The untold story of Malaysia foreign exchange controls

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Book reveals how Malaysia beat currency speculators in 1997/98 crisis
By Thean Lee Cheng, Starbiz

 
Nor Mohamed (left) and Wong at the book launch

KUALA LUMPUR: Former Prime Minister Tun Dr Mahathir Mohamad toyed with the idea of exchange controls as early as May 1998 but was met with resistance from within the National Economic Advisory Council, the Cabinet and the central bank.

This was revealed in Notes to the Prime Minister, a new book that chronicles one of the biggest challenges and triumphs in Dr Mahathir's 22 years as Malaysia's Prime Minister.

Notes to the Prime Minister: The Untold Story of How Malaysia Beat the Currency Speculators was launched yesterday in Kuala Lumpur by Minister in the Prime Minister's Department Tan Sri Nor Mohamed Yakcop. Tun Dr Mahathir was not present as he was advised by doctors to rest at home.

The book, published by MPH Publishing, is based on 45 sets of notes written between Oct 3, 1997 and Aug 21, 1998 by Nor Mohamed when he became Dr Mahathir's unofficial and unpaid economic adviser.

The Asian financial crisis, which first engulfed Thailand in the middle of 1997, hit Malaysia soon after. Selective capital controls were imposed on Sept 1.

The book is written by veteran journalist Datuk Wong Sulong, the former business editor and group chief editor of The Star.

In an excerpt from the book, Dr Mahathir told Wong that he decided on foreign exchange controls “after Nor Mohamed explained to me how currency trading works ... millions and millions of ringgit can be transferred from a domestic account to a foreign account by a stroke of a pen ... I realised that foreign currency trading can be stopped by stopping this balance transfer.



“But I must say it was not as easy as that. We needed to do a lot of background work and monitoring and Bank Negara (needed to) set up many committees to do that to ensure that the controls were effectively implemented. (Tan Sri) Dr Zeti (Akhtar Aziz, then deputy governor of Bank Negara) did a lot in that respect and also in the economic recovery.”

Notes to the Prime Minister is not only a valuable lesson on how Malaysia took unorthodox steps to solve the Asian financial crisis but it is also a story of how two Malaysians met halfway around the world and came up with the Malaysian solution to the Asian financial crisis.

It is an intriguing story of how Nor Mohamed, then chief executive officer of Mun Loong Bhd, was summoned by Dr Mahathir to meet him in Buenos Aires, Argentina, on Oct 2, 1997. The first set of those notes was written a day later, on Oct 3.

Prior to this unique flow of notes, Nor Mohamed was a Bank Negara adviser.

His expertise in foreign exchange landed him and then Bank Negara governor Tan Sri Jaafar Hussein in trouble. Both of them resigned to take responsibility for Bank Negara's speculation on foreign exchange losses that went into billions of ringgit in the early 1990s. Nor Mohamed joined the private sector after that.

Said Nor Mohamed at the launch: “We learn in history that sometimes the lives of individuals and the fate of nations hinge on a millimetre's difference in the trajectory of a bullet, a road not taken on a whim, or the random stray of a shrapnel.

“In my case, my fate was sealed ... by the turn of a head Tun Dr Mahathir's ... It was a sunny afternoon in September 1997, when the PM's motorcade was speeding along the streets of Kuala Lumpur.

“At one junction, as the motorcade slowed, Tun Dr Mahathir turned his head to look out. And he saw a forlorn-looking man walking towards a row of shops for lunch. That forlorn-looking man was me!”

Nor Mohamed was summoned a few days later to go to Argentina. In April 1998, Nor Mohamed resigned from Mun Loong to concentrate on being Dr Mahathir's unofficial adviser.

During that period of assessement, Nor Mohamed went to Singapore to observe the operations of Central Limit Order Book (CLOB), a board on the Singapore Stock Exchange which dealt with a great number of Malaysian shares. Dr Mahathir felt that Malaysia's currency crisis could not be solved as long as CLOB exists.

Dr Mahathir, aware that his adviser was unemployed, asked: “Do you have money to go down to Singapore?” Nor Mohamed laughed and assured him that the trip would not cost a lot of money. The rest, as they say, is history.

As for Wong, who shares a deep liking for Nor Mohamed, he was asked by his friend to write the book.

