Reluctant Regulators: How the West Created and China Survived the Global Financial Crisis

Preface

It would be hard to find a better vantage point from which to survey the international financial crisis of 2007–09 than Hong Kong. The unparalleled global economic growth that preceded the disaster had followed three decades of a worldwide trend towards the liberalisation of trade and finance at both the national and international levels. Protectionism and state-planning went out of favour, even in a nation previously wedded to the most anti-capitalist ideology as China had been — with astonishing growth as its reward. Thus, laissez-faire, Hong Kong’s long-ignored formula for selfgenerated , sustained growth, became a global fashion. Its own economic performance had several claims to fame starting with the fastest rise from poverty in Asian history. Thanks to its industrial take-off after World War II, it had become the world’s largest supplier of light industrial products by the mid-1960s. Its dominance of the world garment trade continued till the end of the century despite the relocation of virtually all its manufacturing facilities to southern China in response to Deng Xiaoping’s 1978 liberalisation policies. Less well known is its role as Asia’s leading international finance centre. For much of the previous century, Hong Kong was the location for Asia’s freest financial markets and provided the region’s most liberal environment for international banks. Between 1950 and 1971, it had also been the base from which China could safely carry out international financial and commercial transactions despite the economic embargoes of the Cold War. After the nation adopted its ‘open door’ policies in 1978 and embarked on economic liberalisation, Hong Kong grew in stature as an international financial centre. Yet, until 1986, financial crises were a recurrent feature of the business landscape, aggravated by the mounting vulnerability of the Hong Kong dollar from the mid1970s . The susceptibility of its financial markets to asset bubbles — especially in the property sector — was a major feature of Hong Kong’s history. Preface viii Preface The colonial administration of that period was extremely reluctant to accept responsibility for financial stability and introduced regulatory reforms to halt illegal and imprudent banking behaviour piecemeal and as minimally as possible. The United Kingdom, although constitutionally responsible for the good government of Hong Kong, preferred not to get involved. Nevertheless, despite the crises and scandals, the financial sector went from strength to strength, attracting an influx of major foreign banks and an expansion of Chinese state banks’ activities. By 1985, however, the case for regulation had become irresistible as bank failures could be traced to the gross professional incompetence of bank owners and executives as well as to their illegal activities. The government was now forced to abandon its preference for the lightest touch regulation and its aversion to intervention in the markets as mounting public outrage at the regulators’ failures made further bank bailouts too expensive politically. From a personal point of view, I benefitted from an ample supply of excellent ‘mentors’ as a young member of the Far Eastern Economic Review’s editorial team from 1966 to 1976. Political leaders, officials and businessmen around Asia were willing to explain events and policies to me principally out of an awareness that if journalists are misinformed , their output can undermine depositor and market confidence. Thereafter, access to policy-makers and industry leaders expanded when I reported for Euromoney and Asiabanking on financial developments in Hong Kong and the Chinese Mainland, which were of growing international interest. One group of bank executives deserves to be identified individually . The speed of China’s emergence as a major participant in global financial as well as export markets can be attributed to the personal qualities of its bankers throughout the first 30 years of the People’s Republic. From 1949 to 1978, the ‘capitalist’ world and its ways were targets for relentless condemnation by the Chinese Communist Party, and contacts with foreign firms and individuals could be politically perilous . Nevertheless, managers from China’s state banks in Hong Kong, many of them from the Shanghai business élite whose relatives on the Mainland were being punished for their ‘class origins’, followed the line of Prime Minister Zhou Enlai and maintained connections with their foreign counterparts. As a result, China’s links with the world’s banking system were never severed completely, and thus the obstacles to normalising financial relations with the outside world in the 1970s were less daunting than would later be the case for the former Soviet Bloc. Among those involved in...