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Immunity and Opportunity in Asia: Implications of the Financial Crisis

Speaker: Gerard Lyons, Chief Economist and Group Head of Global Research, Standard Chartered Bank
Moderator: Nancy Yao Maasbach, Managing Director, Corporate Affairs, Council on Foreign Relations
October 10, 2008
Council on Foreign Relations

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MS. MAASBACH: Good morning, everyone. And let's get started right away. We have 45 minutes to pick the brain of an incredible economist, Gerard Lyons, who joins us as chief economist and group head of global research at Standard Chartered.

The topic today is Asia, immunity and opportunity, and what are the implications for the financial crisis in the region? We're hoping that there may be a little bit of up-side conversation in these dismal days, and hopefully Gerard will not let us down in that area. But we did want to also just mention very quickly, this is a corporate program call, Council on Foreign Relations-sponsored, and we really are pleased that everyone could join us.

Please prepare your questions in advance. We'll open it up after about 10 to 12 minutes. And let's get started right off the bat. One thing is we want to also congratulate Standard Chartered on their new program, Seeing Is Believing, to help tackle blindness that some of you may have caught in the New York and D.C. area recently.

Well, we opened this morning to see the Nikkei drop more than 9 percent, the Hang Seng another 7-plus (percent), and the NCI 7 percent as well. And the reaction in Asia is still somewhat curious. As I mentioned, short selling is vilified in the West. China recently announced that it will allow more complex trading strategies, and the Asian economies are still plentiful in capital, giving them a bit of an advantage over some of the other regions.

Gerard is just off a plane a few days ago from Europe, in the U.S. this week, and then off to Asia next week. So we really have the global perspective here. But today we will focus our discussion on the Asia lens. Dr. Lyons is an expert on the world economy. He has been with Standard Chartered for a number of years. Before that, he was at a number of other financial institutions.

He is a council member of the University of Warwick. He's been on the Bretton Woods Committee and a host of other areas; very active also with the Asia House, Japan Society and the Hong Kong Association; so in many ways, quite the expert for our conversation this morning.

So Gerard, without further ado, we'd love to hear your remarks, maybe open it up for eight to 10 minutes, tell us what we can see from the Asia perspective, and then we'll ask a few questions and open it up to the floor. Gerard.

MR. LYONS: Great. Thanks for your kind introduction, and thank you to everyone for spending time on this call.

I'd like to focus on three areas: First, lessons from Asia regarding the current financial crisis in the West; second, what will happen to Asia in economic and financial terms in the year ahead; and third, the longer-term issues and outlook for Asia, which, despite all the present doom and gloom, I think is very positive.

First, the current financial crisis. I'm here in Washington. The best way to describe the mood here at the moment is fear and determination -- fear about the crisis, and the strong determination to actually do something more on the policy side. There have been many analogies drawn here in the States with the Great Depression. I don't want to focus on that, but I think there are some important lessons from what happened in Asia in recent financial crises.

There have been many financial crises around the world. When one looks at them, whilst they're all different, they do have common characteristics. And the outcome, in my view, depends on how three key factors interact together -- the economic fundamentals, the policy response, and confidence, which is often the hardest to call.

If we look at Japan's economic crisis, even though it began in 1990, it was only really in 1997 that it started to really hit Main Street. It spread from, American terminology, Wall Street to Main Street, because from 1990 to '97, jobs were still improving in Japan. The labor market was improving.

In '97, that significantly turned. And at the end of '97, in the space of two weeks, Yomichi (sp), Hokkaido Bank and Sanyo Securities all went bust. And the important thing about that was that it then led to significant policy action, along the lines of what we've seen recently, but actually even more so.

The Japanese government injected capital into the banks, buying preferred stock and subordinated debt. The Bank of Japan embarked eventually on the zero-interest-rate policy. And also the Japanese pumped huge amounts of liquidity into the system; so shades of what we're seeing now.

But the important message from Japan was that all parts of the system pulled together, and that eventually led to a consolidation of the banking sector. I'm not convinced that we're seeing all parts of the system pulling together yet in the West.