“I felt a sense of excitement and a heavy responsibility. These notes had never seen daylight and it shed a new light (on more than just the economic and political aspects of this country). You have to tell a story as honestly as possibile, but not technically, because it has to appeal to the average reader. So that was my dual challenge.”

Related post:

Capital controls: From heresy to orthodoxy  

Malaysians first, Time to stop thinking along racial lines, says Soi Lek!

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Time to stop thinking along racial lines, says Soi Lek

KUALA LUMPUR: The people must start thinking of themselves as Malaysians first rather than the racial group they belong to, said MCA president Datuk Seri Dr Chua Soi Lek.

He said Malaysians had to accept the political reality that the country was a multiracial one and everyone must work together to make it a peaceful and developed place.

“At MCA, we have always asked for the column stating race to be removed from application forms,” he told reporters after the ground-breaking ceremony of the Selangor and Kuala Lumpur Chin Woo Association multi-purpose activity centre here yesterday.



However, Dr Chua acknowledged that it would not be easy to achieve the 1Malaysia objective right now as the people still had very strong racial identity and feelings.

He said Malaysians, from government servants to businessmen, were still thinking along racial lines.

On whether Barisan Nasional component parties that represent the major races in the country are hindrances to achieving the 1Malaysia concept, Dr Chua said they should not be.

“We have been in existence for so long. When we solve problems, we do not talk about race,” he said.

He said even Pakatan Rakyat was a coalition of parties that represented the major races in the country.

“PAS is basically (made up) of Malays and Parti Keadilan Rakyat is (made up of) people (who were previously) from Umno while DAP comprises mostly Chinese,” he said.



On another matter, Dr Chua said more young faces with high chances of winning will be chosen to be MCA candidates in the next general election.

He said young candidates who were media-savvy and had passion and good organisational and language skills would form a good combination with their older counterparts.

“The best combination will be to have the old, middle-aged and the young ones as our candidates,” he said.

He said MCA had always tried to infuse new blood into the party, so those who had been holding party positions should not assume that they would automatically be selected to be election candidates.

“We will also not pick candidates based on their gender or the faction they belong to,” he said.

Recently, Dr Chua hinted that leaders, especially division chairmen who had lost in the previous general election, would not be chosen as candidates in the next general election.

On whether this would backfire and cause acts of sabotage among party members, Dr Chua said: “If a candidate has a high chance of winning, he or she should not be worried.”

He said when MCA made the decision to not take up any government posts should it perform poorly in the next general election, it was a warning to incumbent leaders not to be complacent but to work hard to get the support of voters.

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Errant lawyers ticked off

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By M. MAGESWARI mages@thestar.com.my

KUALA LUMPUR: Seven lawyers were reprimanded by the Advocates and Solicitors Disciplinary Board in the first five months of this year following six complaints against them for unbefitting conduct, breach of Legal Profession Act Rules and negligence in handling their cases.

Board chairman Tan Sri Khalid Ahmad Sulaiman told The Star that the disciplinary board only reprimanded the lawyers after finding that they had no intention of cheating their clients or misleading the courts.

“We have even reprimanded senior lawyers for overlooking certain things. “Lawyers must be professional and their client’s interest is paramount to them,” he said.

Khalid said one of the reasons lawyers were reprimanded was failing to respond to the Bar Council and their client’s letters.

“They were reprimanded for unbecoming conduct as advocates and solicitors. “Lawyers who do not attend court proceedings will also be reprimanded,” he added.



Khalid said the board had ticked off senior lawyers for leaving their legal advisers or clerks to deal with certain matters.

“I have told them to keep an eye on their legal advisers and clerks. We told them to be careful next time and not let this happen again.”

He said the board warned the lawyers that they would face severe punishment, including suspension.
Khalid hoped the lawyers, mostly first-time offenders, would not repeat their mistakes.

He said those reprimanded were among the more than 500 lawyers who were investigated by the board after complaints were lodged against them between January and May.

The Star had published an exclusive report yesterday stating that the board had received 538 complaints against lawyers, mostly in Selangor, Kuala Lumpur and Johor Baru, in the first five months of the year.

