Emerging markets, generally

Giving Asia Its Due in Global Financial Regulation *

January 10, 2017, by Nicolas Véron, Brussels

With US inward turn, China should get a bigger role to bolster system

Global cooperation on financial regulation has become increasingly important and valuable over the last decade, but its effectiveness cannot be taken for granted. Following November’s U.S. presidential election, Asia, and particularly China, needs to take a more central role to ensure the viability of the global system.

Compared with other modes of international economic cooperation, the global financial regulatory system is in a nascent stage of development. It is made up of a network of diverse organizations and groupings, many of them without legally binding authority, with the Financial Stability Board acting as a coordinating hub.

This system has grown in importance, particularly since the global financial crisis, and its impact has been overwhelmingly positive. The Basel Committee on Banking Supervision, for example, has helped to limit cross-border competitive distortions resulting from incompatible prudential rules and has been increasingly forceful in monitoring national compliance with its agreed standards. The widespread adoption of the International Financial Reporting Standards Foundation’s accounting principles has greatly enhanced the international comparability of listed companies’ profit statements, even if not yet on a universal basis. The Global Legal Entity Identifier Foundation has opened the way toward universal interoperable financial data formats by issuing codes to transaction participants that function in a way comparable to the internet protocol addresses that underlie the World Wide Web.

Such arrangements are even more valuable as the global financial system becomes increasingly multipolar and interconnected, enhancing the need for joint work by public financial authorities on a commonly agreed basis.

Aside from the above organizations, key participants in the regulatory system include treaty-based organizations such as the Bank for International Settlements, which hosts the Financial Stability Board, the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation and Development and its Financial Action Task Force. These are complemented by independent groups such as the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the International Forum of Independent Audit Regulators. The roots of the treaty-based institutions can be traced to the second quarter of the 20th century, but none of the other entities in this global network are more than 45 years old.

The global financial regulatory system has long been lopsided and in need of change as the emergence of new financial powerhouses, particularly in Asia, has challenged the dominance of North American and European states.

Significant improvement has flowed from the 2008 shift to tackling financial and economic issues at Group of 20 leaders’ summits from Group of Seven nation summits. The membership ranks of the Basel Committee and the Financial Stability Board, for example, have been expanded to include major emerging economies and financial centers.

But blatant imbalances remain. On a recent count, all but one of the 27 most senior leadership positions in this system were held by nationals from North Atlantic countries. Almost all entities in the network are similarly headquartered in the North Atlantic region, the only exception being the soon-to-be-established permanent secretariat of the International Forum of Independent Audit Regulators in Tokyo.

Challenges ahead

The system’s institutional fragility is about to be tested by the incoming administration of U.S. President-elect Donald Trump. His “America first” stance will surely create multiple challenges for all international cooperation frameworks, and financial regulation will be no exception.

The response to this test should include an accelerated rebalancing and reform of the global regulatory system to ensure its viability in the new environment. Asia, and specifically China, should claim a much more central position in the system than is currently the case and other nations should facilitate this evolution.

Specifically, China should propose highly qualified officials, of which it has an increasing number, for positions of leadership in global financial regulatory bodies and engage more proactively in their various workstreams. As with action against climate change, and given Europe’s current internal difficulties, China is fast becoming the indispensable anchor for sustainable joint efforts at the global level and should invest accordingly in its representation in global discussions.

In this context, Europe should streamline its presence in the system, as a logical consequence of its own ongoing reform and thus leave room for greater Asian and Chinese leadership. Specifically, Europe’s banking union implies that the representation of individual euro-area countries in bodies in charge of financial stability has become anachronistic and should be replaced by euro-area or EU-level participation. The Basel Committee is a case in point. Now that banking supervisory policy has been comprehensively pooled within the euro area, the separate membership of Belgium, France, Germany, Italy, Luxembourg, the Netherlands and Spain should be phased out.

The relevant bodies should then demonstrate their continued relevance by further improving the system’s effectiveness, even if the new U.S. administration does not initially join some of the resulting initiatives. For example, the Bank for International Settlements, IMF and others should further harmonize formats for financial statistics and data collection. Global regulatory standards should be forcefully developed in new areas in which their need is increasingly evident, such as derivatives. And steps should be considered toward establishing a global level of supervision for limited but critical segments of the financial system, starting with those with no likely fiscal or quasi-fiscal impact in a crisis, such as credit rating agencies or audit firms.

The events of the past decade have amply demonstrated the need for strong global regulatory and supervisory arrangements to keep the inherent risks of cross-border financial integration in check. The prospect of a more unilateralist America should force a rapid realignment in China, other Asian countries and Europe, so that the existing, beneficial financial regulatory system is not left to unravel.

