Director and Chief Economist of JP Morgan Securities, Japan, began the panelists discussion by talking about ‘US Financial Risks’. Mr Ugai talked about the growing accommodative policies in the world economies, declining market liquidity across the Equity, Treasury and Repo markets.
Next, Wang Xun (Peking University’s National School of Development) talked about ‘Financial Risks and China’s Options under Trade Tensions’. He began by defining the dynamics of Shadow Banking Loans in China, noting that ‘entrusting lending’, ‘trusted leading’ and bank acceptances were the most important part of the loans. He talked about state and non-state banks, where state banks take up 40% of the market. He described the definition of currency manipulator, before explaining some policy options for China.
Chatib Basri (University of Indonesia) responded to some of the points made by Mr Ugai and Dr Wang. And he talked about the difficulty of countries going to CMIM, and the IMF because of the negative political stigma, and the need to focus on currency bilateral swaps with Federal Reserve of US, China and Japanese central bank.
Nana Otsuki (NUCB Business School) talked about the possibility and timing of the next financial shock, and the possibility of the shock developing into a crisis.
Mr Iwata (JCER Chairman) opened the discussions by asking the panelists to discuss risk of the bifurcation of the world economy to the global financial system. Digital currency and future risks to the global system were also discussed.

Panel 2: Risk Management and coordinating Asia’s financial safety net

[Panel 2] Shiro Armstrong (ABER) introduced the speakers.
Gordon de Brouwer (ANU Honorary Professor) talked about the uncertain outlook for the global economy as a result of high corporate and government debt. And he talked about the need for strengthening domestic balance sheets, making the case for the global safety net, and trying to use APEC strategically to achieve these goals.
Sayuri Shirai (Keio University) spoke of the ‘Recent Monetary Policy Challenges in Emerging Economies’, including trilemma in international finance, including stable exchange rate, free capital flow and independent monetary policy, providing solutions such as providing new Synthetic Hegemonic Currency (SHC) like Libra, strengthening the Federal Reserve’s swap arrangements and improve IMF core liquify functions to reduce foreign reserves.
Bandid Nijathaworn (AMRO Advisory Panel) spoke about the improvements in ASEAN mechanisms to resolve financial crisis since the Asian financial crisis in 1997. He spoke of the liquidity challenges and balance of payment problems that need to be covered. How to revamp the Asian swap facility to focus on these liquidity issues are a priority.
Adam Triggs (ABER) spoke about the inadequacies of the global financial safety net and the false sense of security it creates. While the safety net has grown, this growth has come about as a result of increased fragmentation. Modelling shows it remains too small to deal with modern, widespread shocks.
The discussion focused first on the reform of the IMF and the need to do so with a coalition of countries, not only in ASEAN+3 but also engaging the US. But the current political environment makes IMF reform difficult. As such, Asian countries should focus on strengthening regional institutions, such as the Chiang Mai Initiative Multilateralization, integrating them with the IMF and extending swap lines to cover economies inadequately served by the current safety net. Strengthening domestic resilience and building domestic buffers will also be critical. These priorities should be pursued through the APEC and G20 frameworks to ensure an adequate multilateral response.
Dr Basri began by noting the uncertainties surround liquidity issues, currency and trade wars, and global geopolitical issues. Governments must work to strengthen the domestic economy, financial reform deepening must also continue, and must continue working on the regional safety net, CMIM (warning that having only $6 billion in available funding for Indonesia is not enough). Policy coordination between countries in the region must also improve. Macro-prudential policy (monetary policy) is also important in this issue.
Professor Shirai talked about the US monetary policy, cash demand higher than Fed projected and they expanded by buying lots more treasury bonds, near $4.4 trillion. The implications are that the US and BOJ and ECB will both maintain huge balance sheets, exerting downward pressure on global interest rate. Lots of money may come into emerging economy collective, which may make for fragile capital flow movements.
Professor de Brouwer reemphasised about the importance of regional dialogue around these critical issues, and the importance of taking action.
Professor Drysdale (ABER) re-emphasised how important it was to get the framework right for working through the economic and financial issues that confronted the region collectively. He noted the need to manage the febrile capital flows, and the intense correlation of risks that presented big global challenges. And how to work on the international institutions that need to reform in order to adapt to these problems. That is why domestic strengthening of economic and social reform and improving the regional coordination mechanisms that would help to keep the pressure on reform, such as the RCEP negotiations which are expected to be concluded soon. Existing institutions are not strong enough to manage the issues that the region now faces such as CMIM & AMRO, which are not connected effectively to political power and will. These institutional weaknesses call for dialogue at the highest levels of government in the region.