Knowledge@Australian School of Business Public Policy and Management Research Article

Knowledge@Australian School of Business

International Monetary Fund division chief Cheng Hoon Lim says she’s impressed by the degree of public consciousness about the need to prepare Australia for the next century. While the Asian region is not immune to the woes of the rest of the world, it presents significant opportunities. Australia – despite its presently over-valued dollar – is well placed to take advantage of them. At a recent Australian Graduate School of Management forum on the financial and business prospects of the Asia-Pacific region, Lim and her colleague, Masahiko Takeda, the region's deputy director of the IMF, said the future success of Australian interests in Asia is in the planning and positioning, a process that’s already well under way. And, as they tell Julian Lorkin of Knowledge@Australian School of Business, the key to developing the most effective strategies for Australia in the Asian century will be found by tapping into the brainpower of many.

An edited transcript of the interview follows.

Knowledge@Australian School of Business: Dr Takeda, if I could start with you, how optimistic should we be about Asia?

Masahiko Takeda: Well, Asia has a big potential going for it in China and India, and these countries are growing quite decently, although right now there is a bit of a downturn. So that means Australia has a lot to benefit from their growth.

Knowledge@Australian School of Business: Nevertheless, there is concern that some of Europe’s financial woes may spread and there will be a downturn in Chinese manufacturing. There are quite a lot of downsides.

Masahiko Takeda: That’s true. Asia cannot be completely separate from the rest of the world; it is still export-dependent. But Asia has been making a lot of effort to generate domestic demand and domestic demand-driven growth. So to the extent that it’s successful, there is sensitivity to the rest of the world and to the economies that may have reduced recently.

Knowledge@Australian School of Business: Dr Lim, what about the health of the Australian economy? It seems to now be dependent on Asia being healthy.

Cheng Hoon Lim: That’s absolutely right. And we’ve been impressed by how well Australia's financial system has been resilient to the global financial crisis. We think the financial system is sound and is very well managed. And that resilience was really tested in the GFC. The authorities came in, in a very well co-ordinated fashion, to provide liquidity to the financial system when it needed it, and smooth the transition process.

Knowledge@Australian School of Business: Nevertheless, even in Australia we’re looking at possible downsides from the housing bubble. Do you think there's a danger of it bursting and then bringing the rest of the economy down with it?

Cheng Hoon Lim: House prices have gone up quite considerably during the past two decades. But I’m always wary of calling something a bubble, because I can show you one model that says it’s a bubble, and I can show you another model that says it’s not. The more important thing is not to get distracted by whether it’s a bubble or not a bubble, but to see whether the authorities have a good set of policies to deal with the risk of elevated house prices and with banking sector exposure to mortgages, and so on.

Knowledge@Australian School of Business: Let’s look at regulation. The regulation Australia has at the moment seems to have ensured the economy sailed through the global financial crisis quite well. But is that regulation too tight?

Masahiko Takeda: Financial sector regulation is said to be intrusive. My colleague will be able to explain that to you. But there is a positive side to it, and thanks to that, Australia has been able to come out of the crisis relatively unscathed, and that’s partly thanks to relatively tight regulation.

Cheng Hoon Lim: Perhaps I should explain what I mean by intrusive supervision. I mean that supervisors need to have both the ability and willingness to act. So it’s not just important that the legislative framework empowers a supervisor to go in to check the banks and to take actions, but it also should have the willingness, having identified the problem, to actually enforce that particular course of action. We need to strike a balance between regulation and encouraging businesses and banking systems to take opportunities and to make a profit. We need to strike the right tone and pitch with that balance.

Knowledge@Australian School of Business: Is our banking regulation too centred on regulation that works for the northern hemisphere as opposed to regulation that may be appropriate for Asia and the southern hemisphere?

Cheng Hoon Lim: We need to keep in mind that the regulations we have today were premised, or are based, on the experiences of countries from all over the world: the G20 community [and] the Financial Stability Board via its membership, which is now representative of more countries than it was before. The regulation is premised on what, based on these experiences, are international best practices.

