APEC MEETINGS END WITH CALL FOR HEDGE FUNDS REVIEW

In the recent Kuala Lumpur APEC (Asia-Pacific Economic Cooperation) Summit's official meeting as well as at the parallel APEC Business Summit, the role of hedge funds and financial speculation dominated the debate. Whether the Summit's proposals to review hedge funds and other financial institutions will be effectively followed up is now the question.

By Martin Khor

THE recent APEC (Asia-Pacific Economic Cooperation) Summit in Kuala Lumpur concluded without any path-breaking decisions, as the final Declaration did not come up with anything significantly concrete on tackling the financial crisis.

This was to be expected, since it was impossible to forge consensus among countries with such disparate views on the crisis, the role of the market, and whether it should be left alone or regulated.

Nevertheless, APEC took a good step forward in focusing global attention on Asian countries' concern over financial speculation, and on setting up a task force to review the operations of hedge funds and other financial institutions.

As chairman, Malaysian Prime Minister Dr Mahathir Mohamad made sure that the theme of the role of currency traders and the need for global regulation of financial markets came up in the discussions. He found support from several developing countries, notably China.

But stiff opposition to market regulation was put up by many other countries, including the United States, Australia and South Korea, which wanted to preserve the unrestricted flow of capital for investors. Those opposed to regulation of short-term capital flows even argued that it would prevent long-term capital flows.

Also, Chile and Mexico issued a statement at the Summit's end that the solution to Asia's crisis 'requires further market opening, not the opposite'.

Although the APEC leaders could not reach agreement on global currency regulation, they edged ahead in calling for a task force to examine transparency and disclosure standards of private financial institutions, a review of rating agencies, and for an expanded Group of 22 to strengthen the global financial system.

The task force should 'examine the questions of appropriate transparency and disclosure standards for private sector financial institutions involved in international capital flows, such as investment banks, hedge funds and other institutional investors', said the Declaration.

The task force should also examine the implications of operations of highly leveraged and offshore institutions and also 'strengthened prudential regulation of financial institutions in industrialised economies to promote safe and sustainable capital flows, to encourage sound analysis and better risk assessment'. The proposed task force would develop practical proposals in these areas. APEC finance ministers would also develop measures to implement the proposals through the G22 forum.

There was intensive debate on which forum and at which level endorsement and implementation of the resulting proposals should take place.

Most APEC members preferred the G22 as it included developing countries (unlike the G7), but as some APEC members are not part of the G22, the Declaration mentioned an 'expanded' G22.

That financial issues were so prominent in the Declaration and more so in the closed-door Summit discussion showed up the preoccupation of the region with its financial crisis, since APEC's machinery was set up to deal only with trade and investment issues. APEC does not have an explicit finance programme, and the Summit-level meeting is preceded by a meeting of Trade or Economic Ministers whilst Finance Ministers are absent.

Trade liberalisation (the raison d'etre of APEC) had been significantly downgraded this year when the Economic Ministers could not agree on an accelerated voluntary plan (called EVSL, or Early Voluntary Sectoral Liberalisation) and decided to transfer the negotiations to the World Trade Organisation.

And on the finance crisis issue, APEC leaders made proposals for measures but also transferred the follow-up to another body, in this case the G22.

This has raised the question of what APEC'S 'value added' role is. Before the official Summit meeting, participants at the parallel APEC Business Summit had warned that APEC's credibility would be seriously eroded if it could not come up with concrete action to tackle the region's financial crisis.

'Promoting a stable financial environment was not integrated into APEC and it is not equipped to deal with financial issues as the lead in APEC is taken by trade and foreign ministers,' said Jeffrey Koo, chairman of China Trust Commercial Bank of Chinese Taipeh, at the Business Summit.

He said APEC should seize the opportunity of the crisis to take collective and concrete action.

Gareth Evans, former Australian Foreign Minister, was more forthright. APEC runs the risk of being marginalised and its achievements squandered if it did not come up with a concrete plan to tackle the financial crisis, he said.

In an audience vote conducted by the session chairman, on the eve of the Summit-level meeting, half of the 1,000 business participants said APEC had contributed little to resolving the Asian crisis; another half said its role was 'woefully inadequate', whilst no one voted that its role had been important.

Perhaps if another vote had been taken after the end of the Summit, more participants would have voted that APEC was finally contributing a little.