At the same time, Asia had its own economic crisis. One of the lessons Asia drew from that was that one shouldn't deregulate one's financial markets just on the basis of what people in the West say, but one should deregulate (to be ?) better suited to one's domestic needs.

But following that crisis, Asia thought it was solvent but not liquid. And subsequently, over the intervening years, we've seen Asia increase its defenses. Foreign exchange reserves, for instance, have increased. A decade ago, Asia had one-third of global currency reserves. Now it has two-thirds, the bulk in dollars. And we've seen much more credible policies. So as a region, Asia is a (surplus ?) region.

Also, finally in this section, specific measures. People keep asking, "What could the authorities do here in addition to fiscal and monetary policy, in addition to stabilization measures?" Given the amount of short selling that's taken place in the last 24 hours, it's worth bearing in mind that in Hong Kong, in August '98, there was a huge bear squeeze as the Hong Kong government bought shares. They bought shares to teach the speculators a lessons. And eventually those holdings, 110 billion Hong Kong dollars' worth, were disposed by -- (inaudible) -- set up in November '99 and sold at a profit.

I think the lessons from Asia are important, not just in terms of how one addresses the crisis, but the longer-term macro lesson is that in the West, in America, in the UK, we need to spend less and save more and get balance sheets back into shape.

The second part is what are the implications for Asia? What is the immediate economic and financial outlook? We've already seen an impact. But maybe if I can put it in perspective, at the beginning of last year, at Standard Chartered we had a very bearish view of the U.S. Indeed, last November we called for the fed funds rate to go to 1 percent.

Now, at that time we were still, last year, very upbeat on Asia. Some people said, "Ah, that means you believe in decoupling." And I said, "No, the message we've continued to stress is that Asia is not decoupled, but it's better insulated." Indeed, this year we've had a very bearish negative view on the outlook for Asia, but unfortunately we'll probably have to revise those forecasts down further.

The saying that Asia is not decoupled but better insulated, I think, is important, because when the world's major economy goes into recession -- the U.S. -- it has a global impact. But whilst I thought Asia was insulated from, say, a hurricane, I don't think it's insulated from a nuclear fallout. And that's what we're effectively seeing. And I think there will be a more significant impact.

The impact so far has been noticeable in a number of different areas. In the financial area, it's been the stock markets that have been hit. And also we've seen, in the bond markets, those bond markets like Indonesia, with a high foreign holding, have been hit. And credit spreads widened, but in a sensible way in some markets. The markets had this discriminated -- Korea, Indonesia, spreads widening; in one or two banks in other countries.

The economic linkage has been very much exports being hit; exports to the States, and more recently to Europe. When one looks at Asia, I think it's important, in macroeconomic terms, to differentiate between the exports and the domestically focused economies.

In 2001, when the U.S. last had a recession, albeit a mild one, we then saw the most open economies in Asia go into recession -- Hong Kong, Singapore, Malaysia, Taiwan. Before this recent crisis the last few weeks, I thought Hong Kong and Singapore could have a technical recession but at the same time still have positive and steady growth.

What we're seeing this time is the export-oriented economies have been joined by Vietnam, which has opened up the last decade. So, just to give you some figures, Hong Kong and Singapore, if one looks at exports versus imports as a percent of GDP, in both Hong Kong and Singapore they're 349 percent; Malaysia, 173 percent; Taiwan, 127 percent; and Vietnam, as I say, has now opened up, and that's 156 percent.

There's many differences between them. Obviously Hong Kong is more tied to China. Malaysia is influenced by commodity prices. But the point is, those economies are more open to the world economy. And with the global recession, with the heat taken out of commodity markets and with global trade slowed, they will feel more of an impact.

The domestically focused economies have much better insulation, although across the region it's difficult to get a clear regional trend in how domestic demand is doing. It's been very weak in Taiwan, Singapore, strong but decelerating in Korea, Hong Kong and China.

