c-span radio and c-span.org. next, officials from the international monetary fund talk about the challenges facing asian economies. they discuss issues such as aging demographics, infrastructure investments and financing and the lack of diversification from bank dominated financial systems. from the brookings institution in washington. this is just under 90 minutes. >> good afternoon, everyone. this is a privilege for us to welcome deputy managing director and his team. and presenting very interesting work on the asian financial

system. i won't say too much but it is one of the hottest topics around and most important topics around. of course there's china but there's the whole of asia. and i think the financial system as we've all learned is one of the absolute requirements for growth. deputy managing director min zhu was previously adviser to the managing director, senior adviser, and he was the deputy governor of the bank of china, and before that, chairing a working group on financial issues. so there is few i think in the world, if any, who knows more certainly about the chinese financial system but now about

the whole world financial system than min zhu, our friend min zhu. and he makes us an honor to come to brookings for this event. so thank you very much. i will cede the floor to him. after his remarks the panel will -- i will introduce the panel and we will have some further remarks from two colleagues from the fund, from our own eswar prasad. i will then launch a discussion where we will go from a panel discussion first to then having some questions from the floor. deputy managing director min zhu, please, and thank you again. [ applause ] >> thank you, kemal dervis, for the kindness of your introduction and also for your warm hospitality. to hold this event. i think it's wonderful for us to come to this place, to bring this book to the audience and also it's a great honor for me

to be here, to speak to this very distinguished audience as well. thank you, kemal. i just realized one thing when i walked in. i thought the brookings has very good budget resources so probably will provide everybody a free copy of the book. i am always very aware of budget constraints. but i realize there is a bookshop there. so everyone, hopefully after this session, will go to the bookshop, line up. i can't afford to give everybody a book but i probably can afford to give everybody who purchases the book a certain degree of discount of the book. once again, thank you very much for coming to the session, in the cold weather, as kemal mentioned. i'm going to have sort of a

background information, to set the past for the full set of discussions that the authors will be on the podium to discuss the whole issues. let me talk about a few things about the asian financial market. the market grew very strongly and fast. if you're looking here, the asian financial shares and global shares really increased around 5% to 18% from 2002 to 2013. this is a big, big challenge. it's really big. if you see, it went from 6% to 23%, that's global shares. you will see the asian financial

sector is really gaining market share in the past ten years in a very dramatic way. if we add everything together, add japan to it, as a whole, arab is 28% of global financial assets, which is quite a bit. and the growth is very impressive. but overall, this 28% is still below the asian's gdp percent share in the whole world, which is 33%. and then you also see the biggest structure is very much banking. you see in the emerging asia, also in china, the emerging asia, the banking sector gdp is roughly 183%. and before, 129%.

but the equity market is only 76% gdp, and the debt market is 52%. this chart will tell us the asia financial sector, number one, strong growth in the last ten years, really grow strongly, particularly emerging asia from 5% global financial assets to 18% china, from 2% financial assets to 10% today. if you're looking structurally, very much a focus on the banking sector, still practically slow. by looking further, the whole financial sector with very strong growth in the past ten to 15 years. still below asian gdp shares. there's still room for continued strong growth. if you put asia in the global picture, it's also very interesting.

)jutáusq't positions. this is the capital inflow to asia. in the ten years from 2005 to 2015, asia's international exposure increased dramatically. asia sports exports $17.5 trillion. the region's international exposure also increased dramatically. $10 trillion ten years ago. today, $20 trillion. also, asia imported this amount. so, international exposure also increased dramatically. but most interesting is here. this means how much asia export

capital, how much asia import capital. that is $1.3 trillion. so at the net, asia exports a lot of capital to the whole world. now, that's also very interesting chart. the chart says asia's international exposure increased dramatically in the past ten years. net to net, asia export, roughly -- oh, they asked me to not step away from the mike, i guess, i have to be here. okay. usually this is a disciplined place, but i tend to move around. brookings is a much more disciplined place, i realize today. so you see, net to net, asia exports so far $4.35 trillion to the whole world. the question is how asia can utilize this next export capital for the region.

i think that's a big issue. because of that, asia exposed to the international scale. the advanced economy to emerging asia, it's quite high, roughly from 50% equity returns, equity positivities. today, it's roughly still around 50%. so asia's equity market movements, roughly 50% is associated with advancing economies spill over. if you're looking for today, china, when china become bigger and bigger, china's financial assets from 2% global share to 10% global share and also china played a bigger role. and china spent also have a big player for the region as well. we compare, it's very interesting, in this chart -- i cannot move, i'm sorry -- and

the blue bar is the u.s. temporary impact for the region, for the equity market movements, and the returns. and the red bar is roughly the august episodes, the financial impact from china in august last year. if you compare the two things, you will see there is malaysia, indonesia, india, and you will see on the currency side, china have quite a bit of impact to the region, almost equivalent to the united states, particularly on the equity sides and movement sides. and china today have even big impacts compared with tapering impact in 2013. now, that's also become the new feature of the whole financial sectors are facing today. now, this is very much the system, if i provide some artificials in the few slices. the real economy is changing.

the whole region changing in a very dramatic way. the first issue is demographic change. you will see the red line is for japan. you will see japan, in 30 years horizon, 15 years, that people aging over 65 really increased from 60% to 32%, double in 30 years. so we all move to aging. also if you're looking at the soft careers, the blue line, you will see almost a vertical increase in the next 10, 15 years, roughly from 6%, 7%, increase to 24%. so almost a four-time aging increase. this is absolutely stunning demographic change. if you're looking for china, the brown line, also from 6% increase to 16%, to the horizon.

the black line is for the whole world. to compel the whole world, we're all getting older in the in demographic structure. but asian getting older faster. and stronger. this is the big fundamental change, because when you're getting older, you will start today longing for long-term investment instruments. and you can move forward to the equity market and the banking sector may not necessarily provide enough product to serve aging people and aging prop lagss this is a profound driving force will shape the asian financial market. and structure. in the future. given the steep of the curve is so big and is really moved very strong and fast.

