SUNS  4328 Friday 20 November 1998



FINANCE: APEC MEETINGS END WITH CALL FOR HEDGE FUNDS REVIEW

Penang 19 Nov (Martin Khor) -- The APEC Summit concluded in Kuala Lumpur Wednesday without any ground-breaking or really newsworthy decisions, as the final Declaration did not come up with anything significantly concrete on tackling the financial crisis.

This was to be expected, since it was impossible to forge consensus among countries with such disparate views on the crisis, the role of the market, and whether it should be left alone or regulated.

As chairman, Malaysia's Prime Minister Dr Mahathir Mohamad made sure that his theme of the role of currency traders and the need for global regulation of financial markets came up in the
discussions. He found support from several developing countries, notably China.

But stiff opposition to market regulation came from many other countries, including the United States, Australia and South Korea, which wanted to preserve the unrestricted flow of capital for (all
kinds of) investors. Those opposed to regulation of short-term capital flows even argued it would prevent long-term capital flows.

Also, Chile, Mexico and Peru issued a statement at the Summit's end that the solution to Asia's crisis "requires further market opening, not the opposite."  They supported a new round of trade
negotiations at the WTO by year 2000, opting against a sectoral approach and saying "a comprehensive single undertaking round of negotiation" is the best way to ensure  all economies receive fair benefits.

[According to an IPS report, the Presidents of Mexico, Chile and Peru had agreed with Malaysian Prime Minister Mahathir Mohamad on the need to restructure the financial system to shield economies - even those with relatively sound fundamentals - from its destructive ups and downs.

[They also stressed the importance of Asia getting past its recession, not least because of the aftershocks that Latin America is feeling from its downturn.

[Mexican officials quoted Zedillo as telling APEC colleagues that any "hesitation" by stricken Asian economies in taking reforms to get out of their recession would only deepen it and make it expand
in scope.

[Peru's exports are expected to slow this year, due both to the effects of the El Niño phenomenon and the Asian crisis, although most of the Asian-bound products go to the relatively more affluent
markets of China, Japan and South Korea.

[Chile is especially vulnerable because 33 percent of its nearly 20 billion dollars in annual exports go to East Asia. Its copper exports are badly hit by the fall in world prices owing to a slump in Asian demand - and copper made up 42 percent of 1997 exports.]

Although the APEC leaders could not reach agreement on global currency regulation, they called for a task force to examine transparency and disclosure standards of private financial institutions, a review of rating agencies, and for an expanded Group of 22 to strengthen the global financial system.

[The Group of 22 is the group of industrial and developing countries convened by the United States, first as an ad hoc body to consider new financial architecture, and then sought to be made
more or less permanent (thus undercutting the IMF interim committee).

[The US called for the G-22 to head off the earlier moves from the Group of 24 (developing country group at the IMF and the World Bank), at their Cartagena meeting in February, when the group
assessed the unfolding 'Asian crisis' and in a Declaration advocated a more cautious approach to the liberalization of capital accounts (pushed by the IMF management and the US Treasury) under
IMF auspices, and for a Task Force of developing and developed countries to deal with a range of issues that subsequently have come to be described new international financial architecture.

[The US efforts to use the G22 for discussions on the finance issues has come for criticism, not only from the industrialized countries who are not in the G-7, but from the G-24 too. This latter view was very prominently raised at the G-22 meeting in September by India which is in the Interim Committee, IMF board, in the G-24, and in the G-22].

The APEC summit said the task force should "examine the questions of appropriate transparency and disclosure standards for private sector financial institutions involved in international capital
flows, such as investment banks, hedge funds and other institutional investors," said the Declaration.

The task force should also examine the implications of operations of highly leveraged and offshore institutions and also "strengthened prudential regulation of financial institutions in industrialised economies to promote safe and sustainable capital flows, to encourage sound analysis and better risk assessment."

The proposed task force would develop practical proposals in these areas. Apec finance ministers would also develop measures to implement the proposals through the G-22 forum.

A report in the Straits Times (Singapore) quoted the spokesman for Japan's Prime Minister as saying there was "intensive debate" on which forum and at which level endorsement and implementation of the resulting proposals should take place.
Most APEC members preferred the G-22 as it included developing countries (unlike the G7) but as some APEC members are not part of the G22, the declaration mentioned an "expanded" G-22.  There was also disagreement and no consensus whether the G-22 should convene a summit for the purpose.

That financial issues were so prominent in the Declaration and even more in the closed-door Summit discussion showed up the preoccupation of the region with its financial crisis, since APEC's
machinery was set up to deal only with trade and investment issues.  APEC does not have an explicit finance programme, and the Summit-level meeting is preceded by a meeting of Trade or Economic Ministers. However Finance Ministers and officials are absent.

Trade liberalisation (the main focus of APEC) had been significantly down-graded this year when the Economic Ministers could not agree on an accelerated voluntary plan (called EVSL or early voluntary sectoral liberalisation) and decided to transfer the negotiations to the WTO.

And on the finance crisis issue, APEC leaders made proposals for measures but also transferred the follow up to another body, in this case the G22.

This has raised the question of what APEC"s "value added" role is. Before the Summit-level meeting, participants at the parallel APEC Business Summit had warned that APEC's credibility would be seriously eroded if it could not come up with concrete action to tackle the region's financial crisis.

"Promoting a stable financial environment was not integrated into APEC and it is not equipped to deal with financial issues as the lead in APEC is taken by trade and foreign ministers," said Jeffrey
Koo, chairman of China Trust Commercial Bank of Taiwan China, at the Business Summit.

