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WASHINGTON: The American financial crisis is expected to delay capital market reforms in China and other developing Asian economies, which have been hit by the damage unleashed by complex financial contracts on the United States, experts said.

Flush with cash reserves, many developing Asian nations have been prodded by Western financial institutions to deepen their capital markets by introducing sophisticated financial derivatives to hedge against various risks.

But as derivatives tied to mortgage-backed securities were blamed for the turmoil in the US, Asian economies would tread more cautiously in adopting complex financial trading contracts, the experts said.

‘I think that is going to be the takeaway by the bank regulator in China, for example,’ said Asian expert Nicholas Lardy of the Washington-based Peterson Institute for International Economics.

‘I think they are going to say to themselves, ‘We were right to resist the opening up of our financial system to Western financial institutions that wanted to add supposedly more sophisticated products into our market’.’

China has not introduced any of the exotic, risk-carrying derivative products, such as unregulated credit default swap contracts, which are at the centre of the current US financial chaos.

‘The sudden downfall of several prominent global institutions has the authorities concerned about ripple effects and is prompting a re-assessment of the pace of China’s financial-sector reforms,’ Ms Jing Ulrich, the chairman of China equities at JPMorgan, said in a report last week, according to the Washington Post.

The US crisis has exposed systemic missteps by banking overseers, securities regulators, the US Congress and corporate executives - all of whom underestimated the risks of leveraging and are now paying the price, the newspaper quoted securities officials as saying.

‘Maybe the US system wasn’t as well regulated as many thought, and certainly it has taken on an enormous amount of risk and sees enough in ways that have uncomfortable parallels to the Asian crisis,’ said Mr Brad Setser, a former US Treasury official, now with the Council on Foreign Relations, a US think-tank.

The Asian crisis roiled banks that took enormous risks by financing high levels of investments, often using foreign currency-denominated loans. It forced governments to take over the institutions by injecting public money to keep the banking system from collapse.

‘I think the main lesson for everybody is that leverage is risky,’ Mr Lardy said. ‘People had forgotten that, especially with the low cost of money in the last few years.’

AGENCE FRANCE-PRESSE

Source : Straits Times - 22 Sept 2008