Five were barred from practising, 28 including four Datuks were fined between RM1,000 and RM30,000, while investigations into the other cases are ongoing.

The board receives an average of 900 complaints a year, including criminal breach of trust and breach of solicitor’s ethics.

Former Malaysian Bar president Ragunath Kesavan said complaints against lawyers, mostly for dishonesty involving client’s money, had been forwarded to the board.

“Any (wrongful) transaction involving the client’s accounts is a serious offence. We have lodged complaints against lawyers for dishonesty involving amounts ranging between RM20,000 and RM2mil,” he said.

He added that the board had found the lawyers guilty after investigating the complaints.

Ragunath said the Bar had confidence in the disciplinary proceedings by the board as it was independent.
“It is very important to have public confidence in the legal profession.”

He said the Bar forwarded complaints of dishonesty without any hesitation, although only a small percentage of lawyers were involved in such cases.

Racial divide a myth as racialism is not the cause

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Racial divide a myth

by Ajit Singh Jessy 

SCANNING the various websites and the comments from readers, one would think that racialism pervades our society and daily life. It is also made out to appear that we are about to have racial riots and that there is an insurmountable racial divide.

In my view, this is far from the truth and largely exists in the minds of the writers and may, in fact, be reflective of their own racist views and upbringing.

The issue of scholarships and comments by Datuk Seri Mohammed Nazri Abdul Aziz that Ibrahim Ali is a clown and so forth, are twisted to imply that racialism is the cause.

Scholarships, of course, must be offered to those with good academic results, as well as deserving cases, who may not have the best results but need assistance.

I am not aware of any time in our history where scholarships were given automatically to those with the best results only.

Other factors have always been weighed in and it is not possible for scholarships to be given to all.

In the United States, too, at one time, African-Americans were given special consideration in education and jobs. In India, this is widespread, with some so-called backward classes committing suicide to ensure that they are given special privileges in education and that places are reserved for them in institutions of higher learning.

When Nazri said Ibrahim was a clown, he probably meant that Ibrahim should not be taken seriously.

We still go to Malay weddings, kenduri and lunch with our Malay colleagues and they attend the functions of others. We should not make accusations of double standards at the drop of a hat.

Such accusations imply that others should be allowed to make similar sensitive statements. What would be the end result?



Tension and fear. How does this help the cause of nation- building? These racial critics talk about fairness but are blind to the fact that continuous tit for tat does not serve any purpose.

The views of people like Ibrahim should be ignored.

This talk of a threatening racial divide does not exist in our daily life. You can go to any government department, where the Malays form the majority, and yet, they will not attend to a Malay first but to everyone by turn.

I go to a Malay stall for lunch and there is always a long line of customers from all races and yet, the woman will serve you by your turn. She does not ask the Malays to jump queue just because they are of the same race or religion.

So, what are these critics complaining about discrimination being institutionalised?

You can walk down any street and no one will call out by your race but address you politely according to your age or gender, such as adik, kak, pakcik or makcik. You will not find this if there is a racial divide.

My legal firm has Chinese, Malay and Indian staff. I see them going out for lunch together, celebrating birthdays and visiting one another's homes during festivals.

In fact, we feel most at home when we go to some homes for Hari Raya because the family will attend to the non-Malay visitors first and even remove the beef dishes from the table.

This is the reality of multiracial and multireligious Malaysia and the said behaviour reflects how we live together and not accommodate or tolerate one another, as these misinformed racialists will have us believe.

I think it is time for these mischievous and self-appointed experts on racial issues to come down from their ivory towers and lead a normal life, by sincerely intermingling with one and all.

These writers are in fact creating problems by passing off their prejudiced views as those of the majority of Malaysians.

To compound matters, there are former Malaysians who give their opinion about how this country is headed for racial and financial disaster, and their views are given wide circulation through the Internet. While I welcome different views, it is not proper for these ex-citizens to behave as though only they know what is best for our country.

Leave that to us, and please, take care of your adopted country, where you probably cannot even stand for elections and do not have the numbers to make a difference to the election outcome.

AJIT SINGH JESSY
Penang

The Renminbi’s Journey to the World

As China's currency becomes more popular internationally, the country will have less need to hold US dollar assets.