I think it's important to stress that, in terms of the region, there are lots of room -- or there is lots of room for policy tools to come to the region's rescue. Because the region has built up its defenses, there's the (scope ?) for fiscal policy boosts. Now with inflation pressures easing, we've seen (scope for?) interest rates to fall, and, of course, FX reserves are very high.

I think a lot of people will focus particularly on how China and India plays out. In China, I would argue that in Beijing they've started to panic recently, but panic in the positive way. They're panicking not because of what's already happening, but because of what they fear could happen. And, as a result, they've already embarked on an interest rate cut; they've shifted to a more neutral currency policy; and they're preparing to unveil a huge, huge, huge fiscal boost.

So much so that, even factoring in a significant hit to exports and investment, the fiscal boost will probably allow China to grow somewhere between 7.5 (percent) to 8 percent next year. Our forecast is 7.9 percent. So the room for policy maneuver gives China a strong footing.

India, likewise slowing, but in India a few weeks ago I was given a very mixed opinion from different policymakers, some bullish, some very bearish. But the interesting thing was that the corporate sector had a pretty similar message. The corporate sector's message was that having had four or five years of strong growth, they've got a big, sort of, cash reserve, shall we say, and they're not over leveraged. And, in fact, that's a key theme across much of Asia. Korea probably is more leveraged than other parts of Asia, but generally the region is a surplus region. Different parts of it will be hit but, as I say, Asia is not decoupled but it's better insulated.

Third, and finally, what's the longer term outlook? I think when you look at the longer term outlook I would stress that I believe that financial markets around the world still don't get it. They still don't really understand what's happening. They underestimate the pace and the scale of change on the ground in China. It's phenomenal. If one goes to Chongching, Chengdu, Shenyang, you name it, what's happening is a private sector that's been let loose and an economy that's really developing for the longer term.

Furthermore, I think the markets underestimate the catch-up potential of economies like Indonesia, and India and, indeed, a few others. But yet the challenge -- and particularly a challenge in this cycle, is that these economies still are inherently volatile because they don't have the institutions and the policy tools that we take for granted in the West. Business cycle has not been abolished despite the emergence of China, India in Asia. But the trend is up. And whether one is bullish or bearish about the world economy, I think when we start to see recovery into 2010 the bounce-back will be most dramatic and most visible in Asia.

There are some underlying trends I would just like to conclude on. We're seeing new trade corridors, intra-Asian trade rising, Asian-African, Asian-Latin American, Asian-Middle Eastern trade. That's flows of commodities, of goods, of people, of remittances, and of investment. We're seeing an emerging middle class across Asia. The Asian Development Bank calculates that as many as 750 million jobs could be created over the next decade, any of them in economies like India where 45 percent of the population is below 20.

One has also seen an infrastructure boom. One is also likely to see a shift in foreign exchange reserves as people start to diversify into currencies other than the dollar. And as we've seen in the last year, the emergence of sovereign wealth funds highlights where the capital and the liquidity lies.

There are, however, challenges. The environmental issue is immense. Some countries still need to diversify in terms of their (commodity ?) demands. But, also I think it's important to stress that were Asia to really fully achieve its potential, it does need to see deeper and broader financial markets across the region. That's why the Chinese measures are still encouraging, as was mentioned at the beginning, that they're still deregulating. The other countries across Asia may take this crisis as an excuse not to deregulate further, and that is a worry.

And finally, to conclude, sitting here in Washington with the G-7 meeting today I think it's amazing that global policy fora have not yet changed to reflect the shift in the global economic and financial balance of power. We need to have more representation from the likes of Brazil, even Russia, South Africa, clearly India, clearly China, and clearly Southeast Asia.

So, just to conclude, three things: There are lessons for the financial crisis from what's happened in Asia. Second, I think there will be an economic and financial impact. Asia is not decoupled, it's better insulated, but there clearly will be a significant impact over the next year. But third, and finally, the longer term outlook I think is very positive indeed.

The factors that led people to be positive in recent years have not disappeared. We're seeing a strong, cyclical correction, a global recession probably over next year. But, there are many positives which I think will allow Asia to be the region that rebounds earliest and rebounds strongest from the impending economic -- (inaudible) -- and setback over the next year. Thank you.

