Pacific Exchanges

In the final episode of our series on the Asian financial crisis, we take a look back at key themes and takeaways from our conversations. We also discuss Nick's recent research paper on Asian bond market developments since the crisis.

Some of the key themes we review:

• Most of our guests focused on the role of fixed exchange rates, foreign currency debt, and capital control liberalization.
• Still, 20 years later, there remain differing views on the importance of failed Asian corporate governance versus speculative foreign capital inflows in driving excessive risk taking ahead of the crisis.
• The region's reaction to the crisis—notably a movement towards more flexible exchange rates and a build-up in foreign exchange reserves—led to a sea change in global capital flows, a shift some analysts consider as a contributor to the 2008 global financial crisis a decade later.
• Many problems previously considered distinct to emerging markets in the wake of the Asian Financial Crisis now appear to be universal.
• China faces a number of challenges similar to those of emerging Asian economies in the 1990s, including a rapid build-up in credit and currency management in the face of volatile capital flows.
• Asia's bond markets have grown significantly over the past two decades and represent a growing alternative to the banking system. Whether these markets can provide a "spare tire" in time of crisis remains debatable, however.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode of our series on financial technology, we sat down with Souheil Badran, president of Alipay North America. Alipay is the payments spinoff of China's ecommerce giant Alibaba and is now part of Ant Financial, the largest fintech company in the world.

Some of the key takeaways from our conversation with Souheil include:

• China's mobile payment platforms have become "lifestyle apps". Chinese consumers use their phones to make payments for everything from taxis and movie tickets to insurance and mutual funds.
• Every year, Chinese tourists take 130 million trips outside of China. Chinese mobile payment firms are expanding internationally in order to service these customers when they are travelling abroad.
• The rapid growth of mobile payments in China was driven by the lack of payments infrastructure for credit and debit cards. Chinese fintech companies offered merchants a cheaper solution through the use of QR codes.
• Data from payments activity has allowed Chinese fintech companies to create their own credit scores for users and make small loans to them.
• The same types of fintech services are available in both China and the U.S., but the Chinese market is different because these services are all available on a single "platform" rather than distributed across multiple different apps.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode of our series on financial technology, we sat down with Katie Macc, co-founder and chief operating officer of Juntos Global, a fintech company that serves as a bridge between financial access and financial inclusion for the world's newly banked. Kate tells us about the ways technology can help solve many of the problems facing the unbanked around the world.

Some of the key takeaways from our conversation include:

• Lack of trust is a key barrier to getting the newly banked to use their new accounts.
• For fintech products to be successful, new users need to trust the financial institution, the product itself, and their own ability to use it.
• Socioeconomic status can play a huge role in how people use fintech. The differences between users within a country can be greater than similar groups across multiple countries.
• Necessity is the mother of innovation. Fintech in emerging markets has been forced to adapt to low profit margins and information constraints. These experiences could offer insights for firms aiming to fill gaps in financial inclusion in the United States.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode of our series on financial technology, we sat down with Kate Lauer, a senior policy advisor at CGAP. Kate is an expert in microfinance, financial inclusion and global financial regulation. She is currently researching the impact of regulatory sandboxes on fintech and financial inclusion.

Some of the key takeaways from our conversation with Kate include:

• Regulatory sandboxes are a two-way street, allowing fintech companies to learn about regulation, but also allowing regulators to learn about fintech.
• Creating a level platform for fintech companies to compete, while also mitigating risks, is one of the primary challenges facing regulators.
• There are very large differences in the structure of Asian regulatory sandboxes.
• Asia faces an immense financial inclusion problem, but some of the most interesting financial inclusion efforts are taking place in the region.
• Bringing people into the formal financial system touches upon complicated issues of taxation and privacy.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In the eighth episode of our series on the Asian financial crisis, we spoke with Don Hanna, a prominent international economist who has advised investors on Asia for over three decades. Don has worked as an economist at a variety of global financial institutions and multilateral organizations and lived in the region for 16 years. He has written extensively on Asia's economic and financial development since the crisis.

Some of the key takeaways of our conversation include:

• Foreign investors had a more nuanced view of Asia during the crisis than is commonly acknowledged. While some prominent hedge funds were famously short the Thai Baht, they had a more balanced view of other Asian economies, such as Indonesia.

• Investors often confuse the difference between real and nominal rates when investing in overseas markets. This can lead to insufficient risk analysis and, in the worst case, rapid outflows when investors suddenly discover the difference.

