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Asia Falling [Secure eReader]
eBook by Callum Henderson

eBook Category: Business
eBook Description: The first complete coverage of the Asian currency crisis and what it means for investors worldwide. Asia's recent economic troubles affect billions of people around the globe. Asia Falling provides a detailed, accessible account of the economic and political policies that led to Asia's currency crisis. It's the first comprehensive, authoritative analysis of the crisis, and what it means to the larger world of investors. This up-to-the-minute work, packed with solid recommendations for investors, names the countries that should emerge strongest, outlines the steps Asian economies must take to regain their worldwide luster, and provides policy-level political analysis on the actions and reactions that led to Asia's currency crisis.

eBook Publisher: McGraw-Hill Companies, Published: 2002
Fictionwise Release Date: July 2002




Introduction

"Currency trading is unnecessary, unproductive and immoral!" Dr. Mahathir Mohammed exclaimed in a blistering speech he gave at the Annual Meeting of the IMF and World Bank in Hong Kong. Speaking before the massed ranks of the world's media, international delegates, and government and IMF officials, Dr. Mahathir held his audience on the edge of their seats.

"It should be stopped. It should be made illegal!" he thundered. Railing against foreign funds whose gains "must come from impoverishing others," the Malaysian prime minister, impeccably dressed and with his traditional charisma, lashed out against those who had bought low the Malaysian ringgit, and, in the process, forced Malaysia's stock and bond markets into panicked flight. "Currency traders have become rich -- very, very rich," he said, "through making other people poor!"

While the Asian currency crisis was already well under way by then, the events of the IMF meeting, and more specifically the statement by Dr. Mahathir, brought home like nothing before the global resonance of the drama unfolding in Asia.

The comments, made on the evening of Saturday, September 20, 1997, caused an immediate reaction, not least from George Soros. Soros is the founder and head of Soros Fund Management and chief adviser to the Quantum Fund, the largest "hedge fund" in the world. He had come under personal verbal attack from the Malaysian prime minister and seemed to symbolize the speculative forces about which Dr. Mahathir was talking. In a televised briefing the next day, Soros, in a vigorous retort, said the suggestion that currency trading should be banned was so inappropriate it did not deserve serious consideration. He declared, "Interfering with the convertibility of capital at a moment like this is a recipe for disaster.... Dr. Mahathir is a menace to his own country."

Deputy Prime Minister and Finance Minister Anwar Ibrahim, while supporting his prime minister, moved swiftly to try to calm the situation and instigate some damage control. He stressed that there were no plans to change the currency trading regime in Malaysia -- contrary to the suggestion that currency trading would be limited to trade finance -- and said it was time to put an end to this type of acrimonious dispute and get on with sorting out the economy.

It was a brave attempt to calm the situation, but when Malaysian markets opened on Monday, September 22, 1997, traders did not listen to such reassurances. Focusing instead on the Mahathir comments, investors panicked, stunned by what many deemed inflammatory remarks that would only add to already shaky market conditions. Malaysian stocks were hit from the opening bell. On that day the Malaysian composite (stock) index lost 27.34 points, or around 3.5%, declining to 760.50, while in the global currency market the dollar-ringgit (USD-MYR) traded as high as 3.1300.

International investors were just as dismayed as their domestic Malaysian counterparts, indeed probably more so. "After he made those comments, I phoned Boston and told them to get out -- totally -- while we still could," a U.S. fund manager with a Boston-based mutual fund told me, referring to both stock and bond positions.

Subsequently that week, both the ringgit and the stock market managed to stabilize somewhat, with Anwar doing his best to soothe investor nerves. However, confidence had been severely damaged, and market and economic conditions were to get much worse still. Politicians and bureaucrats the world over, as is their wont, blamed the "speculators" for the Asian currency crisis -- and, as a result, the ensuing economic slowdown in Asia. It was all the fault of rich individuals and funds whose sole purpose was to rob from the "poor" to further enrich themselves, if one is to believe this argument. All this brings back fond memories of the equally hysterical reaction of French and German officials to the second ERM(exchange rate mechanism) crisis in August 1993, when in a violent paroxysm of release the markets managed to throw off (but not break) the chains by which they were held -- those of the ERM.