as a huge financial gap in asia. this is the u.n. and calculated to meet sdg requirements, how much money asian needs. last year is the year for development because we had the year of sdg replace ndg and we have climate change and finance for developing the artist. but to the region we realize, in the next ten years, every year asian need $96 billion to fill the remaining table for mdg. education, health care and other things. need another $323 to fill the gap for people living under $2 per day and need another $718 billion per year for infrastructure investments. all financial sector can help. to mobile the resources, from public to private. it's a $1 trillion challenge for one year in asia to immediate

stg target. it's a big challenge for asia financial sectors. meanwhile, if we're looking further, there's even more tougher challenges the region facing. we are pulling the full major economy, china, japan, korea and taiwan together we see how much they contribute in the growth. usc take a career case, as a dark line, because clear, the contribute gross, 3.5% and the gross to .5. and down to less than 2%. japan, the red dot line also see the same thing. china kept contributing to growth drop even faster. that's means with heavy investments and capital return. particularly margin of return drop faster than you expected. and because the capital contribute to the growth. the down panel showed the

productivity contribute to growth. also drop quite a dramatic ways, you will see the dark line creeia the career productivity increase in the first ten years and on all the way down, gross to roughly less than 1%, contributing to growth and those years and also you see japan, the productivity grows very strong in the first 15 years and drop. the productivity growth remain high less than 4%, drop dramatically in the past five years on because the capital efficiency, and the productivity because the imd, innovation and things stored under there. what does this tell us? this chart tell us that asian facing a fundamental challenge that's to improve the productivity, to raise the productivity growth, to raise the potential growth.

as also mean to support a service sector, particularly when the region getting mature move to service sector-oriented economies, to support a service sector productivity. which the key challenge in the financial sector should and could play a very important role in this area. but i have to say this is not easy. this is not easy. for financial sector to support ind, to support innovations, to support a start-up, more sort of venture capital type of things, to become more flexible, to support the growth, to support sustainable growth. that's a real challenge. last, not the least, and there's inclusion issues in asia. osc in the region. in the asia adult have the banking account, yes increase from 2011 to 2014.

roughly from 32% to 46%, but still only 46% so way, way low. half of people in the south asia do not have a banking account. >> and even in the east asia we say roughly 30% still don't have a banking account. there's quite a bit of room to improve the inclusiveness in the financial sectors. we all know today, the financial inclusion is a very important drive for us for sustainable growth. because you provide financings for individuals, for the smes, for the poor families. which will bring the productivity and the support the growth. so financial inclusions also another very important issues. so bring them all together there's a few recommendations, that we are looking for the future. current structure in the future and enhancing financing deepening and integrations,

while building resilience and strengthen policy coordinations in the region. this is very broad. so let me bring them together. what's the story? i think the story just a source of very few, seven to eight slices i try to say is number one, the asian financial sector gross strongly in the past ten years. for example, china was up 2% of all financial asset to 10%, roughly to the 28%, from 10%. really strong growth. and there's still room for the future because still the financial assets is below gdp shares in the whole world and structurally still remain a banking focused and neither develop on the equity market and the bonds market as well. and the region export 4.35 trillion dollars to the whole world. and the region imported 20 billion and export $17 trillion.

which clearly put the region under huge international exposure. and when china become bigger and bigger and china's monetary policy and the market movers have spirling for the region as well that's the financial sector. but with demographic change, i think that's a big one. with infrastructure insemt need day by day and and the way the whole economy structure moving into the more innovative. more service and productivity, become more and more important and with financial inclusion still have a huge gap to fill in the future financial systems for asia. have to look into those issues. have to meet these challenges. and we saw this study try to understand what is the asian financial structures, understand what the area we can do, we should be able to catch up and what policy need for the region.

after two and a half years, hard workers have produced beautiful books with red color on the cover. so that's the one. but i don't know why they tied money. they should free the money. i think that's the whole thing. and thank you once again, coming to this session, i hope very much you will enjoy the book afterwards i hope you will buy the book. thank you very much. [ applause ]

so mr. shakasumi will compliment the marks of mr. win ju. he's the assistant director of the asia-pacific department and has headed this financial sector project. previously served as deputy vice minister of finance for international affairs and deputy commissioner of the financial services agency for the government of japan. and shin huang lymph, she reviews the department financial surveillance work and serves a as mission chief for canada. canada is one of the successfuls financial countries, i guess,

right? is that? >> very much so. >> but you can always get better. >> she has had 13 years in the capital markets department of the imf where she worked on financial crises and sovereign debt issues, including sovereign debt restructuring and the development of analytical tools to assess systemic microfinancial risks and bank soundness. she is known for working on the effectiveness in many ways of micro-prudential policies. which as you know is one of the big topics in financial market analysis these days. and then we have our own answar prasad, we share him with cornell university where he's senior professor of trade policy. but he's more fundamentally anchored at brookings. and he is a senior fellow in the global economy and development department. and the new century chair in the international economics.

he's an associate of the mber and he was at the fund before chief of the financial studies division. and head of the imf china division. i think we couldn't have hoped for a better panel. so -- which one of you wants to start? >> i think it's going to be me. >> all right. >> well, thank you very much, mr. dervish, good afternoon and welcome to this seminar. mr. chu has given awe very nice overview of the book. i would like to pick up on one important message from his remarks. and that is, asia's financial sector still has room to grow and it will evolve to meet the needs of the future generation. that could be for infrastructure financing as he mentioned. or it could be to mobilize for

an aging population. or managing a higher volume of cross-border trade or capital flows. so it is very likely that you will see asia's financial sector become bigger, more complex, and more interconnected. now in my next five to ten minutes that i've been given, i would like to talk a little bit about the importance for asia, to anticipate and prepare for these changes. and i will speak from a regulatory perspective. in our view, understanding new products, new markets and new risks, will help asia build resilience. how can asia best do this? how can it best prepare for the changes that are coming? let's look at what asia's strengths are and area where is it still needs to work on.

