Should Asians be financial leaders or followers?

Writer: 
Andrew Sheng

Hong Kong this week celebrated the breaking of the Hang Seng Index 30,000 level, poised to break the peak of 31,958 set on October 30, 2007 that was the last hurrah before the global financial crisis.  

Earlier last month, the US Treasury published the third of its reports on the US financial system, with the aim of unwinding much of the tough financial reforms enacted in the post-crisis decade on banking, capital markets and asset management and insurance.

A decade of slow growth after the taking the tough medicine of Dodd-Frank Act and Basel III reforms, the US and Europeans are beginning to actively roll back some of these complex and burdensome regulations.  As part of the election promises by the Trump Administration, the US Treasury issued earlier this year some core principles on how it proposes to making financial regulation efficient, effective and appropriately tailored.  In regulatory code terms, this means “best fit” for putting American interest first, rather than “best practice”. 

Across the Atlantic, it is not without irony that Andreas Dombret, Board Member of the Deutsche Bundesbank recently observed: “Basel III reforms…have made the rules even more detailed and complicated.  The Basel rules are made for large internationally active banks - they were not designed with small banks in mind.”  “Rules are too complex for small, locally oriented banks.”

Crudely speaking, have we asked Asian banks, which are mostly locally oriented banks, to take complex cancer medicine for global banks, when the on-the-ground problems are more basic malaria? 

Attending the Asian Global Dialogue at the Asia Global Institute, University of Hong Kong, the mood was concern that current mindsets and institutions are running at one or two cycles behind the markets that are moving at internet speed.   This is particularly true for Asian intellectuals and policy makers that have followed the creed that “West is Best”.  As then Chinese Vice Premier Wang Qishan asked presciently in 2008 on the outbreak of the global crisis, “what do the students do when the teachers make mistakes?”

The problem of Asians-as-followers syndrome has become more acute in the area of FinTech, a term that roughly covers the digitisation of finance or broader still, the New Digital Economy.  As Asian regulators diligently followed the implementation of complex Basel III rules, which are great in principle on more capital, but deeply complex and comprehensible only to highly paid lawyers and compliance specialists, Asian financial market lunches are being eaten by the rise of FinTech platforms that have moved rapidly into the field of payments, logistics, distribution and even asset management.  The rise of Bitcoin, which has risen to over $8.200, even threatens to disrupt sovereign central bank money. 

Those who asks incumbent financial institutions to play in regulatory sandboxes need to ask whether Asians are still kindergarden kids or adults facing the real world?  They miss the fundamental point that current regulatory mindsets are still in functional or product silos, whereas technology platforms are already cutting across regulatory boundaries, which push the real business either off-balance sheet or off-shore.  Financial regulators did not ask the fundamental question whether regulating only part of business makes sense, when they are holding only the financial leg of business, whereas tech platforms are engaging in multi-sector business seamlessly from manufacturing, production, distribution, payments and then value management? 

In other words, whilst banks which are the dominant component of Asian finance, are asked to stay in sandboxes, their lunch (interest rate margins) is being squeezed by lower and lower interest rates, costs are increased by tighter regulations and market share is being taken by technology.  As any parent will tell you, if you treat your kids as babies, they will never grow up to compete. 

After German Chancellor Angela Merkel remarked that Europeans should think for themselves, after being criticised for German trade surpluses, Asians should truly ask whether we should also begin to think for ourselves? 

The answer is that the future is so clouded by complex geo-politics, populist demands, climate change and disruptive technology that no one, including the best in the West, knows the answer.   America first means that Americans choose policies that best fit American conditions and needs.   Asian followers that think that West is best should at the minimum agree that global rules should be applied to best fit Asian conditions.   No one disputes the need to apply broad principles of prudent banking and sound corporate governance, but if finance does not serve the real economy  and it does not grow, even kids will recognise that finance will suffer sooner or later.  

The fundamental mistake of the post-crisis reforms adopted by both the US and the Europeans (diligently followed in Asia) is to think that their debt overhang can be solved by more debt.  The US Treasury report on the capital market showed that both the number of listed companies and the number and size of IPOs (initial public offering of listed securities) have declined.   There are only 50,000 listed companies in the world, whereas there are hundreds and millions of small and medium-sized enterprises that are still struggling to access capital.   In short, public equity markets serve only a minority of players, not the majority.

Indeed, as Professor Lazonick has amply shown on US financialization and shareholder value policy, the amount of net equity capital raised by US companies in public markets in the last decade has been less than the amount paid out by these companies in terms of dividends and share buybacks.  These giant companies have cut back on long-term investments and kept higher amount of cash in off-shore tax havens, whilst borrowing domestically for tax purposes.  They cut back on wages and the labor force, creating the whirlwind of populist anger from job insecurity.

If Americans are questioning whether this is best for American behaviour, Asians need to ask more fundamental questions whether that model of real economy and financial structure best fit their own domestic conditions.  Should Asians, or for that matter Africans and Latin Americans, continue to think in regulatory sandboxes?

Time to grow up and think for ourselves.

Andrew Sheng writes on global issues from an Asian perspective and refuses to think in sandboxes.