Uncaging the Tiger – but is it ready to escape?

Caged Tiger highlights an obvious deficiency of the Asian century: an underdeveloped financial system is constraining Asia’s economic potential. Whether we will be able to witness an Asian Century really depends on whether Asian economies can get their financial systems set up so they can leap through the middle income trap.

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I believe these arguments are provocative and the need for more liberalisation will dawn on people. In presenting the report it is fair to say that argument is understood but there is scepticism the necessary change will take place.

I can say we are already seeing movement. While the state can play a leading role in setting up the necessary financial infrastructure, private and foreign financial participation in Asia’s financial system is also crucial. Some economies in the region have already got it. For example, China is liberalising its services and financial services at a fast pace with the establishment of the Shanghai Free Trade Zone.

External pressure can also reinforce the need to liberalise systems.  In fact, the current financial stress in China, such as a property company collapse and a rumoured bank run, will be the catalyst for the authorities to speed up China’s financial reform and liberalisation.

While we believe China’s financial system is still solid, certain shadow banking activities such as trust loans and trust products will require aggressive policy responses to prevent major financial fallout from happening.    

Of course the scepticism about the enormous shift in economic centre of gravity Caged Tiger projects is understandable – the shift is immense. A natural question readers ask is how a sophisticated financial system can be built in less than two decades, whereas a sophisticated financial system in the West took hundreds of years to build.

During those long years in the west, banking and financial crises have occurred regularly and they sometimes sent economies into deep recessions. Therefore, achieving a sophisticated financial system is by no means a smooth path to follow. In fact, it could be a treacherous journey. During the process, policy mistakes could be made; banking and financial crises could occur; and these crises could significantly divert the current path of rapid economic developments.

So, yes,  the road to an Asian century is bound to be a challenging one. This requires the policy makers in the region to have a carefully thought-out sequencing strategy to nurture Asia’s capital market developments. In particular, significant efforts will be needed to build up a country’s core institutions engendering a robust rule of law, transparent taxation and accounting systems, effective regulatory structures and regulatory authorities, and prudent and rule-based fiscal policy as well as a credible monetary policy institution.

So big challenges, I agree. There will be considerable volatility. But nothing we have seen or heard since the launch of Caged Tiger has shaken the broad thesis. We still believe there is a high probability that our projections can be realised. The Asian policy makers have the advantage of learning the lessons of Western financial developments as well as tapping the talents they need. 

The role of China in the transformation of Asia’s financial markets, as featured in Higher View Business Magazine, in Simplified Chinese.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.