Page 2 of
2 Davos: Pointless
pontificators By Chan Akya
during the 1980s. Fast-forward 20
years or so, and it is difficult to find any
particular asset class that is too tightly held by
a single investor, or indeed even an investor
group. The use of innovative financial
instruments, such as derivatives and the adoption
of transparent pricing techniques, has helped to
move risks around the world.
This last
point is important, and indeed the primary reason
policymakers are increasingly useless. The
marginal price of risk
is
set by the one who takes it, who now resides far
away from the tentacles of the central bankers.
Thus when a Chinese buyer purchases US risk, he in
effect enters a "no man's zone" between the
central bankers of China and the US. As
with all no man's zones, the financial world has
its own code of conduct, one that is far removed
from the teak-stained halls that the mandarins of
Washington or Beijing are used to.
Asian participation If
policymakers from Europe and North America came
across as clueless dodos, representatives from
Asia did not exactly set the forum on fire,
either. In particular, I was disappointed by the
performance of the unofficial representatives of
both China and India.
China was
represented by Zhu Min, a vice president of the
Bank of China in Hong Kong. Adding to the
platitudes on concerns with respect to the pricing
of risk expressed by other panel members, Zhu said
"overliquidity in the financial market is pretty
tough today" and that despite rising rates,
"nothing is happening on liquidity".
These
statements quietly miss the cause and effect of
liquidity, which is the accumulation of deposits
by Chinese banks as the central bank fails to
widen its currency trading band in line with more
flexible economic policies that are required. [3]
But it was Zhu's statement on derivatives that
caught my attention: "Credit derivative products,
structural [sic] products are everywhere. I'm
really concerned because the money has to go
somewhere."
This notion, that derivatives
are somehow evil because today's geriatric bankers
did not learn them at school, is simply astounding
for someone of Zhu's stature. His failure to
understand the context of using derivatives, and
their place in the portfolios of large banks,
simply highlights entrenched ignorance. As an
advertisement for the quality of China's bankers,
Zhu appeared to have fallen far short of the
ideal.
India fared worse. It was
represented by Montek Singh Ahluwalia, whose job
description itself is a bit mysterious, but I will
get to that in a moment. Continuing with the
downbeat pattern of policymakers' concerns on
derivatives, he stated that "derivatives demand is
a problem because people don't have much
experience of this". That coming from a novice
commercial banker is one thing, but to have a
senior government official making silly sweeping
statements in another entirely. His ignorance of
derivatives and their utility in risk management
clearly did not impress the audience, who were
perhaps expecting a more appropriate candidate to
showcase India's burgeoning talent in the services
sector.
Even more scandalous than his
statement was his job description as the deputy
chief of the country's Planning Commission,
doubtless a throwback to the good old socialist
practices initiated by the likes of prime
ministers Jawaharlal Nehru and Indira Gandhi. In
this day and age of fluid globalization and
efficient markets, why does India need a Planning
Commission at all? As an indicator of a bloated
bureaucracy that is completely out of touch with
both global economic trends and its own people's
requirements for development, India couldn't
conceivably have made a worse choice.
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