Global Shock, Risks, and Asian Financial Reform
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Global Shock, Risks, and Asian Financial Reform

Edited by Iwan J. Aziz and Hyun S. Shin

The growth of financial markets has clearly outpaced the development of financial market regulations. With growing complexity in the world of finance and the resultant higher frequency of financial crises, all eyes have shifted toward the current inadequacy of financial regulation. This book expertly examines what this episode means for Asia’s financial sector and its stability, and what the implications will be for the region’s financial regulation. By focusing on legal and institutional frameworks the book also elaborates on various issues and challenges in terms of how financial liberalization can maximize the benefits and minimize the risks of crisis.
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Chapter 5: Economy-wide vulnerability in Asia: flow-of-fund analysis

Iwan J. Azis and Damaris Yarcia


There has been a dramatic change in the Asian economy in recent decades: excess investment has turned into excess savings. The turning point was the 1997–98 Asian financial crisis (AFC) (Figure 5.1). From the flow-of-funds data, a change in agents’ behavior has been observed, with a new preference to invest in financial assets. Asymmetry in the incentive system and the growing opportunities of financial investment (‘financialization’) – thanks to financial liberalization and innovation – contributed to such a trend. With expectations and uncertainty playing a determining role in firms’ behavior, the corporate sector’s savings are particularly high. Asia’s liquidity condition since the AFC has been further complicated by increased inflows of capital. With loose monetary policies and growing risks in advanced economies, capital flocked to emerging markets. The size of the flows to Asia surged, and the volatility of these flows increased during the 2008–09 global financial crisis (GFC). While growing demand for financial assets and rising capital flows have boosted financial sector development and stimulated growth, the risks of financial instability also increased. Debt and bank-led flows shifted dramatically from negative to positive positions in the early 2000s. Debt-led flows, in particular, significantly expanded during the post-GFC (Azis and Shin 2013).

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