Does Asia's bank-and-credit crisis signal long-term problems or just short-term worry?

Long-term

1 of 2

by Stephen Carter

Write now Print Invite a writer™ Add to Favorites RSS Feed Contact this writer

Observers are inclined to think that because the brief, sharp currency crisis back in 1997/98 is long gone, that the larger, deeper, more profound crisis surrounding the banking industry and their levels of debt (loans often made by government edict to preferred, or 'favored' corporations) is also long gone. Nothing could be further from the truth.

Theories abound about the original causes of the 'currency contagion', as it was called. The most plausible cause is the one in plain sight: the irrational, preferential, 'guangxi'-based decision-making paradigm (lending to those with 'connections') that banks use as a matter of course in their operations. To my knowledge this practice has not changed substantially (there are notable exceptions, however). Bear in mind that cultural practices are usually slow to adapt to changing circumstances.

These various crises have receded largely because trade surpluses in Asian countries have produced excessive foreign exchange liquidity, especially that of US dollars, that is being used to supplement foreign exchange reserves. Contrary to popular belief, this will not necessarily prevent the next crisis. It will simply change the nature of the crisis.

It thus appears that the situation in some parts of Asia is one of increasing long term credit and currency risk. It is not merely a situation of short-term worry.

What, then, is the solution?

As is normally the case with economic problems, there is no single, exclusive, across-the-board solution. China, for example, is taking a road of extreme prudence, moving very slowly in allowing its currency to adjust, in effect, to an economy that is expanding beyond the reach of policy-makers to regulate. Other nations are able to move less slowly, less intrusively, allowing their currencies a considerably greater latitude of movement. It is ironic that despite China's rigorous attempts to 'direct' its economy, any control it has is largely illusory.

At any rate, before the Bretton Woods agreement was abandoned in 1972, the global 'money system' was relatively stable, if not rigid. However, as inflation shocks piled up, and as pressure on the 'value' of gold (as opposed to its fixed
'price') escalated, it rapidly became an unsustainable burden for the US. Then Bretton Woods was abandoned and the current system of freely floating currencies was instituted. However, not surprisingly, the global currency system and credit ratios have continued to face challenges. Clearly at some point a new paradigm will be required. Asia's banking and credit industries are among the world's least well-equipped to handle such a change of paradigm. Therefore the currently-simmering pressures will have long-term implications for Asian economies.

Asia will not be able to solve these problems on its own, as certain aspects of our current situation are global and systemic. For the present it does seem that financial institutions would be well-advised to place lending decisions on a more objective, impartial, rules-based, and decidedly less 'mercantilist', foundation.

Learn more about this author, Stephen Carter.
Click here to send this author comments or questions.