what are asia's strengths? asia has strong and well capitalized banks. it has relatively large provisions for non-performing loans. asia has good compliance. with international regulatory standards. most central banks have a framework to monitor systemic risks through pack roh opinion prudential supervision. and asia has relatively robust crisis management frameworks, these are all very good. but there are areas that asia still needs to work on. and what is these, i'm going to be like david letterman and leave you with a top ten list of recommendations, from the book. and hopefully this will entice you to go out and buy a copy of the book. i'm going to go through the list very quickly so listen carefully. first, asia needs to reduce the large role of government in financial intermediation.

and i'm not getting elaborate. i'm going to go through what are the key recommendations. second, asia needs to reinforce, staff and technical capacity at supervisory agencies. third, once you have the supervisors, you have to give them the operational independence, to make decisions and to enforce compliance. so they need to have authority and willingness to act. fourth, asia should continue to improve its surveillance of systemic risk through microprude detention supervision and here it's important to be clear about the assignment of accountability. >> fifth, as financial institutions become more complex, asia needs to enhance consolidated supervision. to monitor funding risks and also to monitor connected

lending. >> sixth. while asian banks are well capitalized, additional capital and liquidity buffers may be needed as the banks grow bigger. seven, asia should strengthen its framework to resolve weak financial institutions in a more timely manner. financial institutions that are no longer viable should be allowed to fail. eighth, asia, could improve the availability, timeliness and quality of financial sector data. including the collection of information of nonbank or shadow banking activities. nine, accounting and auditing rules and practices should be brought closer to internal standards. and finally, number ten, there should be greater cross-border cooperation and collaboration, to share information and to

coordinate crisis resolution. so this is the top ten list. as you know, asia has done a lot in the decade after the asian financial crisis in 1997. to improve financial supervision and to improve resilience. we think that continuing to work on these financial sector reforms will be important for asia to preserve financial stability as it transitions to a new growth model. as you know, any transition will always have a few bumps alonged road. good micro-economic management and financial policies will go a long way to reducing the size and frequency of these bumps. that's all i have to say. >> thank you very much. that was very succinct. and of course long menu, but said very forcefully in a short time. thank you very much. >> thank you very much for allowing us to be here.

first, this is not meant to be tying, this is the interlinkage, this is the financial sector. blame, don't blame us this is what our designer said. this is considered to be the financial centers of the world and this red thing is the interlinkage between it. so we are not trying to bind the thing. let me add something to the comments. she is from the monetary and capital markets department. >> she used to be. >> and i'm from the asian pacific department. this book is a collaboration of these two departments in the imf. so we at the apd, or asia-pacific department look at the countries and she, the mcm looks at the financial sector globally so this is the sort of horizontal versus vertical assignment.

and then she mentioned pretty much the financial sector of the global asia. i mean the asia in general. then this book also contain the microeconomic related chathors like asia's demographic challenges and the infrastructure. or the asean, the association of southeast asian nations, financial integration. and factors behind the capital flows. so among these i found that the asean financial integration chapter is particularly popular among the region's policy makers. because it has to include the lessons learned from europe. or you know, something something that not so well. and then what the other things we should be looking at. when you're going ahead with the financial integration, so this

is the kind of thing that the policy advice is behind what we intend to provide in this book. this is the 300-page book, it's reasonably thick and that's a lot of regression and model. this is more academic book. but then we editors tried our best to make it easy to read. so it has a conclusion that the topics or main key take-aways of the chapter at the outset of each chapter, also a conclusion at the end of each chathor. you can just read it. that you're sort of time-pressured. but having said that, imf, at the imf, we are not in the publishing business. so we are to make policy advice to the member countries. what is more important for us is

to make the findings of this book into something tangible, something that the policy makers can use. in making their own policies. and they each countries' specific circumstances. so what we are doing, let me talk about since the dmd zoo gave you the broader overview of the book and we complimented it with detail. let me talk a little bit about the book. what we are planning to do with the book from now on. basically we are planning to make other imf teams learn about the findings of the book. and then make them, i mean use them in their annual consultation with each member countries. so that's what we are doing. particularly in one of the findings in the book is that

asia's economy, weathered the global financial crisis reasonably well, relatively well. the starting point was solid. asia has suffered from the asian financial crisis. ten years earlier. so they're very much the, they did their best to make their books in order. then when the global financial crisis hit. asia's economy was relatively better position with relatively conservatively managed the books of the banks so we didn't have toxic assets too much. so then that resulted in relative resilience of the asian region in general. but then during the years that pursued, in the very, very easy monetary conditions and the very historically low interest rates, asia's corporate sector has accumulated quite a lot of debt

and increasing leverage along the way. now last december, that very easy money was reversed in one of the major, the largest advanced economies and then what happens from here? that's the kind of thing we'll be looking at in great earnest. and the tricky thing here is that the corporate leverage or corporate liability average doesn't say much. if country a is suffering or struggling, country b has large cash buffers, and it doesn't on average this should be okay, right? not really. you know even if on average the bank's corporate sector is okay with repaying the debt. it's not average, it's individual country that has to meet the financial obligations, so we are trying to get how much

of the percentage of the corporate sector is vulnerable so this kind of thing we are employing and we are trying to especially forecast on going forward. looking at this seech conduct situations, another thing is that the micro-prudential has been utilized in the context of incoming capital flows. asia has received quite a lot of capital flows in the process. the capital flow went into the real estate, and the real estate price went up. so many of the jurisdictions used the microprude detention policy to combat the asset price inflation in the context of the increasing or incoming capital flows. but now, with possibly, the reversal of this risk sentiment and possibly the region will be facing, outflow with capital instead of inflow with capital.