MS. MAASBACH: Thanks so much, Gerard. That is -- that is optimistic and I think we all needed to hear something positive.

You touched on -- let me start off with a couple of questions as the audience prepares their questions. You mentioned early on economic outlook, policy, confidence. In a recent report in Hong Kong a few days ago, more than 1,000 investors of complex financial products tied to Lehman Brothers marched to the city legislature saying that they were conned into buying these now defunct Lehman derivatives. And I think the total holdings was something over U.S. $1.5 billion.

As far as confidence, I'm wondering what is the confidence level on the ground, do you think, in Hong Kong, in Singapore, in Shanghai, as far as international investments? And will this global -- U.S.-dominated financial crisis lead some of these local investors in Asia to go more local -- as far as choosing their investments, over international products?

MR. LYONS: Yes. Certainly if one looks at the crisis, obviously things are moving at a very rapid pace. In the West we're seeing a mad dash for liquidity. In other regions of the world, it's more a flight to quality. But, depending on where one sits, that view of a flight to quality is very different. There is, for instance, dollar-hoarding at the moment as the Fed and other central banks release dollars they've been hoarding, whether it's -- (inaudible) -- in Korea, or, indeed, in Nigeria.

In terms of individual investors, I think there will be naturally a, sort of, move away from equities and move into -- (inaudible) -- and move into cash. But will they favor domestic over foreign products? Quite likely, I think -- and, not just now but in the future. Indeed, if one looks at sovereign wealth funds, I think while sovereign wealth funds have had a big influence in the last year, my analysis if them shows that they will -- for economic as well as maybe commercial and political reasons, start to put more of their money into emerging economies in the future, and I think individual investors will do likewise.

But, of course, as you said in your question, some of the more open financial sectors in Asia, including Singapore and Hong Kong, clearly are impacted very much so by the current global crisis.

MS. MAASBACH: And then the level of confidence in these markets, on the ground, are they -- do you sense that there is a lot of pulling out, as we've seen in the U.S., of even in mutual funds?

MR. LYONS: Well, there are measures of consumer and business confidence, but they're not always great, to be frank, and they give a very mixed picture. I was in Hong Kong just about a month or so ago, sentiment is mixed in Hong Kong, but clearly it has deteriorated significantly since. Hong Kong has gone through many mood swings.

Its ties to both mainland China, and also its interest rate tie to the U.S. have been positive factors. But, they are now unwinding. So, when we talk about the set-back to confidence, I think it's important to put it in the perspective of what's gone before, where last year developing Asia had its strongest rate of economic growth in 19 years and, indeed, the region has had a boom for the last four or five years.

That factor maybe led to the (likeliness ?) of a setback in confidence, but, clearly, wherever one sits in the world, confidence has taken a huge knock given fallout from events in the West.

MS. MAASBACH: Right.

You also mentioned that, of course, this decoupled but better insulated theory that you have -- which seems to make quite a bit of sense, and when you summed up your remarks you said the next year -- as far as getting out of this, and Asia rebounding first. In the U.S. it seems they've talked much more beyond this near-term, one-year forecast, but much more into the mid- to long-term. Do you think, in the year's time -- I guess I'm wondering what you're, what you're viewpoint on the global landscape will look like in five years?

MR. LYONS: I think in years to come we will see -- 2007 to 2009, as a -- (inaudible) -- turning point for the world economy. I was arguing this last year when I released the report on sovereign wealth funds, and was arguing that this year, as I said, that November last year we had a view that the Fed would eventually have to cut to 1 percent, and the U.S. would go into recession. And I've been arguing that in years to come we'll see this as a shift in the balance of the economic and financial power from the West to the East.

Not a shift in the balance of political and military power. Certainly, I think the new U.S. president has the ability to play an even more important role there. But, Asia clearly is not decoupled, but in terms of the U.S. I would say that we need to see a significant shift. But, longer term, macroeconomic message is basically we need to see a return to balance; we need to see -- in terms of consumers, consumers basically getting their balance sheets back into shape; and we need to see the financial sector doing likewise.