Politicians and bureaucrats have a habit of blaming "speculators" when things go badly because they need a convenient scapegoat. It is classic Sun Tzu (or Metternich, or Clausewitz, for that matter) to avert an internal disturbance, create an external diversion. "Speculators" are an easy, amorphous target and usually do not fight back, at least verbally -- the obvious exception being Mr. Soros. The speculators themselves scoff at such talk, contenting themselves with their returns on winning trades. Privately, the "macro" hedge funds and other types of speculations base their strategies on traditional fundamentals and technicals. As one hedge fund manager told me pointedly, "We wouldn't make money if the fundamentals were properly aligned. It is precisely because economic and financial policies are out of line (with economic demands of the country concerned) that we are able to take on a currency or an asset market."

Indeed so. Soros himself, in his public musings, has said as much. It is understandable that politicians feel considerable anger and frustration, seeing a currency crisis destroy (temporarily) much of what they have strived so hard to achieve and build. They are rather vigorous in their blame of others -- and here I speak generally rather than specifically -- because it is their own policies that were at fault. This is not to say that the "market" -- however one defines that -- is infallible. One could well argue that the ringgit, Thai baht, and Indonesian rupiah all overshot their fundamental levels amid the crisis that hit all the Asian markets in the summer of 1997. The market is, however, a better arbiter of government policies than the governments themselves.

I will argue that the long-term economic health of the Asian economies was potentially saved, not destroyed, by the forced breaking of the dollar pegs to the regional currencies -- potentially, because ASEAN specifically, and Asia as a whole, are at a crossroads. In terms of deregulation the countries have two choices. One is to use the currency crisis as a lesson with which to force through and speed up market and economic liberalization and deregulation. The other is to turn inward, make a critical mistake, and waste years of progress. The risks -- and the rewards -- are great indeed.

The dollar peg links served a purpose, for years providing the requisite stability to allow foreign direct and portfolio investment to flow into the region and at the same time insulating it from the ravages of inflation -- but they had clearly passed their "sell-by" date. Fixed or pegged exchange rate regimes, unless flexible enough to allow for the variations in the economic cycle and unless backed by strong economic fundamentals, will inevitably fail. It may happen sooner, it may happen later, but it will happen eventually.

During the Asian currency crisis, the speculators had a go at the Hong Kong dollar (HKD). To tame the selling demand for the HKD, the Hong Kong Monetary Authority (HKMA) was obliged to intervene in the currency market by selling dollars and in the money market by allowing the overnight borrowing rate to soar as high as 300%. The HKMA's efforts were successful, not just because the HKMA was skillful and determined, but because the HKD was and is presently backed by sound economic fundamentals and a system that matches every U.S. dollar with 7.8 HKD. Steering the economy is a tricky task in the best of times, but especially so within a fixed or pegged exchange rate system. The Hong Kong authorities will have to remain both vigilant and flexible or the speculators will be back.

While the specifics for this book only became clear in early 1997, they sprang from a long-held fascination with a region whose economic successes, while marvelously notable, are but a recent phenomenon, the culmination of emergence from a century of political turbulence, widespread conflict, oppression, and plunder. Witnessing this emergence has been a thrilling experience. In only three decades, Asia achieved a degree of economic transformation and improvement that in Europe and the U.S. took almost a century. Accompanying this, the East Asian "miracle," as the World Bank described it, were several by-products, both positive and negative. The Asian emergence became an economic boom, with all the usual trappings that proliferate in such periods. A new doctrine, one concerning "Asian values," was created to explain the rise of the East -- and the anticipated decline of the (decadent) West. Easy answers were sought and, as is usually the case, found. For a time, Asian markets and economies could only go up.