and at the same time we are f e facing a bit of softening with the economy. if the economy softens, we lose the monetary policy. if you lose the monetary policy, then asset price inflation may be stoked. what are we going to do with these monetary policy. you have to on the one side you have to combat the demand management. you have to loosen to accommodate the economic activities. but at the same time you have to make sure that it doesn't stoke the asset price inflation. so the micro-prudential policy uses in that regard will have become very important. thirdly, the capital inflow will be somewhat more precious in the future. in the past years, we have inflow into the region. now we are not so sure that the capital inflow continues to be that lux.

so in the years to come. we need to think about more effective use of capital inflow. to perhaps usher the capital into more productive rather than somewhat sort of somewhat superfluous unproductive investments. how are we going to do it? many countries has its own structure reasons or historical reasons, certain alignment of incentives. for certain country, because they wanted to encourage house ownership they may have certain bias toward buying a house rather than saving. so these kind of things may have certain impact on the choice of investment into productive versus nonproductive investments. these are the kind of things basically what we'll be looking

at within this umbrella of future asia's finance project. we'll be looking at in the context of each of the member countries. thank you very much. >> thank you very much. ashwar, looking forward to your comments and. >> finance has become the lifeblood of modern economies. unless you get finance right, you don't get growth right and you get a lot of volatility in return. so for the most dynamic region in the world right now, despite recent bumps in the road, which is asia, i think i think keeping a close look at what is happening and needed in financial systems is a very valuable service, which this book does very nicely. in my remarks which build upon those of the previous three panelists let me talk a little about what's been happening on the ground in asia. which in many ways sin treeging.

then talk a little bit building on the themes of the book about what is needed for financial systems to work well. and then talk about one specific example that i think drives home many of these issues. assuming there's some interest in china, i'll draw that into the discussion. if run thinks about what happened after the global financial crisis. there was a sense that finance had gotten too far ahead of itself. interestingly, the year after the financial crisis hit, india introduced an instrument that had not been seen there before. credit default swaps. two years after this, china introduced our opened up its foreign exchange derivatives market. at one level these might seen like foolhardy moves. after all it was derivatives markets and in particular, derivatives like the default

swaps that caused much of the turmoil in global finance. but this speaks not to the folly of these countries, but to the sense that financial market regulators had that there was genuine demand for financial products in many of these countries. one might think about credit default swaps as having gotten ahead of themselves as toxic, overly sophisticated financial products. but there is a good reason. the economists like to talk about completing financial markets, that is a financial products that love for insurance against all the states of the world possible. we don't quite get the complete financial markets and the problem is that on the transition, to complete financial markets, many instruments, if you have the wrong incentives, if you have the wrong regulatory frameworks in place can cause a lot more trouble than the benefits they bring. but i think what we are likely to see, is at some level a

convergence, between where finance was in the western world before the financial crisis and where the emerging markets were before the financial crisis. with very underdeveloped financial systems. i think the ideal meeting point is somewhere in the middle. a much more well developed set of financial markets. but perhaps not to the extent that we saw in the western world before the crisis. and the book very nicely lays out the path. what are the key attributes that are necessary for finance to work well? i wouldary that there are three. breadth, depth and inclusiveness. all of these are touched upon in the book. breadth refers to the scope of financial markets. as mr. minju pointed out in his presentation. asia still remains very largely bank-dominated. and i think having a very broad set of financial markets can serve a variety of purposes. not only does it provide more

competition and discipline to the banking system in itself, but in addition it gives safers opportunities to diversify their portfolios, it gives firms other avenues of raising capital and i think this sort of competition is ultimately going to be working towards much better system. >> and as mr. suomi pointed out, if you have good bond markets in particular, they're not only very good in terms of intermediating domestic finance, but intermediating foreign finance towards longer-term productive projects, if you take projects in asia, india a prime example, there's a crying need for finance in india. but what is crucial is there be ways for foreign investors to participate in the india growth story in a way that also serves india's long-term growth needs. which can be done through bond market development. you need depth in these markets,

if you have shallow markets, ultimately you get a fair bit of volatility and the markets don't work very well. so the amount of liquidity, the amount of turnover in these markets is important. and here i think the path many of the countries in asia have taken towards opening up the capital amounts more thus play a useful role. much has been said about how premature opening up of capital accounts can be a potential problem. and there is certainly truth to that. but i think there is a different perspective that opening up of the capital account in a careful and cautious way can in fact generate what my researchers call collateral benefits. that is the benefit of developing parts of the financial system through foreign investors expertise, their money, their better assessment of risk. in addition you need to have the financial system reach a large part of the economy. if one thinks about the fact that growth in many economies in

asia has been somewhat unbalanced and if you think about the fact that structural reforms of a variety of sorts have not gotten much traction, part of it is related to the political economy. in many of these countries, it is a very viable and important argument that many of the benefits of reforms ultimately go to the political and economic elite. who are able to benefit from the reforms, while the short-term dislocations often end up having costs that are borne by those who are not well tied in. and tying in ends up being very closely related to financial inclusion, if you're not well tied into the financial system. it becomes difficult to participate in the economy more broadly and to participate from the benefits of growth. so i think there is not only a macro base, but political economic-based argument that makes financial inclusion a very important imperative. we've seen in many countries in

asia china and india and so on. the government recognizing this and taking significant steps to improve financial inclusion. so then let me come to the last part of this the discussion and i think china is a very good example of what i think is necessary beyond financial market liberalization and capital account opening. in case you've been watching the news, you have noticed, things have been happening in china for the last few weeks and months. my view is that this is not the result of policy mismanagement by china alone although certainly things could have been managed a lot better. i think the signals are proceeding in the right direction. might say what the heck do i mean. i think what china has been trying to do is in fact to let markets work well. the problem that china faces is that if you try to liberalize financial markets, without the supporting framework. things don't go well what do i