The positive for the U.S. is that after the U.S. recession in 2001 big corporate America did get its balance sheet back into shape. It spent less, it saved more. And also -- and I see this across Asia where some of our big clients are American clients, big corporate America repositioned itself to play a bigger global role, investing, not so much, say, in the -- (inaudible) -- but investing in China and places like that.

So, the ability of big corporate America to reinvent itself after the last year's recession still gives me confidence about the ability for America to reinvent itself now. But I think that big near-term shock is going to be quite severe, and not just in the States, but also in British, Western Europe's going to be impacted and, therefore, with those big export markets in recession it should be no surprise if Asia gets hit hard and, therefore, that's why I differentiated between the export -- (inaudible) -- and the more domestically focused.

But in terms of the global economy, I think even before the last few weeks, the world economy was heading for a significant slow-down. Recent events, I think, really compound that.

MS. MAASBACH: Right. Thank you.

Operator, let's open it up to the floor and field any questions we have in the audience.

OPERATOR: Okay. At this time we'll open the floor for questions. If you would like to ask a question, please press the * key, followed by the 1 key on your touch-tone phone now. Questions will be taken in the order they are received, and if at any time you wish to remove yourself from the questioning queue, you may press *2. Again, to ask a question, it's *1, and to remove yourself from the queue, it's *2.

We'll wait just a moment while we poll for questions.

Our first question comes from Patricia Careras (sp).

Q Hi -- so my name is Patricia Careras (sp), and I was specifically interested about China. You have been talking about recovery by 2010, and you've been saying that -- you were saying a lot of middle-class job opening up. I am worried, myself, on the short-term about unemployment in China. And I'd like to know what you think about it, and what would be the consequences of more unemployment in China because that's what I'm seeing in my area.

MR. LYONS: Okay. I think when we look at China it's vitally important to appreciate how big the country is. And, therefore, when we talk about China as if there is one economy I think we're probably misleading. In the sense that, when I look at China, really, there's five strong economic -- or five different economic regions: The Pearl River Delta around Hong Kong; the Yangtze River Delta around Shanghai, the Bohai ring around Beijing; then the northeastern parts of China, and the western and central parts of China. And all of them have done -- operated at different speeds. In fact, western and central China, northeast China had much slower performance for some time.

On top of there, their leadership in recent years has talked about the need for a harmonious society, prosperous society, scientific development. Basically, what that means is they want to move from strong and unsustainable growth to a more sustainable pace of growth -- (inaudible) -- a percent of growth.

Now, the challenge, of course, is that China, even though it's growing strongly, the growth has been a lot more investment focused than the -- the authorities would like. They've not maybe generated as many jobs as they probably would like, given the pace of growth. And China needs to create about -- somewhere between 8 (million) to 11 million jobs per year. Not only that, but over the next 10 to 11 years it has the next, or the last surge, in terms of its young population. And that really compounds the pressures in terms of job creation.

That's why the leadership I think has been quite keen to, sort of, try and prevent a boom/bust, for instance, of the likes we saw in the '90s. And that's why they were pretty determined, in the last couple of years, to slow the pace of growth. But, trying to fine tune and economy like China is almost nigh impossible. Whereas, five years ago Beijing ruled the roost, now with the private sector let loose, with so many different regions wanting to do their own thing, controlling an economy on the scale of China is very hard.

So, coming back to your unemployment question, if the economy slows to something under 8 percent, (yeah ?), that starts to generate significant worries on jobs. But that's why I think -- as I say, Beijing is panicky, and that's why I think Beijing will unveil a huge fiscal boost which will be jobs positive. So, I think they will still be content that they're generating sufficient jobs between 8 (million) to 10 (million) or 11 million people.

Q Thank you.

MR. LYONS: It's going to be a difficult one.

