The financial stability challenges of an emerging Asia: Speech by Mr Joseph Yam

In a speech entitled "The Financial Stability Challenges of An Emerging Asia" delivered at De Nederlandsche Bank in the Netherlands today (25 October), Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, talked about what he described as the "Asian dilemma", which arose out of the conflict between emerging Asian economies' search for financial stability on the one hand, and, on the other, their pursuit of financial liberalisation in order to develop economies and markets.

Mr Yam said emerging Asian markets might be able to attract a net inflow of foreign savings into domestic investments during financial liberalisation. However, capital flows could reverse, in view of domestic macro-economic issues, and debilitate their financial systems and economies, he added.

Mr Yam said some emerging Asian economies had adopted different formal or informal measures to regulate fund flows. Such measures included limits to the convertibility of the domestic currency in either direction and limits to the ability of banks to expand their assets or liabilities denominated in the domestic currency.

Mr Yam believed that the small size of the emerging Asian markets, relative to international capital, had made them vulnerable to financial instability. "If one agrees with that argument, then one alternative long-term strategy is obviously to build a bigger integrated market that is capable of absorbing the volatility of international capital and reducing dependence on it through enhancing financial intermediation within that common market. In other words, in the interests of greater financial stability, emerging Asia should consider monetary union," Mr Yam said.

He said that, even though there had been no formal discussion among Asian authorities on monetary union, which he believed was a long-term solution, there had been some monetary co-operation efforts. However, he believed that the difficulties in mobilising monetary co-operation in a diverse region such as Asia should not be under-estimated. "To some, I suppose there is doubt as to whether the benefits of greater financial stability and greater efficiency in financial intermediation justify the cost, in terms of autonomy over macro-economic policies, in particular monetary policy," Mr Yam said.

Mr Yam said emerging Asia had to address a few issues including the need for convergence before monetary union and the lack of intra-regional currency anchor before any discussion on a more concrete plan of monetary union. "My view is that, for something that takes so long, we'd better start early. For something that takes so long, we can also afford to be imaginative," Mr Yam said.

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Hong Kong Monetary Authority
25 October 2004