mean by the supporting framework? the book refers to needing much more regulatory framework. but if you think about volatility in the chinese stock market, why is the chinese stock market so volatile? part of the reason is that you don't have the good institutional framework to support it. that means better corporate governance, better auditing and accounting standards. if you don't have those, then what happens is that even retail investors become momentum trainers, they don't have enough information about the investors they're investing in. they tend to get pulled along, and pulled down when the stock market is going down. when the government has its only tool somewhat heavy-handed government intervention which looks very happen-hazard and where the strategy is not clear that makes things worse. there has been a great deal of criticism. some of it i think misguided, some of it i think is perhaps more right. that the government is making

things worse by trying to intervene. and stock markets or currency market. i think the fundamental issue here is that for financial markets, equity markets, currency markets, bond markets to work well, you need a better supporting framework. so here again, i think the book alludes to these issues but this is really going to be the core issue in an emerging market economy, not that you need to hold back on financial market development or capital account opening. but make sure that the other parts of the economy, both real side reforms and institutional reforms going parallel. perhaps wait for those reforms to take place before moving ahead on financial market reform would be waiting indefinitely. but i think that's where these economies are going to have to go i think the book makes a very valuable contribution in terms of honing in on what china really needs, which is better financial markets and pointing out what else is needed to support good finance in asia.

>> thank you very much, ashwar. let me ask one or two questions. and then we go to the floor. one question i have to the group and you can decide maybe our imf colleagues will have the first kind of go. either one or both. and ashwar also, it's hard to separate financial sector management from exchange rate management. it's not the same topic. they are deeply linked by the balance sheets of the corporate sector, by many other factors. and is it the problem that the capital stock or the financial assets stock adjustment that may be happening with liberalization in china. in other words, more capital outflows starting as opposed to

inflows. which is an asset diversification. things. at the same time while the current account surplus is not at the highest levels it's been. but i just saw yesterday that the trade surplus with the u.s. is at an all-time high for china. on the one hand you have capital outflow that will tend to depreciate the exchange rate. and there's a lot of confusion in the kind of nonspecialized press as to what, what really should be the exchange rate movement. anyway, there is the big surplus. and the depreciation, other things held constant might increase that surplus, how do you look at that problem. >> generically in the imf, you

have the strategic balance assistment and we look at these countries current account, deficit and surplus and positions. then try to explain it from the fundamentals and the desired policies. then we in each of the countries surveillance, we come to explain, suppose your country has this surplus of like 4% of gdp. but then that is explained by certain factors. then what is the residual which cannot be explained by this fundamentals and long-term desired policies? then we say look at these, the country-specific issues and try to come to into more balance.

for that particular country. i'm not in charge of china. china themes currently now in china for the scheduled stuff with it and they will be talk with the authorities probably as we speak. each of the country cases we do look at what makes that current account surplus as it is. as opposed to what we think the fundamentals of the economy and the desired policy would dictate the current account level to be somewhat different so what are the differences and why is it happening? then we usually ask the country authorities to think about why this is diverting from the norm. and what can they do to reduce that version. i'm, i know i'm not answering your question in the way you

like. but that's how we sort of -- >> let me rephrase it maybe for ashwar. you know when you have a system where which is liberalized on both the trade and the capital accounts side. you still get a lot of volatility. but in china and parts of other parts of asia, you had a capital account that was pretty managed. and maybe the goods account more and more liberalized. and you have a fairly sudden or at least rapid relaxation of capital account management. i mean, and therefore, a stock adjustment on the capital goods side. will that stock adjustment be a challenge to macro prudential policy? let's say the corporate balance sheet? banks can be very well capitalized. but if the corporate sector has an open position, vis-a-vis for an exchange, that may not mean

very much. i'm not saying that's the case. how is the kind of change and capital account policies of china, of other countries impacting financial sector analysis and policy? do you have any views? >> i think it's important to remember that since the asian financial crisis in 1997, asia as a whole has cut down significantly on its external debt so there's a lot less foreign currency liabilities on the books of the corporate sector than it was in the past. and this actually has allowed many asian countries to adopt a more flexible exchange rate. and you saw that that flexible exchange rate served asia extremely well during the 2008 crisis. it acted as a very effective shock absorber. so i think from an exchange rate policy perspective, we have seen a sort of a very nice transition from largely managed exchange rate regimes to a more flexible

exchange rate regimes. this has served asia well. from a macro prudential policy perspective and for those who don't know the term macro-prudential policy. at the imf we forget that sometimes people don't know these terms. but it's essentially not supervision of individual financial institutions. but supervision of the financial system from an aggregate perspective. you look at the financial system and you see where are the risks coming. so you know, it may be that individually, financial institutions may not be at risk. but on aggregate, if there's significant exposure to the real estate sector for example, that could pose systemic risks to the financial sector. so from a macro-prudential perspective, i think it's important also to keep in mind that it is different from

exchange rate management. micro-prudential policy is to address systemic risk in the financial system. if there's significant capital inflows into asia as we saw right after the 2008 crisis. the micro-prudential policy would be the useful tool to use to address exposure of the financial system as a whole. to real estate prices, or to some other asset class. now in the event of capital outflows, micro-prudential policy could be loosened in the event that buffers have already been built if there are no buffers, if buffers have not been built, then it's important to make sure that macro-prudential policy remains where the vulnerabilities or the exposure of the financial sector remain manageable. this might be a long-winded way of saying that i think asia has

a sound exchange rate policy. it's a much more flexible exchange rate regime to absorb shocks. it has more central banks have a framework for micro-prudential supervision. and asia in fact has led the world in terms of implementing macro-prudential policies to address systemic risks in the financial system. >> let me force one more time. let me ask ashwar, he's written so much on the international monetary system. we do have a little bit of a strange situation in the world now from a macropoint of view. it links up with the financial sector. we have two countries which have very large surpluses. china was reduced, but going up again. and germany. okay? both of these countries are embedded in regions.

