## Globalization and Asia: The Challenges for Regional Cooperation and the Implications for Hong Kong

_IMF News, March 7, 1997_

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## Bibliographic details
- Published: March 7, 1997

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### Overview
- Address by Michel Camdessus, Managing Director of the International Monetary Fund, at the conference "Financial Integration in Asia and the Role of Hong Kong", Hong Kong, March 7, 1997.
- Central theme: the impact of globalization on Asia’s role in the world economy, the internal transformations within Asia, and implications for regional cooperation and for Hong Kong specifically.
- Framing: successes of the "Asian miracle", rising trade and financial integration, and preparatory context less than 120 days before the resumption of Chinese sovereignty.

### Global and regional integration: key findings
- Asia’s share of world output:
  - As recently as a decade ago, the developing countries of Asia accounted for only one-sixth of world output.
  - Asia, excluding Australia, Japan, and New Zealand, now accounts for about one quarter of world GDP on purchasing power parity-adjusted terms.
  - On this trend, the region could account for one-third of world output by the year 2005.
- Trade:
  - Over the last decade the developing countries of Asia have seen their share of world exports nearly double, to about one-fifth of the total.
  - Increased share of industrial country exports helped cushion the impact of recessions in industrial countries during 1990-93.
- Capital flows:
  - Net private capital inflows to the region rose to over $100 billion in 1995, described as well over half of total private capital flows to developing countries.
  - Between 1990 and 1995, foreign direct investment in the region increased more than fourfold.
- Financial market deepening:
  - In some countries, equity market size as a share of GDP now matches many industrial countries; examples given: Hong Kong, Malaysia, and Singapore—stock market capitalization as a share of GDP exceeds that of France, Germany, and Italy.
- Financial intermediation geography:
  - Japan is and is likely to remain the world’s largest exporter of capital.
  - Hong Kong and Singapore have emerged as major financial centers intermediating savings within Asia and channeling saving from other parts of the world.
  - Hong Kong is the main conduit for investment in China and arranges a significant proportion of Asia’s syndicated borrowing; Singapore has evolved into the main banking center for Southeast Asia.

### Trade challenges and policy recommendations
- Structural change and comparative advantage:
  - Comparative advantages are shifting; high-wage economies are moving toward higher value-added products and services.
  - Example: labor-intensive manufacturing shifting out of Hong Kong into mainland China, with Hong Kong benefiting via trade and financial services growth.
- Policy recommendations:
  - Maintain and extend open trade regimes; countries that have not fully opened should do so.
  - Extend openness to new trade frontiers, notably services.
  - Increase transparency and free flow of information critical for services and financial sectors.
  - Develop effective "exit" policies for noncompetitive industries.
  - Improve infrastructure (transportation, telecommunications, power) while avoiding undue strain on public finances or external positions.
  - Encourage private sector participation in infrastructure—requiring greater regulatory transparency and clarified pricing policies where necessary.
  - Reduce less productive public outlays (e.g., military expenditure) to strengthen public finances.
  - Ensure regional trade initiatives are compatible with global trade liberalization, with optimism that Asia’s cooperative approach will complement WTO efforts.

### Financial sector challenges and policy recommendations
- Domestic policy fundamentals:
  - Stable macroeconomic policies, transparent and predictable regulation, and reliable legal frameworks are essential to attract savings and investment.
  - Prudential regulation and supervision in many countries have not kept pace with financial innovation and integration.
- Risks and consequences:
  - Large capital inflows reduce policy maneuver room and increase exposure to financial sector risks.
  - Weak supervision could impede the ability of monetary authorities to tighten policy without aggravating banking problems.
- Financial infrastructure and regional centers:
  - Asia needs a stronger, more dynamic financial infrastructure to handle complex intermediation requirements.
  - Expected development of a network of modern financial centers: Tokyo, Hong Kong, Singapore, and emerging centers such as Shanghai, Bangkok, Kuala Lumpur, and Seoul.
- IMF-related steps and safety nets:
  - Strengthened IMF surveillance will give greater attention to capital account developments, banking system soundness, data quality and timeliness, and emerging-market-specific issues.
  - The New Arrangements to Borrow will double the credit lines available to the IMF to deal with exceptional situations threatening the international monetary system.
  - Emphasis that these resources supplement, but do not replace, the Fund’s quota-based resources; membership will soon decide on a quota increase described as needing to be substantial.

### Regional cooperation and coordination
- Rationale:
  - Closer integration raises each country’s stake in the stability and prosperity of others.
- Examples and recommendations:
  - Swap arrangements among Asian central banks cited as constructive cooperation to maintain regional stability; explore further development of such initiatives.
  - Enhanced cooperation among national supervisors will improve bank supervision effectiveness and contribute to a more global approach.
  - Welcomes membership of several emerging Asian economies in the Bank for International Settlements and their support for strengthening IMF surveillance.

### Implications for Hong Kong and reasons for confidence
- Hong Kong’s role:
  - Seen as essential to continued Asian prosperity and global integration.
- Ingredients of Hong Kong’s success:
  - Long record of sound policies: exchange rate link to the dollar, tight rule-based fiscal policy, macroeconomic stability, investor confidence.
  - Institutional assurances: Joint Declaration and the Basic Law enshrine "one country, two systems"; arrangements for the Hong Kong Monetary Authority and the People’s Bank of China to operate as two mutually independent, but cooperating, monetary authorities.
  - IMF consultations: IMF annual review of Hong Kong completed two weeks prior to the address; Executive Board strongly endorsed the policy framework; consultations to continue after the transfer of sovereignty.
  - Flexible product and labor markets; entrepreneurial and management skills emphasized.
  - Openness: free port and no capital controls; reference to China’s progress—renminbi trades on a market basis in China and exchange controls on current transactions have been eliminated.
  - Prudential supervision: high standards, well-capitalized banks, large official foreign exchange reserves.
  - Sound legal and administrative framework, neutral civil service, impartial judiciary, and freedom of information.
  - Economic integration with the mainland: continued mainland development provides market opportunities for Hong Kong; Hong Kong’s dynamism supports China’s growth.
- Outlook:
  - Transitions present uncertainty but "one country, two systems" approach expected to ensure smooth transition and short-lived uncertainty.
  - IMF and World Bank members to observe arrangements at the 1997 Annual Meetings in Hong Kong.
  - Continued IMF interest and yearly consultations reaffirmed.

### Key statistics and numeric highlights
- "Less than 120 days before the resumption of Chinese sovereignty."
- Developing countries of Asia previously: one-sixth of world output.
- Current share: about one quarter of world GDP (PPP-adjusted) for Asia excluding Australia, Japan, New Zealand.
- Projection: could account for one-third of world output by the year 2005.
- Share of world exports for developing Asia: about one-fifth.
- Recessions in industrial countries referenced for 1990-93.
- Net private capital inflows to the region: over $100 billion in 1995.
- Private capital inflows described as "well over half of total private capital flows to developing countries."
- Foreign direct investment in the region increased more than fourfold between 1990 and 1995.
- Stock market capitalization as a share of GDP: in Hong Kong, Malaysia, and Singapore exceeds that of France, Germany, and Italy.
- Reference to IMF document identifier: 97/3.
- New Arrangements to Borrow: "will double the credit lines available to the IMF."
- IMF quota decision: membership will soon be deciding on a quota increase, described as needing to be "substantial."

*Address by Michel Camdessus, March 7, 1997.*

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