Comments on Mr. William J. McDonough's Lecture on Asia and the World Economy － A Central Banker's Perspective

Mr Bill McDonough,
Mr Joseph Yam,
Distinguished Guests,
Ladies and Gentlemen,

I am very honoured to be invited to be the first discussant of the the Inaugural Distinguished Lecture of the Hong Kong Monetary Authority. Mr.Mr Bill McDonough's theme today, "Asia and the World Economy - A Central Banker's Perspective" is very important to us all. We are very privileged to hear such wise and visionary words from one of the leading central bankers in the world, a man who has come to central banking with proven credentials in commercial banking.

It is not uncommon to talk of Asian growth and prosperity in the last two decades in terms of superlatives: "Asian Miracle" and the "21st Asian Century". Under current measurements, Asia is no doubt a giant, accounting for 56% of the world' population, 27% of world GNP and 26% of world trade. Under World Bank purchasing power parity terms, Asia now accounts for roughly 32% of world output (of which Japan accounts for 8%), compared with 21% each for the US and Europe respectively. Latest statistics indicate that Asian central banks hold roughly 40% of the world's official foreign exchange reserves.

In less than 50 years, Asia has reached enviable levels of growth that is roughly double that the rest of the world Indeed, there are now critics of Asian growth, such as Professor Paul Krugman, who say that the Asian growth is no miracle at all, but the result of "perspiration, not inspiration". In that sense, I see such comments not as criticism but as a compliment - Asian growth could not have been achieved without hard work. But such sustained growth cannot just be the result of simple hard work. There are many factors to Asian growth. These include:

Responsible governments, who have emphasized stability, prosperity and greater income equality. Asian governments have run very sound fiscal policies and paid great attention to sound currencies and generally low inflation. They have created a sound macro-economic environment for the market economy to expand.

An openness to trade. Increasing exposure to the international market improves efficiency of domestic industries through rising competition. Today, US-Pacific trade is almost half as large as its trade across the Atlantic, indicating the importance of the partnership in trade along the Pacific Rim. Intra-Asian trade has been rising at 18% per year in the last decade China has announced for example, that we will further reduce the average tariff rate to 15% by the year 2000. Asia has also been open to foreign investment, accounting for 47 55% of total capital flows in 1995.

Responsible governments, who have emphasized stability, prosperity and greater income equality. Asian governments have run very sound fiscal policies and paid attention to sound currencies and generally low inflation. They have created a sound macro-economic environment for the market economy to expand. Asian governments have continually emphasized the importance of improving physical and human capital. Asian communications have continually been upgraded over time, and public utilities in the form of water, electricity and telephones are widely available to very remote areas. Literacy rates have risen sharply, and education curricula increasingly reflect the demand for higher technical skills.

By learning and adapting from the WestIn addition, Asian corporations and even state enterprises are catching up on managerial and technical know-how. The Japanese manufacturing skills are world class, followed closely by the Koreans. In the services sector, it is not surprising that the best airline is Singaporean, the best hotel in Thailand, and For example, Hong Kong can offer world class financial services.

All these add up to the fact that productivity levels in Asia, with close co-operation between the state and the market, can lead to great advances in social and economic progress.

Indeed, China has followed this open door policy in its modernization strategy for the last 15 years with perceptible achievements. But Asia, and in particular China, cannot take the past achievements for granted. Today, trade now accounts for 36% of China's GDP, making her an important trading partner to Asia, America, Europe and the rest of the world.

The strong trade and investment links have made and will continue to make the Asian economies more vulnerable to the vicissitudes of the global, including the US, business cycle. Other than a correction to the overheating in Asia in recent years and the slowdown in the electronics industry, the recent downturn in Asian export growth has been due, in no small measure, to sluggish import demand from the US. These are, nonetheless, cyclical in nature. Furthermore, the strength of the US dollar will dampen the export competitiveness of most Asian economies. This is because most of the Asian currencies are linked to the dollar one way or the other, while the Japanese and Latin American currencies have depreciated recently against the dollar.

Over the medium term, however, I do share with Mr. McDonough that there are a number of concerns which might hinder the potential growth of the Asian economies. Asian growth cannot be taken for granted. Whatever the Asian aspirations, there will need to be more hard-working and inspiration to overcome considerable obstacles to growth.

First, many Asian countries now face an aging population, caused by the recent decline in birth rates and longer life expectancy. If the Asian economies do not develop effective retirement savings programmes, most of which are rudimentary for the time being, the demographics alone will gradually eat up the region's savings and cause a scarcity of capital.