china in asia and germany in europe. but they resemble each other in terms of trade position quite a bit. and yet, both of these countries have exchange rates that are depreciating. whereas in a kind of global balance sense, would you hope that they would appreciate. any thoughts? ashwar? >> so china is from that tradition framework a bit of a conundrum. the chinese trade surplus related to the levels before the global financial crisis, has certainly come down a lot. in the last three quarters it's gone back up to about 6% of gdp, which is high. the current account is another matter, that as i referred to earlier, china has been experiencing capital outflows. so there is that complex, that something done right now and the chine ses currency is still managed quite actively against the u.s. dollar and the u.s. dollar has risen very sharply in

the last year or so until last summer. so in china had you an expanding trade surplus at the same time. that the currency was appreciating in trade-weighted or effective exchange rate and a large part of that was decline in imports, not so much import volumes, but import prices. because the prices of a lot of china's imports especially commodities have been very weak. so the configuration is not easy to map into the traditional sort of configuration that we might think about. in china's case, as your initial questioner pointed out, there are some significant challenges. china has been6zz÷ aggressively opening up the capital account. not only to inflows, but to outflows. even in the midst of all of this turmoil, the financial capital account opening is continued. although china has started tightening up on some administrative requirements to limit capital seepage through

what it sees as unofficial channels. the problem is that the timing was not ideal. you had an increase in capital outflows, for what i think are very good reasons. because after all there are about 170% of gdp, worth of deposits in the chinese banking system. about half of which is by households, half by corporates and about 10% by the government. it makes good sense to take some of that money out of the banking system for diversification systems. and would provide competition for the banking system as well. the problem is that the unofficial capital flows as reflected from the net errors and omissions have started creeping up at the same time that we have these, capital outflow force the right reasons, diversification outflows compounded by outflows that are exacerbated by concerns about the economy and possibly the anti-corruption drive this creates very unstable capital flow dynamics. which i think is what the government is contending with.

>> as referenced earlier, the notion of asia shifting towards a more flexible exchange rate. being good for the reason, think is a story that continues to this day, china is trying to move towards that. but without the right supporting framework in place it creates a lot of turmoil. what is going to be needed to pull things back is any more static intervention. or in the equity markets. but really this broader complex of reforms and policies that are going to be needed to stabilize expectations. >> one more question and we'll turn to the audience. i do remember the london g-20 meeting. and one of the big issues which was partly because of political, but partly real, partly political messaging. was tax havens and information

exchange in the financial system. i think it's becoming more and more important issue. from two point of view. i mean i think there is much more decisiveness in the world to fight against illegal tax evasion. and it's large, very large. and second, there's also now increasing you know, decisiveness on dealing with legal tax avoidance issues. a lot of these are financial sector issues, when sometimes one has the feeling that in asia there's a lot of reluctance to open up the information exchange and to end whatever tax shelters that may still exist. any views on that?

>> i think it would be fair to say that the imf has done a lot of financial sector assessments for the asian countries. one component of those financial sector assessments is an assessment of the anti-money laundering infrastructure. what you call tax havens and so on and i think by and large these results have been relatively robust. there are areas for improvement. absolutely. but i don't think the findings for asia, are any different from other regions of the world. think globally, we need to do more to combat illegal transfers of money. and as well as anti-money laundering. i don't think this is specific to asia alone.

>> anybody wants to add? okay. there is of course that international movement. i think if you look at the last five years, particularly with the oecd in the lead, and also some governments, there's a much more decisive move on that. and i think it would be welcome if there is various asian jurisdictions joined in that movement. it's one of those typical global public goods that you know, if large part of the world doesn't cooperate, then you cannot really eradicate the disease. so that's why i'm asking the question. let's go to the audience now. and take a few questions at once. and then -- >> there was one who immediately raised their arm in the back. >> please do identify yourself before you ask the question.

>> your voice is pretty good. >> i wonder, i know we're talking about trying to look longer-term trends, but we can't get to the long-term if we don't get through the short-term. it seems to me that i think the imf, who estimated that the over-investment capacity of china was something like 25% of gdp, if there are a cascading series of defaults in china, that slows down near-term growth.

does it not? and causes a massive spillover throughout the rest of the globe. how does china deal with that, without causing a nosedive in growth? one. and two, how does beijing manage the damned if you do and damned if you don't on the rmb valuation? depreciating it would be allowing greater flexibility while sending signals to the rest of the world that growth may be a lot worse than they're letting on. >> okay. we'll take -- yes. >> financial markets react to reporting in numbers. so let's assume for moment that the quality of the numbers in china in particular aren't very accurate. how does that affect some of the projections in terms of the financing need that is required. and there's a big difference, if the bogey, the difference between reality and what the

numbers are being reported as 10%, as opposed to being bigger than 10. i'd like to hear your thoughts on that. >> i do want to remind all of us, this is on the topic of the book. straying away from daily affairs and daily press reports. while we can interpret that broadly, i would appreciate if we tried to ask questions that you know, more directly relevant to the actual presentation. yes? both of you, in turn. >> kelsey ross. >> student at american university. you touch on this a little when talking about asean. i'm wondering about the big ten you had on ways to improve the asian financial system. how do you expect the countries to work together on these or do you expect these reforms to be

individual countries and if so, how would these work in a broader financial system. >> i was wondering if you could comment on kind of the 20 to 30-year kind of perspective for hong kong and singapore? >> maybe one more? yeah. >> peter from the german instituteses of global studies. you mentioned increasing debt. i recently read in an economist article, asia was obviously in percent of gdp the clear master all countries, malaise yarks china, you name them, were substantially above 150, 200% in total private-sector debt. obviously we just said, external debt seems to have decreased, isn't the book the statistics on that showing that indeed the