Q Yes, I think --

MR. LYONS: Actually, just on this point, visiting Chongching last year it was just quite amazing. Chongching is 600 miles up the Yangtze from Three Gorges Dam. The water level has yet to reach its maximize, but will by next year. China is already built container ports in Chongching. It's a city of 31 million people but, as the party secretary pointed out just then, it's a region where there's probably a 100 million people labor force and they're on cheaper wages than on the coast.

And when we look at the jobs in China I think we will see more migration from coastal areas to inland, from first, second-tier cities. That's already happening with the highway system having been extended. And so there is the ability for firms to, sort of, continue to reinvent themselves and keep costs down. But, I think it's a challenging time for the Chinese leadership, though they've done a phenomenal job so far. Thank you.

OPERATOR: Okay. Again, if you would like to ask a question, please press the * key, followed by the 1 key on your touch-tone phone now.

MS. MAASBACH: While we're waiting for another question, Gerard, could you expand a bit more on your, one of your final comments, which is the balance of power -- if I infer correctly, the U.S., a bit, acting in a vacuum, underestimating China? What are possible actions that you would like to see to bring in the Asian component into these discussions, or trying to have us feel a little bit more cognizant of what is happening in the region?

MR. LYONS: Yeah. Normally, good economics is good politics. But, at the same time, I think it's important to stress that demography doesn't determine your destiny. So, you can still have a big population and get it wrong, as indeed you could argue China and India underperformed much of the last century and a half.

But if they -- Asia, given its young population, gets its policies right that will be a very big development. And if Asia starts to achieve the economic growth rate, I think it's (not impossible ?), but I think that will help the region develop a greater regional voice, and a greater voice at global policy forum.

But, in terms of where we are immediately in the (cycle ?), in recent years we've had a very imbalanced world economy. To return to balance we'd need to see a period of, effectively, (weakness ?) in the West. We need to see maybe stability in Europe and Japan. But also we need to see Asia move from having high savings to higher domestic demand.

And with that, we'd (like also ?) to see a currency adjustment where, even though the dollar looks like it's going to benefit in the very near-term, and whilst this crisis persists, eventually it weakens at longer term.

But, in a nutshell, the key issue is for Asia to realize its potential, and to create the policy environment where its potential can be realized. Maybe the biggest challenge, after this crisis, is that some countries may decide that they don't really want to open up, they don't want to deepen and their financial markets.

I think what we do need to see is financial market development, but with a well-regulated financial sector. When I look at the problems in the West, I put them into three interrelated baskets: risk management, where the market didn't price for risk; second, liquidity management, where the market didn't manage liquidity, particularly under stress conditions; and third, the pro-cyclicality or adding fuel to the fire.

Asia needs to learn the lessons from the West, and actually have a well-regulated financial sector that suits its domestic and its regional needs.

MS. MAASBACH: Thank you.

More questions, operator?

OPERATOR: Yes, ma'am, we do have another question from James Jones.

Q Hi, I came in a few minutes late in your very interesting presentation. But, I think I know the answer, but I want to ask it anyway.

And that is with China -- particularly having, what, a trillion, three ($1.3 trillion) or so, in reserves, and having a huge amount of our debt; and our irresponsible fiscal policies coupled with the problems we're currently having -- is there any mischief that you see that China might play that would further weaken our position by the fact that they hold so much of our debt and we are, basically, they're our banker?

MR. LYONS: Okay, I would say two related things on this -- one, the broader issue; and second, related to a concern tied to your question.

The broader issue, if I -- (inaudible) -- speak to policymakers, what's interesting is that over the last decades -- as I mentioned, we've seen Asia move from having one-third to now having two-thirds of global currency reserves, the bulk of those reserves has been in dollars. Many Asian countries would ideally like to have a smaller holding of dollars, but they don't actively want to sell dollars because it's not in their best interests to do so. It would destabilize the world economy and financial system -- if, indeed, it could be more destabilized.

But, what we've actually seen is what I would call "passive diversification," where Asian central banks have put less of their net new reserves into dollars. It's a marginal shift, but I think it's an on-going shift, which is likely to continue.

