At the domestic level, there has been growing recognition that there is no one-sizefits-all approach to capital flows management. While conventional macroeconomic policies are useful in containing overheating in the overall economy, their deployment is often constrained by their broad-brush nature and the concern about attracting even more speculative inflows. Therefore, many developing economies have also adopted other prudential and capital account measures to manage capital inflows and to contain the buildup of excesses in specific sectors of the economy and the banking system. For example, some regional economies have recently tightened the mortgage underwriting standards of their banks, and limited banks’ foreign currency borrowing and derivatives positions. 12. To effectively manage capital flows, policymakers would need to improvise with the apparatuses in their policy toolkit and apply a policy mix tailored to their domestic circumstances. It is like the use of “Chinese herbal medicine” – we feel the pulse, carefully calibrate a combination of remedial herbs (i.e. policies), and follow through with continuous fine-tuning in the light of market reactions. The process is pragmatic and, to a large extent, interactive. 13. Given the need for customised solution at the national level, the sharing of experience is therefore very important. We welcome the timely publication of this book, which provides a good basis for studying the different approaches to managing capital inflows by different economies. Individual countries’ experiences would, collectively, help shed light on the formulation of an effective policy framework. 14.

So how should we cope with these challenges presented by the unprecedented scale of global excess liquidity? Given the global nature of fund flows and the increasing interconnectedness of the global financial system, it is obvious that national policies alone are insufficient to tackle the challenges. We need greater international and regional cooperation to manage risks posed by volatile capital flows to global financial stability. I believe there are three main areas for cooperation. 8. First is enhancing the resilience of the global and regional financial systems through financial regulatory reforms. A large amount of work in this area is under way at the G20, the Financial Stability Board (FSB) and various standard setting bodies – including but not limited to strengthening banks’ capital and liquidity requirements, reducing moral hazard posed by systemically important financial institutions, and reforming the OTC derivatives markets. Recently, the FSB decided to set up regional consultative groups, including one for Asia, to bring together central banks, finance ministries and regulators in different regions. These groups are expected to serve as a platform for us to discuss and cooperate on issues of interest to regional financial stability, and to reflect the region’s collective views to the FSB in the international standard setting process. 9. The second area is enhancing the global and regional financial safety nets. We welcome the recent significant augmentation of IMF’s resources and lending facilities. These enhancements will allow the IMF to respond more effectively and speedily to member countries in need.