Have we really learned from Lehman?
Liu Mingkang says the effectiveness of regulatory reformin addressing the weaknesses exposed by the global financial crisis will depend not only on new rules, but on whether they can be implemented successfully
When the US investment bank Lehman Brothers collapsed five years ago, emerging-market economies did not hold many of the toxic financial assets - mainly US subprime mortgages - that fuelled the subsequent global financial crisis.
But they were deeply affected by the drop in world trade, which recorded a peak-to-trough decline of at least 15 per cent.
Soon after the crisis erupted, the G20 countries embraced massive stimulus packages, unconventional monetary policies in the advanced economies, and major institutional efforts, such as the Dodd-Frank financial reform legislation in the US and the Basel III initiative to strengthen banking standards. China's 4 trillion yuan (HK$4.5 trillion at the time) stimulus package restored confidence in global commodity markets. Led by strong Chinese market growth, emerging markets stabilised.
Since 2009, quantitative easing by the US Federal Reserve has resulted in record-low interest rates around the world. But, while the resulting surge in capital flows to emerging markets stimulated economic growth, it also inflated asset bubbles.
Now, with the Fed publicly considering an end to its massive, open-ended purchases of long-term securities and foreign capital fleeing home from emerging markets, many fear that Asia's economies could come crashing down, as they did in the late 1990s. Leverage in some emerging markets' household and corporate sectors has reached record levels. China's annual economic growth has slowed to around 7.5 per cent, while Indonesia and India - and, outside Asia, Brazil and South Africa - are experiencing sharp downward pressure on their exchange rates.
Moreover, there has been no major reform of the global financial architecture. China's renminbi is internationalising, but its share of global payments remains relatively small.
While regulatory reform is progressing, its effectiveness in addressing the weaknesses exposed by the global financial crisis will depend not only on the new rules that emerge, but also on the consistency and quality of their implementation.