Second, the resource gap. Asia has considerable natural resources, but a higher population/resource ratio than the rest of the world. Nowhere is this more evident than in China, which has a quarter of the world's population and 7% of the world's arable land. Given wide disparity in incomes and stages of development even within China, for example, between the coastal zone and the inland rural areas, under our Ninth Five-Year Plan, we expect to spend a total of 100 billion yuan to eliminate poverty by year 2000.

Third, the natural resource gap is also reflected in the huge amount required for investments in infrastructure and the domestic savings rate. The World Bank has already estimated that Asia will require US$1.5 trillion to finance its basic infrastructure over the next decade. In China, we need to improve roads, airports, bridges, irrigation, water, power, and also develop energy sources to bring the right resources to the right areas to support domestic growth. Although some of the savings-investment gap can be filled through external funding, we do not intend to let our external balance grow at a level that is uncomfortable. As a central banker, I would prefer that we develop our domestic financial system as a matter of priority, so that domestic resource intermediation is made more efficient.

All the above ties in with the continual reform and deregulation that is spreading throughout Asia. Beginning with Japan, all other less developed economies in Asia today realizes that the old growth model with emphasis on manufacturing is no longer adequate in the 21st century. For productivity growth to be sustained in this knowledge-based global economy, developments in primary and secondary industries must be matched by productivity in the tertiary or services sector. . Witness how Japan has just announced a package of financial deregulation or Tokyo Big Bang to the year 2001. A good example is that tThe Hong Kong economy is already irreversibly a servicing economy.

In this regard, China is continuing on its major reforms towards a socialist market economy. Major reforms have been undertaken in the price, the budget, foreign exchange, the state enterprise sector and the financial system. All this will continue, because all these reforms are closely related to each other.

The state enterprise sector still accounts for about half of the working population and makes substantial contribution to GDP.over 80% of state bank loans. We are aware that some of them are operating at low efficiency. Its reform commands top priority in our Ninth Five Year Plan. The main thrust of the reform policy on the state enterprises is to "focus on the larger ones and give more flexibility to the smaller ones" and to introduce a "modern enterprise system".

On the financial front, we are continuing with our reforms of the banking and non-banking sectors. The commercializationcommercialisation of the state banks will enable the banking sector to operate under the realm of market forces. There are now [13 ] new urban united banks to provide more competitions, while the policy-lending banks and investment banks have been introduced to deal with specific sectors of the economy. With the promulgation of the Commercial Banking Law and the Loan Regulations, state banks are now basing their lending decisions on commercial criteria. This will foster competition and improve the quality of bank assets. We also plan to allow foreign banks to conduct local currency business in Shanghai in very near future. The development of the capital market will also help mobilisemobilise private savings to finance productive investments.

At the heart of the drive for the deepening of economic reforms and market liberalizationliberalisation, is our desire, which the Asian economies all share, for stability and steady growth. We are keenly aware of the inherent volatilities associated with a market economy. This explains why Chinese reforms, like most Asian reforms, are taken on a "gradualist" approach. It would not be immodest to say that through firm, but steady reforms, but also generally tight fiscal and monetary stance, the Chinese economy has achieved good progress in achieving a soft landing.

In sum, we are a firm believer in Asian stability and prosperity. Being one of the larger economies in Asia, China's continued stability and prosperity will contribute to growth and trade in the Region, and indeed the world. Our commitment to reform and liberalizationliberalisation is here to stay. so is that in the other Asian economies. We welcome the participation of the international community in our growing markets, sharing with us their experience and ideas.

The history has witnessed an annual increase of 10% of the Chinese economy over the 18 years since China adopted reform and opening policy. Inflation has come down to 6.5% for this year and foreign exchange reserves has increased to US$100 billion. The Chinese currency became convertible under current account two days ago. According to the Ninth Five-Year Plan, the Chinese economy will continue to increase at 8% per annum while inflation will be below the growth rate. China is willing to share its experiences with other countries and regions. More importantly, China, together with other countries and regions, will make joint efforts to the prosperity in Asia and in the world as well.

I have learnt much from Mr.Mr McDonough's penetrating and challenging view of Asia, and its role in the international financial community. We will need to reflect more on his insights. I would like to congratulate the Hong Kong Monetary Authority for inaugurating this Distinguished Lecture series. Bringing financial leaders such as Mr.Mr McDonough with new ideas and fresh perspectives of the changing global financial market is a good way of helping Hong Kong's financial community of appreciating it's role as an international financial centre. Asia, America and indeed Europe and the rest of the world all operate in a global market. In the 21st century, all cities in Asia would have access to global markets. We see a bright and glorious future for us all, but we must work hard and work together to make that future a reality.

Thank you.