It’s misleading to take the northern hemisphere model and apply it to the southern hemisphere model. It will not translate well. The [regulations] are actually based on international experiences, and from there derive a consensus on what the best practice is. It’s fair to say that while there are quibbles about a particular rule or regulation, overall I think most countries in the world would agree and accept that these are indeed the right set of regulations based on international best practices.

Knowledge@Australian School of Business: The capital and liquidity rules of Basel III, agreed to in September 2010, were very much based on a Franco-German understanding of the financial markets with the rest of Europe joining in. If you look at the funding requirements of Basel III, are they actually appropriate for, say, a bank in Thailand or another part of Asia?

Cheng Hoon Lim: Australia is a member of the G20 community and it has a say in how Basel III is being formulated. On your question about liquidity, a new rule was introduced called the LCF, or liquidity facility, for countries such as Australia and some others where the banks don’t hold a lot of liquid assets because the governments don’t issue debt. The LCF allows them to find a different way of meeting the Basel III requirement on liquidity.

Knowledge@Australian School of Business: It’s onerous for some of the Australian banks to meet liquidity requirements – although they say they don’t have any problems meeting them. But it’s still going to cost them a lot of money to do so.

Cheng Hoon Lim: It would cost them a lot of money if there were a crisis and they had to borrow the money from somewhere else. This is just a very good system to set up a way in which you can get hold of liquidity in a time of need. The central bank is there; they pay a fee to access that facility, because they can’t hold triple-rated government securities because they’re so low. This is a very good manifestation of international co-ordination where you come to a solution based on international dialogue.

Knowledge@Australian School of Business: Are Australian financial services really in the right position to seize all the opportunities in Asia, considering that they’ve got a good set of regulations here, whereas in Asia, it may be a somewhat different environment?

Masahiko Takeda: Over the past couple of years, European banks – especially continental European banks – have been receding from Asia because of their need to de-leverage. And that gap has been filled by Asian banks, by Japanese, Singaporean and also Australian banks. So Australian banks are already going into Asian markets. They can probably do more, because opportunities are quite abundant in Asia.

Knowledge@Australian School of Business: Equally at the moment, with the Australian dollar being so strong, they have opportunities. But is the Australian dollar overvalued?

Masahiko Takeda: Well, our view is that, certainly, the Australian dollar has been affected by terms of trade movements. But maybe the current level is somewhat higher than is explained by the terms of trade effect. That does not necessarily mean that there’s something wrong with the exchange rate. It may be partly because there are very low interest rates, which are outside of Australia’s control. So as the economy normalises, we expect the exchange rate to come down a little bit.

Knowledge@Australian School of Business: You’re talking about the economy normalising. It almost sounds as if you can see the world coming out of the financial crisis, and things getting back to …

Masahiko Takeda: That’s right. That’s right.

Knowledge@Australian School of Business: Over what time period?

Masahiko Takeda: It may take a couple of years. I don’t know; that’s hard to tell.

Knowledge@Australian School of Business: Thank you for being at the forum today. If you were to sum up the feeling from the room, from everybody who was here, what would it be?

Masahiko Takeda: I think the key is how to position Australia in the Asian century: how to take advantage of the rise of Asia? And what the government can do, first and foremost, is to raise awareness, to let everyone know: “Look, there’s this issue. We have to think about it; you have to think about it – and then take action.”

I think that process is being followed right now. And with the publication of the Australia in the Asian Century white paper, hopefully in the next month or so, a useful discussion will be taking place in Australia. I look forward to being part of it, if possible.

Knowledge@Australian School of Business: And Dr Lim?

Cheng Hoon Lim: I agree with Dr Takeda. I’ve actually been very impressed by the amount of public consciousness about the need to prepare Australia for the next century. Not many countries have a citizenry that is so well in tune with the needs of its country and how they should position themselves to be competitive in the global arena. I’m truly impressed. That’s what I took from the conversation.