And -- (inaudible) -- when Fannie and Freddie were bailed out in the States, I think it was not only because of (the need to ?) -- their systemic importance to the U.S. housing market (there ?). When we'd last had a big debate in the States on Fannie and Freddie -- gosh, was it the mid-90s, (their spread then ?) -- fell quite sharply, and international investors effectively viewed Fannie and Freddie and government sponsored agencies, or government sponsored enterprises, as government supported debt -- (inaudible) -- high-yielding treasuries, and the foreign holdings of Fannie and Freddies were quite significant.

So, I think all of these factors show that even though there may have been opportunities in the last few years for Asians to actively sell the dollar, they've still held agency debt, and they're only passively diversifying FX reserves. But I think, in the future, as global trade flows shift, we're likely to see (off- ?) shifts in currency. So, countries around the world -- (inaudible) -- hold a basket of currencies, not just the dollar. And they'll hold that basket (being ?) the countries with which they trade. I think the Middle East would be quite important in the outcome in this.

The other part, which is linked to what could go wrong -- it seems to me, sitting here in Washington now, from what I've heard in New York and Washington this week, that President Obama will, sorry, Mr. Obama is, or Senator Obama is expected to become president -- if that's the case, then from what I'm told here, that Congress will probably be strongly Democratic, that raises the strong possibility of Obama, whether he wants to, or whether Congress wants to, or whether they both want to, a strong possibility of Obama maybe citing China as a currency manipulator come next April.

If that happened, then your, sort of, worried scenario that you talked about in your question, might materialize and there might be some, sort of, turbulence. But, at the moment China has behaved in a pretty responsible way.

MS. MAASBACH: Additional questions, operator?

OPERATOR: At this time I'm not showing any other questions in the queue. But, again, if you would like to ask a question, please press *1 on your telephone keypad.

MS. MAASBACH: Gerard, it wasn't long ago when we saw a host of Chinese banks go public. In fact, in the past two or three years we saw a number of the major, best-in-class Chinese banks go public. Could you share a little bit on why, and if you've looked into this (space ?) at all, as far as Chinese financial institutions, and how prepared and resilient they are to the current situation? And how is the timing for all of this, I mean, in hindsight?

MR. LYONS: Obviously, if you have a strong domestic growth performance, that gives your financial sector a strong degree of protection. And it's very difficult to always get into the detail. Indeed, as we've seen in the U.S. alone, it's only when things start to go wrong that all the problems materialize.

And I think when one looks at China one should recognize there's been strong advances made there but there is still maybe a lot that needs to be done, not just in China but in many other sectors. That's why I think it's important to have foreign banks having access to these markets. I always say that foreign banks bring the "A-B-C" to these markets: A) they accelerate the pace of change; B) they bring best practice; C) they add to competition, which is beneficial for retailers and for corporates.

And the Chinese seem to be keen to open up their financial sector further. They seem to be accepting of foreign banks. But gradualism dictates all they do. So, obviously, if there was an economic shock in China, that would unearth maybe some things people didn't expect, but, generally speaking, the financial sector in China seems to be moving in the right direction.

With the banks, obviously it's difficult to say everything because -- need to see how they perform throughout the whole cycle. But, so far obviously they probably have done better than many people expected in recent years.

MS. MAASBACH: And how about the fund management companies. I think there are a little over 60. and half of them are JVs with international and foreign partners.

MR. LYONS: Well, we shouldn't underestimate how much further -- (inaudible) -- we need to see development in many different places. If you just look at the regulatory environment -- (inaudible) -- West that needs to improve. I would say that that has to be an issue everywhere.

The way in which we seem to boom and bust in -- (inaudible) -- markets in Asia is interesting. It's interesting since economies have been able to weather that storm, but also, in my mind, it highlights the need for an appropriate regulatory environment.

Asia, like in the West, people seem to be very keen to jump into things, and asset price inflation has been endemic in the -- (inaudible) -- markets across the region in previous years So, I think, in answer to your question, I think one should, sort of, hope and expect to see a much tighter, sounder regulatory environment in the future across -- actually, not just the globe, but obviously still within Asia (itself ?).

MS. MAASBACH: Additional questions from the operator?