internal debt has increased, because the over private sector debt did not look very good to me. >> i think we can now take a turn, why don't you start. >> to address your question and financial sector reform. i think this is the reform agenda for individual countries. but there is significant scope for asian countries to work together. and they have various forums in which supervisors and regulators get together and exchange information and analysis and one of the recommendations that the imf make is that these supervisory, the supervisory colleges should do that on a regular basis. and they should exchange information that is meaningful and they should do this regularly in normal times. not just in crisis times when there's a problem and then you scramble. if you have a framework in place during normal times, it's much easier to coordinate when there

is pressure in the financial sector. >> you can pick which ones you particularly would like to -- >> let me answer the question about the asean. of course the asean is comprised of ten countries and then are usually tiered into two. asean five and then cmlv. even within each group they're very different. in terms of the degree of how shall i say, the financial deepening and others. in the first instance, they think about their own financial markets. and then to come up with the solutions that best fits their specific circumstances. but on top of it, especially among the asean five. like the more advanced countries, we have this, they are engaged in this initiative called asean bond market

initiative or abmi for short. adb, is helping them coming up certain collaborative approaches to develop the bond market. and cross-listing of the asean countries with the various stock exchanges. so these regional initiatives are proceeding. with the asean, asean plus three. asean and china and japan, korea. cooperating with each country official country of authorities of the asean countries to formulate this financial sector mostly technical assistance. so these are ongoing. >> then the debt we do notice that when will the thing we find encouraging is the development

of the local currency, the nominated bond markets. it used to be so-called original sins or twin mismatches of resulted in the asian financial crisis, is mismatches of currency and duration. they tended to borrow short-term in u.s. dollars and then flip it over and lend to a long-term, long-dated assets. nominated in their own local currencies. so when the banks have to refinance the borrowing, they cannot call back the long-term assets, local currency. they were squeezed to come up with the u.s. dollar to repay it. that was the basic cause of the asian financial crisis. so learning from it, since that time, they have increased the instruments to borrow in a local

currency. and then, well -- it's not entirely the result of a bona fide effect, that some of it is bona fide effect. some of it is as a result of the international investors' pursuit of yield they wanted to have higher yield so in the u.s. dollar denominated rates are so low, so the investors worldwide scrambled for the asean country denominated debt which has the nominally higher rate and they thought that their currency should appreciate a little bit vis-a-vis the u.s. dollar so in the context of like 2010, something, somewhere around just after the global financial crisis there was an influx of money into the local currency denominated bond. that increased the size of the

local bond and many corporations took advantage of cheap financing available in that market. that contributed to the increase in the corporate levels. again, aggregate number is important but then in order for us to look at the financial stability issues, aggregate number is not that pertinent, as i explained earlier. so what percent of the firms have accumulated how much debt and therefore how much of the -- how large a portion of the corporate seconder is burnable should interest rates go up by this much and should earnings generally go back down that much. so this is the kind of stress testing we will do. and then we are -- of course we are cautious about this general trend of increase in the corporate sector debt and we will be looking at it quite

carefully in each country's situation. >> anything on singapore and hong kong? anything else thus far? >> well, yeah, i was a mission chief but then they are a very nicely run country, tightly run country and hkma has a very strong -- i mean, capacity-wise they are very strong in looking at the economy and noticing any changes. so 30 years is a long time to project, but judging from the quality of the people there i have no -- i've no reason to doubt that they will be successful in the coming years. i may be too diplomatic. >> i have no doubt that mr. kiley and others care about the imf's views about china, not mine, but i will take a bullet

for my former imf colleagues. on the currency issue i think what the bboc indicated it planned to do on august 11 of last year which was to move towards a more flexible exchange rate will be good for the bboc, it will be good for china. the initial step was not very well executed and at this stage i think it makes more sense for china to use the flexibility but the issue again comes back to managing expectations in a f8r turbulent environment because at this stage with the government still intervening on and off in the markets both in the on shore market and the offshore market i think it's making things potentially somewhat worse. so what's a good exit strategy? this goes back to what i talked about earlier or what is in the book. i think there the answer is a complex one and goes back to

what i talked about earlier and what is in the book. if you think about policy or monetary policy in a vacuum, it doesn't work very well. you need to have other things working well in the economy. there are concerns about the chinese economy so what do you need to stabilize expectations? you need a mix of macro policies, a little monetary, a little fiscal, preferably more fiscal policies and you need to show signs that there are going to be active steps taken to reform the real side of the economy. so unless you have those as confidence-building measures i think it's going to be a very difficult struggle. and on the issue of debt, there tends to be focus on the level of growth in the chinese economy and the mckinzie numbers, for instance, which are now approaching 300% of gdp in china do sound very scary but as mr. sumi pointed out, one has to look behind the debt. one needs to look at what the financial system is that is intermediating that debt. what the maturity structure of the debt is, who's taken the debt and what activities the debt is financing and i recommend a book to you to get a

better sense of what is behind those numbers so i think the issue for many of these countries is not just the level of debt. in fact, having good, vibrant debt markets, bond markets in particular is potentially a good thing for the financial systems in this economy. it gives you the breadth that i spoke about as one of my top ten lists. but i think those are the key characteristics one should think about. so in the context of many of these economies in asia, again, the level of exposure to external debt, although there is some concentrated exposure, overall it's not a cause for panic as yet although it does constrain many corporations and the macroeconomic policies in some of these countries. although again not anywhere near the extent it was before the asian financial crisis and i

