A look back at East Asian Economies 10 years after the financial tsunami

We all remember the painful financial tsunami happened 10 years ago. From what we have seen happening in the US and in Europe, where banks were forced or standing at the edge of going bankrupt, it seemed that the situation was a lot calmer in the East Asia. Seeing the continuous growth of emergent markets like China, the perception of how East Asian Economies were not as affected grew even stronger. Was that really the truth? If not, are there observable changes in the East Asian economies? Did the financial crisis gave a lesson to investors, speculators, and policy makers? Did they take or are they taking actions to prevent history from repeating?

In this article, I will have to disappoint those who believe in the fallacious perception that you used to have on East Asian Economies during the financial crisis. Starting off by China, groups of researchers led by Willett have investigated the GDP growth and stock performances in major advanced economies and the emergent markets. Although China was able to maintain high growth rates, the shortfalls of growth that below the predicted trend then was pretty much close to the lost percentage of the United States. If we are to estimate how much did China “lose” from its predicted trend, the growth rate was -3.4%, which was indeed higher than the absolute decline of the United States in 2008. Hence, even if it appears that China enjoyed a much higher growth rate in comparison, it’s just the glitter that we see on the surface.

As for Japan, certain economists argue that Japan learnt its lesson from its bubble economy in the 1980s, which prepared them well from being attacked by other financial crises, and took cautions in spending and investing. The perception on how Japan stayed calm after the subprime mortgage crisis was, arguably, “misled” by figures. Whilst global lost from subprime-mortgages topped approximately to one trillion dollars, Japan only lost about eight million, forming a misconception on how Japan was not as seriously affected. When European and the US economies were jealousing how Japan did not suffer as much as they did, pessimists held opinions from an opposite side.

Japan’s economy officially fell into a recession since the second half of 2008, which has already set a weak beginning in the war against the financial crisis. By the time when the financial crisis arrived, Japan was already performing worse than how market had predicted. First, Japan has recorded its first GDP contraction (where an economy records a decline for or more consecutive quarters) since 2001; Secondly, the sudden weakening economies of Japan’s trading partners. For years the closest export markets of Japan are the USA and China. It was well recognized that the Japanese economy had been relying on the export trade to contribute to its GDP. In February 2009, the export growth of Japanese recorded to a lowest drop of 49.4%. As we have just discussed how their export partners were also suffering , the situation did not project a positive prospect for an export-leading economy of Japan. Even one of the Japanese automotive giants Toyota, was facing stress in sales due to the weak export market, and the devaluation of USD.

Two other Asian tigers of South Korea and Hong Kong were not much better off either. Between August 2007 to November 2008, South Korean won devalued approximately 50 percent; the national benchmark index KOSPI 200 failed to a low 948 points in November 2008, over 50% from its original level of about 2000 points. In Hong Kong, stock soared to a historical high of 31,958 in October 2007, but has started plunging immediately a month later. As the subprime mortgage crisis was approaching, the record of biggest daily drop in Heng Seng index was broken twice in only a week of time - 1386 point and 2061 point respectively. In September 2008, the Heng Seng index dropped from over 20,000 points to less than 17,000 in only a few days of time. In October, the HSI index was at a risk to fall from the cliff of 10,000 point, meaning that around 20,000 points were evaporated in only 1 year of time. Other than the plunging stock markets, those who have purchased Lehman Brother’s subprime mortgage bonds went on street to protest against “unethical selling tactics” by banks, and demanded government’s intervention in forcing banks to repay investors.

So, after paying such heavy price as the consequence of the US subprime mortgage loan, how did the East Asian economies react? Were there new regulation implemented in response to the lessons learnt?

For the case in China, the answer was quite direct and obvious. The People’s Bank of China (PBC) continued to play a dominant role in managing investment activity and money flow, as well as implementing innovative risk control policies. For example, rather than setting a inflation target as how international markets generally do, the PBC include multiple considerations when dealing with its monetary policy. In 2016, Chairperson of PBC explained in IMF, stating that the “multi-targeted” monetary policy takes account into price stability, economic growth, employment rate and maintain an observable level of break-even when it comes to money inflow and outflow". The policy was believed by Chinese economist as a mean to increase flexibility of monetary policy, which portrayed a rise-averse image to demonstrate how PBC prioritised the general well-being of citizens, rather than chasing after high-risk, high-return spending. In the process of liberalising interest rate, PBC introduced financial tools such as SLF (standing lending facility); MLF (Medium-term lending facility) and PSL (pledged supplementary lending) - facilities that primarily mean re-distributing resources to the “multi-targeted monetary policy” and preventing market frustration. Recently, in order to prevent bursting a credit bubble, the newly appointed chief banking regulator Guo Shuqing introduced the “regulatory windstorm” to monitor the sales of high-risk wealth management products. These clearly demonstrated the ambition of the Chinese government to prevent the economy from following the footstep of what happened in the USA.