He said APEC should seize the opportunity of the crisis to take collective and concrete action.

Gareth Evans, former Australian Foreign Minister, was more forthright.  APEC runs the risk of being marginalised and its achievements squandered if it did not come up with a concrete plan to tackle the financial crisis, he said.

Already the failure of the early voluntary liberalisation plan and the decision to take the talks to WTO meant that APEC is not adding value above the WTO, he added,

In an audience vote conducted by the session chairman, on the eve of the Summit-level meeting, half the 1,000 business participants said APEC had contributed little to resolve the Asian crisis,
another half said its role was "woefully inadequate", whilst no one voted that its role had been important.

Perhaps if another vote had been taken after the end of the Summit, more participants would have voted that APEC was finally contributing a little.

Whilst the lack of more concrete action in the Declaration was disappointing, the Kuala Lumpur meetings provided many the opportunity to raise their concerns or even outrage about the current state of financial markets.

According to news reports, the role of currency speculation, and in particular hedge funds, figured prominently during the closed-door Summit discussions.

Besides Dr Mahathir, who had set the tone in an address to the Business Summit, the effects of hedge funds was also  highlighted by Hong Kong's chief executive Tung Chee Hwa, who told a post- Summit press conference that the meeting discussed how to supervise and achieve greater accountability of hedge funds "which have caused so much damage to the economies of the region."

He said Hongkong wholeheartedly supports ongoing international efforts to strengthen prudential supervision on international lending to leveraged funds, enforce high standards of transparency
and disclosure for such funds, and to study the potentially destabilising impact of such fund flows on small and open economies.

Mahathir, in his speech to business leaders on the eve of the official Summit, compared the double standards of Western governments in the prosecution of Bill Gates (for monopoly practices of Microsoft in the computer software sector) whilst allowing the monopolistic practices of hedge funds in the financial sector.  

"Mr Bill Gates used his great financial power to build up his business, but the US government thinks he is being unfair to his competitors," said Mahathir. "We see no difference between Bill gates and currency traders. Why should Microsoft be penalised for using market forces when currency traders are not?

"In currency trading the hedge funds are the Bill Gates of the International Financial Market. They compete against puny Central Banks of developing countries. The Central banks have no chance at
all especially against the combined financial strength of all the Funds and the banks that lend them money.

"If it is unfair, improper and illegal for Bill Gates to corner the market then shouldn't the activities of the funds be considered unfair also?  If Bill Gates' competitors have to be protected, should we not protect the victims of the hedge funds also?"

He added the excuse given by governments of powerful countries that currency trading cannot be made more transparent was ridiculous.  "Despite dealing in billions and trillions of dollars we do not
know who they are, how they trade, where they trade and who invests in them. It is only when they fail, as in the Long-term Capital Management case, that we learn about them and their massive
trading.

"It is shocking to learn that with a capital of four billion dollars they Fund could borrow up to one trillion dollars, or 250 times more. Banks are supposed to exercise prudence. Is this what is meant by banking prudence? Aren't the governments supposed to supervise banks or have they abdicated this role also?"

If currency volatility figured significantly in the official Summit, the debate on hedge funds dominated the business meeting with numerous speakers and questioners raising the issue.

Jose Yulo Jr., president of the Philippines Stock Exchange, said there were legitimate reasons for individuals or companies to hedge their currency exposure, but the line of legitimacy was crossed if
a hedge fund manipulates a currency to cause it to fall.

"If a fund sees it can make a profit by betting that the rupiah will fall, and then manipulates the market to make the rupiah fall, then it has crossed the line into the realm of being bad."

Asked by a participant if he thought currency trading should be banned, the co-chairman of Goldman Sachs USA, John Corzine, said he believed in a free and open market, but the system needs a mechanism to support currencies that meet the fundamental test of success. The IMF's new credit line would help smaller economies to smoothly function.
Another business participant pressed further on the same issue, saying that he himself traded on the Chicago market for corn and the Kuala Lumpur stock market for local equities.  "Why is there no
exchange like these for those who trade in currencies so that insider trading or other unethical practices can be checked as is the case of exchanges in other commodities?"

Corzine replied that he agreed the currency trade is unregulated.  Whilst the foreign exchange market has rules, there are also unregulated entities, namely the hedge funds.

Many believe that is a weakness in the system, and that excessive leverage should be held back.  Other say foreign exchange should be traded on an exchange itself.  But he agreed that market
participants need to be placed under disciplines.

Yet another participant asked the speakers to be more explicit on the role of hedge funds in the Asian crisis and how to regulate them. John Wadsworth, chairman of Morgan Stanley Asia in Hongkong, replied that there were different hedge funds. "It's those who use leverage and have huge positions in a market that need regulation."

Corzine of Goldman Sachs said: "Regulation should take place for those institutions that extend credit and do business with the hedge funds."  He added that data should be collected on how much leverage they hedge funds have, their credit exposure and what activities they are involved in.

Also, reporting requirements are needed, and margin requirements should be imposed on them. In the case of LTCM, no one knew how much credit and exposure it had, said Corzine.

Apart from the row over US Vice President Al Gore's dinner speech supporting Malaysia's reform movement, which threatened to overshadow the APEC Summit, it was clear that financial speculation in general and hedge funds in particular were the most frequent and debated topics both at the official Summit and the business conference.

The Summit Declaration's recommendation of a task force to study these issues and to bring the proposals to the G22 should lead to a follow up, but there are of course questions how effective this
will turn out to be as previous studies (such as the one done by the IMF on hedge funds following a request by Malaysia) have not led to any concrete actions.