Whilst the lack of more concrete action in the Declaration was disappointing, the Kuala Lumpur meetings provided many with the opportunity to raise their concerns or even outrage about the current state of financial markets.

According to news reports, the role of currency speculation, and in particular hedge funds, figured prominently during the closed-door Summit discussions.

Besides Dr Mahathir, who had set the tone in an address to the Business Summit, the effects of hedge funds were also highlighted by Hong Kong's chief executive Tung Chee Hwa, who told a post-Summit press conference that the meeting discussed how to supervise and achieve greater accountability of hedge funds 'which have caused so much damage to the economies of the region'.

He said Hong Kong wholeheartedly supports ongoing international efforts to strengthen prudential supervision on international lending to leveraged funds, enforce high standards of transparency and disclosure for such funds, and to study the potentially destabilising impact of such fund flows on small and open economies.

Mahathir, in his speech to business leaders on the eve of the official Summit, compared the double standards of Western governments in the prosecution of Bill Gates (for monopoly practices of Microsoft in the computer software sector) whilst allowing the monopolistic practices of hedge funds in the financial sector.

'Mr Bill Gates used his great financial power to build up his business, but the US government thinks he is being unfair to his competitors,' said Mahathir. 'We see no difference between Bill Gates and currency traders. Why should Microsoft be penalised for using market forces when currency traders are not?

'In currency trading the hedge funds are the Bill Gates of the International Financial Market. They compete against puny central banks of developing countries. The central banks have no chance at all especially against the combined financial strength of all the funds and the banks that lend them money.

'If it is unfair, improper and illegal for Bill Gates to corner the market, then shouldn't the activities of the funds be considered unfair also? If Bill Gates' competitors have to be protected, should we not protect the victims of the hedge funds also?'

If currency volatility figured significantly in the official Summit, the debate on hedge funds dominated the business meeting with numerous speakers and questioners raising the issue.

Jose Yulo Jr, president of the Philippines Stock Exchange, said there were legitimate reasons for individuals or companies to hedge their currency exposure, but the line of legitimacy was crossed if a hedge fund manipulates a currency to cause it to fall.

'If a fund sees it can make a profit by betting that the rupiah will fall, and then manipulates the market to make the rupiah fall, then it has crossed the line into the realm of being bad.'

Asked by a participant if he thought currency trading should be banned, the co-chairman of Goldman Sachs USA, John Corzine, said he believed in a free and open market, but the system needs a mechanism to support currencies that meet the fundamental test of success. The International Monetary Fund's new credit line would help smaller economies to smoothly function.

Another business participant pressed further on the same issue, saying that he himself traded on the Chicago market for corn and the Kuala Lumpur stock market for local equities. 'Why is there no exchange like these for those who trade in currencies so that insider trading or other unethical practices can be checked as is the case of exchanges in other commodities?'

Corzine replied that he agreed the currency trade is unregulated. Whilst the foreign exchange market has rules, there are also unregulated entities, namely the hedge funds.

Many believe that is a weakness in the system, and that excessive leverage should be held back. Others say foreign exchange should be traded on an exchange itself. But he agreed that market participants need to be placed under discipline.

Yet another participant asked the speakers to be more explicit on the role of hedge funds in the Asian crisis and how to regulate them.

John Wadsworth, chairman of Morgan Stanley Asia in Hong Kong, replied that there were different hedge funds. 'It's those who use leverage and have huge positions in a market that need regulation.'

Corzine of Goldman Sachs said: 'Regulation should take place for those institutions that extend credit and do business with the hedge funds.' He added that data should be collected on how much leverage the hedge funds have, their credit exposure and what activities they are involved in.

Also, reporting requirements are needed, and margin requirements should be imposed on them. In the case of Long Term Credit Management, no one knew how much credit and exposure it had, said Corzine.

Apart from the row over US Vice President Al Gore's dinner speech supporting Malaysia's reform movement, which threatened to overshadow the APEC Summit, it was clear that financial speculation in general and hedge funds in particular were the most frequent and debated topics at both the official Summit and the business conference.

The Summit Declaration's recommendation of a task force to study these issues and to bring the proposals to the G22 should lead to a follow-up, but there are of course questions as to how effective this will turn out to be, as previous studies (such as the one done by the IMF on hedge funds following a request by Malaysia) have not led to any concrete actions. - Third World Network Features

About the writer: Martin Khor is Director of the Third World Network.

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