think the issue here is is about developing better regulatory frameworks to make sure that whatever debt we do see in the economy does not necessarily portend significant problems when conditions like interest rates or exchange rates change. so i don't think it's a huge concern yet but in a country like china the level of debt and the fact that it's been intermediated through a financial system that's not been into mediation, since most of this debt is bank debt, i think it's going to be an economic price to pay. not in my view a crisis but certainly a price to be paid. >> thank you very much. okay. we have time for -- yes, you and the gentleman there in the back. >> i'm a first year ph.d. student of economics at american university and i have a question. mr. eswar talked about the liberation of the chinese financial market, and my question is regarding the market mechanism in the stock market there. from what i know, you can only by long and cannot short in the

market. if you buy today you can only sell tomorrow but comparing to the western markets, they are free. buy today sell today. today you can also sell to companies that are not as efficient and not producing money but what happened in 2014 the slowdown in the chinese in economy brought down manufacturing for exporting industries and these financial capital flow into the miami markets after the slow down economy. so even these companies who are not as efficient, not making money, their price still keeps going up. and do you think the environment would be less riskier if the chinese government would make the market freer instead of being restricted? >> thank you. last question over there. >> my name is dimitri, thank you very much, very interesting. my question is also for dr. persad. i read your book recently, i thought it was a great book, thank you very much. my question is -- if i remember

correctly in the book, you describe inefficient but stable equilibrium with the dollar in the middle. would you say that the development of the asian financial system is leading us towards something better? are we headed in the right direction in terms of this situation with the dollar's role in the global economy? thank you. >> thank you, maybe one more. that's the last. okay. >> hello, i'm yvonne from johns hopkins. i just want to ask how do you think the asian investment bank will influence the asian economic market or environment later. thank you. >> okay, maybe i can add one last thing also that you may want to comment on. a big debate in the financial supervision regulation financial stability board and all that is the banks are claiming that after the crisis the regulators kind of have a tendency to

overdo in the terms of capital privilege constrains and things like that and others claim quite the contrary, not enough has been done. you could say one of two words in the asian context about this debate as well as anything else and why don't we start with you. >> to answer your question, i think the other questions were for my other panelists. i like to think of it as the story about goldilocks and the three bears. and i would say that global regulatory reform agenda has got it broadly right. so the porridge is not too hot, not too cold. and, you know, we're going to have lobby groups who will say, you know, it's going to increase the lending -- the borrowing cost of banks and therefore they'll have to pass these costs on to consumers. we in the book did a study to see whether or not the impact of

the global regulatory reform actually caused lending rates to increase in asia. in asian banks. and i think this is chapter 11 in the book, and we actually saw minuscule effects, maybe 10 to 25 basis points but it wasn't something to write home about. so we think, as the imf, that the global reform agenda has made the global financial system safer and stronger. >> very good. good to hear. >> well, i used to work for the japanese fsa and i have my own personal opinions about ifsb but i refrain from it. talking about the aiib, to answer your question, as we have explained that structure investment need is huge. simply huge and then infrastructure investment is a very productive investment and

then it has the potential of crowding in private sector investment for -- so developing countries usually lacks that funding mechanism for that needed infrastructure investment. so in that sense, any help to increase that infrastructure financing would be a nice thing. except that if you -- if one borrower -- i mean one lender lends to the existing borrower, in a way that sort of not commensurate with other lending -- other lenders' standards in terms of credit worthiness or the, say, the

integrity of the project, then an entire -- existing borrower will become at risk. so in a sense that if you make an investment decision, that has to be maid in the transparent way that reflects the shareholders governance structure which is -- i mean the shareholders, many of them are the same as the shareholders of the world bank and, you know, other regional development banks so if this -- we can pretty much see the collaboration, we're looking forward to the collaboration with aiib which is run, and that's sort of nicely -- with good governance and good sort of -- how shall i say the selection of -- transparency of selection of the project and so on. so we'd welcome any help to

finance this vast, vast need to upgrade and solve the structure bottleneck which is constraining the growth on the supply-side at the moment. >> thank you. eswar? >> let me recommend this book to you. the fact that you are here suggest you care about asia's finance and it's clearly an interesting and dynamic region and not only is the book a very good book for the policy wonks among you but it is the cliff notes version of the beginning of each chapter so you get the gist of what the book is trying to convey and i think ultimately getting finance right is important for any country but

especially in asia given the impact that china in the region as a whole is having on the world and in response to a couple questions that came up, i think the issue also here is that ultimately there isn't much of a choice now that these cheese have started on the road to more open capital accounts, towards more liberalized markets. i think getting caught in the middle of the road where you have some degree of market liberalization but still the expectation the government will intervene when things go back. if you don't have the right institutional supporting framework you end up with a lot of volatility but none of the benefits of market liberalization. and i think this book nicely lays out the path towards the ultimate objective in terms of defining what the objective ought to be in terms of different aspects of financial market development but how to get there in a good way. so i congratulate all the imf colleagues for an excellent and timely book. >> very good. and we thank you for being here, for sharing the thoughts with us and for coming to brookings. thanks a lot. [ applause ]

we' got more from the road to the white house tonight with remarks from former secretary of state, hillary clinton, the former first laid and new york senator is in iowa tonight. watch her live tonight at 9:30 p.m. eastern on c-span. c-span's campaign 2016 is taking you on the road to the white house for the iowa caucus caucuses. monday, february 1st were coverage begins at 7:30 eastern. we'll bring you live coverage, taking your phone calls, tweets and texts. at 8 clx p.m. we'll take you to the republican caucus and a democratic caucus. see the event live in its entirety.

stay with c-span and join in on the conversation on c-span radio and c-span.org. now a look back at four decades of reporting on china. several new yorker magazine correspondents talk about covering china from the asia society in new york city. this runs 90 minutes. good evening, everyone. good evening. tonight is a sellout and it's so great to have you all here on this rainy and cold but very festive time in new york. and for a really fabulous evening. this evening the new yorker on china, a look back at four decades of reporting on china is indeed a special night