Nothing is ever that simple, however, or permanent, particularly in financial markets. For every boom, there is a bust; for every bubble, a crash. The markets, and thus real economies, are always in a state of flux. And yet, for a time Asia broke -- or rather, bent -- the rules, experiencing year after year of unheard-of growth. The story, the region, the economies were irresistible -- until they were resisted by global market pressures and forces that seemed to explode onto the scene in July 1997 with the devaluation of the Thai baht, but that in reality had been building for several years.

Here in Hong Kong, the subsequent regional market crisis was equated with a dai foong -- the Cantonese word from which the English "typhoon" originates. Now that the hellish winds of the dai foong have abated somewhat, the financial markets have finally managed to grab some time for quiet reflection -- not only to review what went before and why, but to predict where we go from here. Such a period of reflection will be all too brief, the pace of change here in Asia being so much faster than elsewhere. And the rapid pace of change applies equally well to the views of many commentators who had typed up Asia well beyond even its prodigious capacity. How quiet now are those who argued that growth rates of 10% or more were natural, unending, almost genetic in Asia. And how quick to judgment are the doomsayers who call an end to the "Pacific century," not be cause such a title was misplaced in the first place, but because the crisis supposedly marks the end of the Asian miracle. Once again, easy answers have (hastily) been sought and found. Such commentary is not reasoned, economic analysis but a hysterical, knee-jerk reaction. Those easy answers reveal a glaring gap in understanding what has happened. This book, consequently, seeks to fill that gap. As the currency crises of the ERM (September 1992, August 1993), Mexico (December 1994-March 1995) and Asia teach us, financial markets, which pass judgment on economies and governments every day of the year, can be particularly unmerciful and unforgiving to those they deem misaligned. The effects of such crises are real. They are felt on the street by the unemployed and the homeless. Indeed, they are usually felt by those unable to fight back. However, to blame the speculators alone is to mistake a symptom for the disease.

The spectacular growth rates that Asia achieved in the 1980s and 1990s will be difficult, if not impossible, to match in the future, but that is no bad thing. To paraphrase Federal Reserve Board Chairman Alan Greenspan, it is vital to target and achieve sustainable, noninflationary, productivity-oriented growth for the long-term health of an economy. Growth driven chiefly by temporary, cyclical factors such as easy credit, low wage costs, and headline-grabbing, large infrastructure projects is of necessity more vulnerable to a sharp slowdown or even a crash.

Several ASEAN countries will experience sharp slowdowns -- a painful process, but better a slowdown than a crash. Thailand and Indonesia are the obvious exceptions. They face the twin curses of an economic crisis and a political system that continues to hang on the very edge of a precipice from which it might not return. To be sure, Thailand's new constitution is a positive step in averting political disaster. IMF officials at the meeting in Hong Kong were quick to acknowledge the speed and dedication with which the Thai authorities were addressing the crisis. Such speed is necessary, for confidence needs to be restored quickly -- for the market, the investor, and, not least, the domestic population of Thailand. Equally important, in Korea the election of Kim Dae Jung as president, whatever his individual merits, must result in a major change in the style of government. Such a change is necessary given the appalling credit policies of previous administrations, which have led to the current problems there. The threat exists in Korea also of economic recession -- i.e., negative growth, as opposed to merely slower growth.

As for Dr. Mahathir, such bitter recrimination, as his comments implied, is understandable. He and those around him (notably his Deputy Prime Minister and Finance Minister Anwar Ibrahim) have brought Malaysia a long way and deserve much praise and respect -- praise and respect that is all too lacking in the West. However, looking ahead, the new priorities, both economic and political, that Asia faces require a lighter touch, greater caution, and serious and significant reform of Asian financial sectors. Chief among those priorities must be to stabilize the economic fundamentals first -- trusting in the market to find the appropriate level for the currency and thus letting go of some control. Then, for Asia as a whole, the priority is to transform export-led economies into consumer-driven economies that are less dependent on external demand and founded on strong domestic institutions and markets.

Copyright © 1998 by The McGraw-Hill Companies, Inc.


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