OPERATOR: Yes, we do have another question from James Jones.

Q I don't want to dominate, but this is a longer range question, and perhaps it's more political than economic. But, my visits to China, from the late '70s, early '80s, and then into this decade indicate to me that the wealth that's being created is a nice truce between letting entrepreneurs make money and become wealthy, as long as they don't mess around in politics. But, at some point, the wealth wants to get involved in politics. So at what point do you think that's going to happen, and how's that going to be resolved?

In other words, will the Communist Party fully change and devolve into some sort of a democracy? Or is there a clash down the road between the creation of wealth and the suppression of political thought?

MR. LYONS: Yeah, the Communist Party in China has done well to position itself, given how the economy's opened up in the last 30 years. The leadership, Hu Jintao, and Wen Jiabao, have talked about the imbalances -- the coastal, inland, urban, rural, environmental, international; and, very importantly, the social imbalance.

And what I think has been interesting is that if I was to look at China I would say there's two big groups they need to keep happy, the urban middle class and the farmers. And by delivering strong growth in recent years they've generated enough jobs there to keep things okay. But, this summer, with food price inflation high, the Chinese leadership was worried about how that would feed through.

But the social imbalances, the last two years in their annual budgets, the Chinese have earmarked huge increases in -- albeit from the low-levels, I would argue, it was huge increases in spending on social issues, health and education. And I think that's important. And I think more of that needs to be seen, given that the government has a budget surplus, and has had -- last year and this year, they've got lots of room to pump-prime the economy, but also pump-prime it in the right areas.

I think keeping themselves relevant, delivering economic growth will allow the system to evolve. So, in answer to your question, I think, yes, things will change. How they will change, I don't know, but they'll change in a very Chinese style, which is more -- I would say, as long as the economic conditions help, or going in the right direction, then it's more likely to be a, sort of, evolution.

Obviously, if the economy disappoints, and there are people who (write out ?) China at the cross-roads, and some very good guys who analyze China, who talk about these downside risks, clearly, if the economic situation deteriorates, then that clearly poses political challenges.

MS. MAASBACH: Any other questions from the operator?

OPERATOR: No, ma'am, I'm not showing any other questions in the queue.

MS. MAASBACH: You know what, this is -- I think this is a great time to conclude this call.

Gerard, any final thoughts on what we can expect in the next nine to 12 months?

MR. LYONS: Well, I was going to say if people wanted to follow up they can drop me an e-mail at Gerard.lyons@standardchartered.com.

But, in terms of what we should expect, I think people -- (but, ?) the situation is quite terrifying in some respects. We shouldn't underestimate it. One hopes that the leadership here, over this weekend in Washington, delivers more. I think some of the lessons from Asia are particularly important but, in particular, the lesson from Japan, where the whole system had to pull together.

And I'd like to see both multilateral and national approaches working together into solution. I think we will have a global recession. I think everyone will feel the pain. But I think it's important, in recognizing that there are many positives around, indeed, in the financial sector itself. Take my bank, Standard Chartered, we're in great shape; our liquidity's good; our capital is good; our clients are, sort of, well-positioned -- (inaudible) -- Asia, Africa and the Middle East, but even here in the States there are some banks that look good.

The important thing is that whilst the media looks at the downside -- and we shouldn't underestimate the downside, there are still some very strong economies, strong financial institutions around the world. And I think the flight to quality and the search for liquidity will continue for the near-term.

But I would conclude by saying that we should be looking for the eventual bounce back to be maybe earlier and stronger in Asia. And we should bear that in mind, particularly as we see some negative economic and financial news in the months ahead.

MS. MAASBACH: You gave us so much good information to sit on and to consider. Gerard Lyons, Standard Chartered, thank you very much for a very innovative and interesting morning.

And, thank you all in the audience for participating. We will probably, and most likely send this transcript around for those of you with Gerard's contact details. So, thanks all very much, and I'll speak with you all soon.

MR. LYONS: Thank you.

OPERATOR: This concludes our teleconference. You may now disconnect your lines.

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