• While capital controls can be helpful as a country slowly liberalizes its financial system, sound regulation is arguably more important in preventing and managing crises.

• Since the crisis Asian economies are increasingly issuing debt in their own local currencies. This is a noteworthy development and has the potential to reduce the risks associated with currency mismatches.

• Financial innovation to spur productivity growth, but that innovation can create risks that are often unforeseen and perhaps unknowable in advance. Regulators have to find a balance between promoting innovation and controlling risks.

In the seventh episode of our series on the Asian financial crisis, we spoke with Barry Eichengreen, a professor of economics and political science at UC Berkeley. He's written extensively about the sequencing of financial opening in Asia and the challenges associated with cross-border capital flows. He's also authored numerous articles looking back on the lessons from the Asian financial crisis.

We spoke with Supavud Saicheua, Head of Economic Research at Phatra Securities, about Thailand's role in the Asian financial crisis. In our conversation, Supavud discusses the economic and financial risks that developed in Thailand during the 1990s and how they led to the crisis. He also explains how the Thai economy has changed in the decades since the crisis and what risks remain today.

Some of the key takeaways of our conversation with Supavud include:

• After a long period of stability, Thai borrowers had excessive confidence in the stability of the exchange rate and took on large amounts of foreign currency debt.
• When investors lost faith in Thailand, they began to notice similar problems in other Asian economies, causing the crisis to spread across the region.
• The policy reforms recommended to Thailand after the crisis led to a sharp increase in interest rates, putting further stress on banks and companies.
• Thailand's recovery was slower than other Asian economies due to its aging society, increasing competition from other economies in the region, and political unrest in the wake of the crisis.
• Leverage plays a key role in all financial crises, including the Asian financial crisis.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System

In the next episode of our series on the Asian financial crisis, we spoke with Changyong Rhee, the Director of Asia Pacific Department at the IMF. Changyong is a well-respected economist who has worked as an academic, an advisor to the Korean government, and at a variety of international institutions. He brings along many years of experience covering economic and financial developments in Asia.

Some of the key takeaways of our conversation with Changyong include:

• Korean policymakers were aware of the risks of opening up financial markets and pursued a gradual and indirect approach to capital account liberalization.

• Financial liberalization prioritized indirect borrowing by financial institutions, rather than more stable FDI, making Korea susceptible to capital outflows during the crisis.

• Although strong cooperation between the government, conglomerates, and banking sector was critical to South Korea's growth, it also created large moral hazard problems.

• The IMF program helped Korea restructure its economy and become more resilient to financial shocks, but some of the policy recommendations created domestic backlash.

• While Asian economies are in a far stronger position compared to the past, there are still significant economic risks stemming from high leverage and rapid demographic aging.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System

In the fourth episode of our series on the Asian financial crisis, we talked with Simon Johnson,

Some of the key takeaways of our conversation with Simon include:

• The Asian Financial Crisis was the result of countries running large current account deficits stemming from overvaluation, rather than overinvestment.

• Corporate governance played a significant role during the crisis. Emerging Asian countries had similar governance problem and vulnerabilities, mainly rooted in family ownership of firms.

• Because many of the affected countries were export-oriented, they took advantage of the large depreciation in the real exchange rate in order regain competitiveness and recover from the crisis.

• After the crisis, policymakers' views on capital liberalization changed and many now agree that emerging markets should limit capital inflows during booms.

• Safeguard measures for future crises involve increasing transparency in governance, as well as implementing high and robust capital requirements and funding policy on bank management.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System

In the third episode of our series on the Asian financial crisis, we talked with Andrew Sheng, a Distinguished Fellow at the Asia Global Institute. Andrew has worked as a central banker, financial regulator, academic, and advisor to numerous Asian financial organizations. He had firsthand experience of the Asian financial crisis when he was serving served as the Deputy Chief Executive of the Hong Kong Monetary Authority.

Some of the key takeaways of our conversation with Andrew include:

• The financial linkages and interdependencies among different countries in Asia were not fully understood prior to the crisis and made policy response difficult.
• The depreciation of the Japanese yen led to a regional economic slowdown, exposing risks that would ultimately precipitate the crisis.
• Many of the problems that created the Asian financial crisis were left unresolved—such as inadequate response to insolvency— and these issues would later contribute to the global financial crisis.
• Currency pegs can be useful, but economies must be willing to endure a lot of pain to maintain them.
• Policymakers must be clear on whether they are facing a liquidity crisis or a solvency crisis. The policy prescriptions for each are very different.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.