In 2008, an economist researcher from The Hong Kong Trade and Development Council (HKTDC) published a commentary on the how the government should react to future economist crises. Referencing how the US government acted against its “Small government Big Market” policy to rarely intervene the market during the crisis, the researcher suggested the US reaction served as a good benchmark for Hong Kong. Although Hong Kong is best known for its free economy, the financial crisis in 2007 reflected how this market-led economy lacked flexibility, and slowed down government’s reaction to protect the benefits of investors through intervention.

The commentary certainly called for a re-evaluation on the sustainability of the “small government, big market” ideology - one of the most attractive incentive of Hong Kong. In response, we observed how Hong Kong has been actively signing new economic co-operations with its mainland counterpart in recent years. Framework Agreement on Hong Kong/Guangdong Cooperation was created in 2008, one year after the financial tsunami. In 2016, 9 co-operation treaties were signed in the 19th Plenary of the Hong Kong/Guangdong Cooperation Joint Conference. The content include tighter cooperation for supporting the “One Belt One Road” Initiative, across social service provision, tourism, environmental protection, security, risk management and quality control.

Research revealed that Japan has attempted to tighten the cooperation with the US government, through information exchange, and stopping illegal overseas transaction. On the national level, Japan started closer monitoring investment fund and tracking suspicious transaction. The “Act on Special Measures for Strengthening Financial Functions” was revised in 2008, which increased government limit of the amount of money to be injected into enterprises from 2 trillion to 12 trillion. In case of “emergency”, government can directly inject 10 trillion Japanese Yen to major financial institutes. Big corporates and key industries directly receive government injection of 1 trillion Japanese Yen in times of financial difficulties.

After the immediate responses to the financial crisis, South Korea proposed a medium-to-long term strategy to strengthen its country’s ability to resist future financial shock, namely the “2010 Financial Policy Agenda”. The agenda covered 3 main objects: 1) Increase monitoring, especially in terms of foreign currency liquidity 2) forcing banks to lower the loan-deposit ratio; 3) Restructuring the banking industry to eliminate poor quality financial products. Generally speaking, all countries that we have covered in this commentary used similar economic logics to prevent incurring lost from future financial tsunami, but their approaches were clearly different from each other.

“Doctrine of mean” - a well-known Confucianist philosophy that are still believed by many Chinese today, and many other Chinese proverb such as "A thing turns into its opposite if pushed too far” suggested how the Chinese takes a “balanced” approach in problem solving. As we see how the Chinese government produced those innovative tools of SLF, MLF and PSL, this was one of the examples to demonstrate the so-called “balance approach”, aiming to reach the optimum where different needs are satisfied in a sense. As for Hong Kong, eliminating the discussion of democracy and the voices against the PRC, it is by legal term a part of China. So using the closer economic tights to strengthen the city’s ability to resist financial shock is understandable on the legal aspect.

In the case of Japanese, it appeared that the Japanese government took a goal-oriented approach. Many Asians believe that Japanese are extremely serious at work, but not as many people realized that Japanese is equally bureaucratic. In Japanese military, the culture of hierarchy is not weaker than any other country in the world. When your army general says yes, nobody would say no. So rather than taking a bottom-up approach, Japanese government preferred taking the wheel, and believe that only they have the authority and power to make orders.

However, It is the exact opposite situation in South Korea. In this country, the economy is led by corporates. Some South Korean joked about how Samsung holds more power and authority than the president himself. There are a lot of instances where government follows the rules of these large corporates. Take the example of Samsung again, Samsung indeed owns a lot of South Korean roads and bridges, even when factory labour went on strike to demand better working condition, the government demanded workers to terminate the “illegal” action (i.e. the strike) - a totally different situation to the western world, even to its neighbours. So if you want to play Japanese game in South Korea? You are going to lose your everything.