Financial systems are opened up, for the participation of domestic and foreign financial intermediaries, with a view to obtaining efficiency gains through greater competition and importing financial expertise. This has generally been a success, although specific problems have been encountered. A feature of these problems has been that, at times, the profit motive and the enthusiasm of financial intermediaries, not necessarily just the foreign ones, might prevail to such an extent as to undermine the public interest of ensuring effective financial intermediation. The problems might also have been the result of ineffective regulation of financial markets and supervision of financial intermediaries, and inadequate regard to the basic purpose of the financial system. One example, and it is only appropriate that I should use an example from Hong Kong, is the closure of the Hong Kong stock market in 1987. This was done in the interest of the financial intermediaries who were about to be hit badly by the world-wide crash that occurred overnight because they had taken large and concentrated positions in stock futures. The closure of a secondary market, which provides the liquidity for attracting primary market activity that channels additional savings into investments, was blatantly wrong and seriously damaged the credibility of the stock market as a channel for financial intermediation. The damage was temporary, as it turned out, and confidence was eventually re-established, but not without much soul-searching and many market reform measures. Such problems notwithstanding, it is clear that emerging markets in Asia are enthusiastic in embracing financial openness.

To be sure, such willingness has not been entirely voluntary. Neither has the pace with which openness is being pursued. For relatively small domestic markets, there is understandably a lack of attraction for the large and sophisticated international financial intermediaries. And so there may be special privileges or incentives offered, at the risk of creating structural distortions in the financial system, as enticement for the esteemed presence of the household names of international finance. More important, individual jurisdictions have been, whether of their own free will or under pressure, pursuing financial openness, not just in respect of the financial system, but also in respect of the international mobility of capital. This they do so, in some cases, perhaps prematurely, by reference to their ability to manage the associated risks to monetary and financial stability on a continuous basis, in keeping with the demands arising from the changing scene, and changing risks, of international finance. As a result, the path towards financial openness has not been a smooth one, and diversions, although of a defensive nature, have been rather frequent lately. This is an aspect to which I shall return later. Let me turn first to how financial openness has been manifested in the dynamics of financial intermediation in Asia: this is the fourth characteristic of Asian finance that I wish to talk about. High public-sector and private-sector savings, less developed financial systems and financial openness have affected financial intermediation in two ways.