peter pang : managing capital flows – the search for a framework welcoming address by mr peter pang, deputy chief executive of the hong kong monetary authority, at the asian development bank institute and bank for international settlements joint seminar for the book launch on “ managing capital flows : the search for a framework ”, hong kong, 21 april 2011. * * * good morning, ladies and gentlemen. 1. let me thank mr kawai for inviting me to this event. it ’ s my honour to welcome you to this joint seminar by the asian development bank institute ( adbi ) and the bank for international settlements ( bis ) to mark the launch of the new book, “ managing capital flows : the search for a framework ”. this is a topical issue right at the centre of attention of policymakers in this region. and as the title suggests, it is also a subject that we are still in search for an answer. 2. there is an old chinese proverb saying that “ water can keep a boat afloat but it can also capsize the vessel ”. this suitably characterises the nature of international capital flows – it brings both benefits and risks to the development process in asia. capital inflows have been playing a key role in the economic development of the region – funding investments and bringing along technology and skill transfers. these were conducive to the emergence of the “ four asian tigers ” in the 1980s, and the rapid modernisation process of china, india and other asian economies. on the other hand, the pro - cyclicality and highly volatile nature of capital flows poses significant macroeconomic management challenges to policymakers. if not properly managed, the build - up of excesses amid strong capital inflows and the subsequent bursting of the bubbles could be detrimental to financial stability, wreaking havoc on economic growth. 3. managing capital flows has been a dynamic learning process for policymakers in developing economies. prior to the asian financial crisis, asian economies embraced capital flows with little wariness of the downside risks. the dominant flow pattern at that time was for asian governments to invest their savings in high - grade government papers of the advanced economies. the funds were then recycled back to asia in the form of highly volatile shortterm capital flows. these resulted in serious imbalances in the balance of payments accounts, and mismatches in currency and maturity in the balance sheets of banks. the subsequent shifts in market sentiment and expectations led to abrupt reversals of capital flows out of asia

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. ladies and gentlemen, let me end my remarks by quoting a line from the book : “ risk of crisis as financial integration increases will never disappear, and countries must pursue protection from risks of volatility and sudden stops ” 2. we should always be vigilant, even in peace time. to mr kawai and other authors, congratulations yet again on the launch of this new and important book. 15. thank you. chapter 4 : “ managing large capital inflows : taking stock of international experiences ” ( by susan schadler ). bis central bankers ’ speeches