Nicolas Veron
Senior fellow at Bruegel, an economic think tank in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington.

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* Both the author and Nikkei Asian Review gave us the permission to re-print the article. Thanks to them. The article was initially published on December 26, 2016.

About bubbles in China, Sweden and elsewhere

November 3, 2016, by Hubert Fromlet, Kalmar

Currently, there is an intense discussion going on whether there is a bubble on the Swedish real estate market or not. But this question should not be the point anymore. In my view, there is already a bubble without any doubt after all these years of credit boom and enormous price increases on this specific market in mainly major Swedish cities.

The question is instead whether this bubble will burst or not. Children know about this distinction when producing bubbles with their chewing gums. They want the bubble to burst by inflating it further. Financial analysts, however, have many times no feeling for such a necessary distinction between the existence of a bubble per se and its possible bursting.

So, why does the Riksbank – not literally spoken – refuse to apply this bubble phenomenon taken from the world of childhood? They do, of course, hope – unlike most children – that the bubble within the forseeable future will diminish more or less by itself and/or by the already visibly weakened Swedish currency – preferably without a major explosion, of course.

Is this, however, still possible under current overheating conditions? May be not. Probably, something drastic must happen to deflate the existing bubble on the Swedish real estate market, whatever the tool or the triggering event may be.

Moving the analysis to the Far East, China is another country having a real estate bubble right now, both what regards residential investments and the commercial real estate sector (city offices and industrial parks). Concerns (should) still increase.

What we do know from history is the fact that it normally takes quite some time until a bubble on real estate markets finally bursts – but also that the consequences of such a bursting bubble tend to be severe and long-lasting.

A very micro-oriented observation may be illustrative. I recently had the opportunity during a flight to read a leading Hong Kong-based newspaper completely from the first to the last page. One micro-oriented article was striking me particularly.

This article was about massive property sales of an extremely rich Chinese tycoon (on the highly-valued Shanghai market). He had simply concluded that the risks on Chinese real estate markets had become too high.

Ten years ago, the same tycoon paid around 3000 yuan for one square meter in this specific Shanghai project. Now it is noted that square meter prices in neighboring locations have been soaring up to 50 000 yuan. What a bubble! It may burst – or not. But risk-upgrading is still in place.

Sometimes, micro observations can cause or strengthen real macro concerns …

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board


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Hot topics for analysts inside and outside China

September 30, 2016, by Hubert Fromlet, Kalmar

In the past few weeks, I met quite a number of Chinese economists at different places and conferences.

Totally, some topics were really dominating. Below, I give some brief summery of three points that have been most frequently mentioned and discussed – and of two topics that should be in the headlines:

1. The “One belt, one road”-investment plan

Clearly, the Chinese are very enthusiastic about their mega-infrastructure project “One belt, one  road” from China to Europe (Silk Road Economic Belt & Maritime Silk Road). This major investment  program is assumed to boost the domestic Chinese economy substantially. But the Chinese also emphasize that benefits will reach Western Europe. How much this really will be the case remains to be seen However, it should be said that the (Swedish) press and potentially involved companies in Sweden and other countries should have a regular eye on developments of the Chinese “One belt, one road”-plan – despite the uncertain dimensions of this project.

2.  The deterioration of U.S.-China relations

There is no doubt that the political relations between the United States and China have been deteriorating more recently. The absence of a red carpet at president Obama’s arrival to the G20 summit in Hangzhou was mostly symbolic. The underlying problems, however, are currently much deeper and more fundamental.

3. China is really concerned about Europe/the EU

China’s uncertainty about Europe/the EU and investments and sales there has obviously been increasing in the past few quarters – and even more after the British exit voting. Europe/the EU have lost recognition in China, at least currently.

4. Insufficient knowledge about the current status of Chinese economic reforms

It seems to be striking that many Chinese economists are so little informed about all the ambitious reform plans from the Third Plenum –
and how much has been achieved so far. Transparency seems to be lagging  substantially. This can be considered as a serious shortcoming. How are current short-term growth stimuli related to the planned structural reforms? No answer has been given.

5.  No comments at all on the future composition of the Standing Committee

It’s no real surprise but I have not heard any comment on next year’s new appointments for the Politburo Standing Committee of the Communist Party, the most important political body in the People’s Republic and, consequently, for economic policy. My own feeling is that president Xi Jinping will strengthen his position in this crucial decision-making forum after the fall of 2017.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board


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