It's nearly 10 years since the advent of the Asian financial crisis. And the drastic exchange-control actions taken by the Thai authorities to defend the country's exporters in mid-December came as a stark reminder that regulatory, or political, risk is still the most critical concern when conducting business in most of the region's markets.
Of course, many regulatory moves taking place in Asia should help develop more efficient and liquid markets. Examples include the unexpectedly fast easing of China's rules on domestic and foreign insitutional investments (see pages 20-23) and the liberation of Korea's financial markets (see pages 28-29). But there are also developments in the other direction.
India appears to have taken a backwards step in easing its derivatives regulations. Draft Reserve Bank of India (RBI) rules released in December will ban derivatives built on other derivatives (see pages 32-34). That may prevent counterparties from getting involved in complex instruments they do not understand, but may also rule out proven risk management tools, such as swaptions.
The financial community is now pressing the RBI to revise the proposals. While this may not change matters much, at least dealers can make their case. This contrasts strongly with the sledgehammer approach in Thailand. The imposition of exchange controls sparked a predictable freefall in Thai stocks. Embarrassingly, the authorities were forced to revise the rules to exclude equities a day later. Such efforts do little to inspire confidence, despite the best of intentions. Asia Risk will look at the impact of the Thai rules in more detail next month.
Meanwhile, the structured product market is viewed by many market participants as an important source of their future prosperity. But, like the kumquat fruits sold in abundance in China at this time of year and appearing on our cover this month, part of this market may leave a sour taste. Many 2001-2003 vintage products have provided a meagre yield. With some $2 billion of these instruments due to mature in Hong Kong this year, Asia Risk assesses whether investors are likely to switch their money elsewhere (see pages 16-18).
On a more positive note, as the new editor of Asia Risk, I would like on behalf of the team to wish our readers a happy and prosperous Chinese new year.