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BEIJING – Recently, HSBC bank released an upbeat survey predicting that China’s currency, the renminbi (RMB), will become one of three global settlement currencies (alongside the dollar and euro) sometime this year. It seems that the RMB’s internationalization has been progressing without anyone really noticing. The key remaining questions concern whether or not the RMB will become an important international currency anytime soon, and whether it is poised to pose a serious challenge to the US dollar’s domination of the international monetary system.

 

China has made progress in the use of the renminbi (RMB) as a settlement currency [GALLO/GETTY]

An international currency is used and held beyond the issuing country’s borders, and plays the role of unit of account, medium of exchange, and store of value for residents and non-residents alike. Certainly, there are many potential benefits for China to be gained from the RMB’s internationalization:

·        Elimination of exchange-rate risks to which Chinese firms are exposed;
·        Greater funding efficiency for Chinese financial institutions, thus strengthening their competitiveness in global financial markets;
·        A boost to China’s trade with its neighbors, owing to the reduction in transaction costs;
·        Less need for China to hold US dollar assets and risk capital losses on the country’s foreign-exchange reserves;
·        Eventual status as one of the world’s major reserve currencies, which would provide China more freedom to maneuver in domestic and international economic policy.

China’s enthusiasm for RMB internationalization since 2009 partly reflects its frustration with the lack of progress in reforming the international financial architecture, and with the state of regional financial cooperation. Chinese officials believe that RMB internationalization is a way for China to set its own agenda without being overly constrained by external conditions beyond its control.



Thus far, China has made significant progress in the use of the RMB as a settlement currency, in the issuance of RMB-denominated bonds, and in signing currency-swap agreements with foreign central banks. RMB deposits in Hong Kong are growing exponentially.

Despite these achievements, however, RMB internationalization could still easily go awry. For example, various incentives have been provided to encourage enterprises to use the RMB to settle transactions. But, with an undervalued exchange rate and strong expectations for the RMB to appreciate in the future, foreign importers of Chinese products refuse to use the RMB to settle transactions, while foreign exporters are happy to accept RMB. As a result, even with the same trade balance, China ends up with more foreign-exchange reserves, though using the RMB as a settlement currency is supposed to reduce their accumulation.

Indeed, so far, RMB internationalization has shown a clear pattern of asymmetry – and not only as a settlement currency for China’s imports, but not for exports. RMB-denominated bonds meet strong demand, yet non-residents have no great incentive to issue them. And, while foreign lenders are happy to extend RMB loans, they are not welcome by foreign borrowers. Given strong expectations of RMB appreciation, internationalization will inevitably lead to a serious currency mismatch, with possibly detrimental consequences for China’s welfare.

A more fundamental problem for RMB internationalization is what it implies for China’s capital controls. Although the internationalization of a currency is not tantamount to capital-account liberalization, the degree of internationalization is conditional on capital-account liberalization. In fact, internationalization of the RMB has opened a new hole in China’s wall of capital controls. The big increase in RMB deposits in Hong Kong is a case in point.

When a currency endures a prolonged process of one-way appreciation, speculative capital aimed at exchange-rate arbitrage is bound to seek all chances to flow in. Hot money will increase currency appreciation pressure and complicate macroeconomic management. The profit-taking by speculators at the end of the game will lead to huge welfare losses to the recipient country, in this case China.

Fear of hot money was the main reason why China refused to de-peg the RMB from the dollar until July 2005. While China did decide to allow the RMB to appreciate gradually after that, it has relied on capital controls to prevent hot money from flowing in. The controls are leaky, to be sure, but they have worked (so far), which is why China has effectively maintained macroeconomic stability over the years.

The key objective of China’s capital controls is to prevent non-residents from holding domestic RMB-denominated assets that are unrelated to trade and long-term capital flows. But RMB internationalization encourages non-residents to hold more RMBs and RMB-denominated assets. As a result of RMB internationalization, RMB deposits held by Hong Kong residents have reached RMB370 billion ($57 billion), and the amount may reach RMB1 trillion by the end of the year.

One might wonder what difference there is between hot money and RMB deposits held by non-residents. The answer depends on why non-residents hold these deposits. The attraction of the RMB should come from China’s strong economic fundamentals and faith in its economy. If it comes from expectations of RMB appreciation, the success of RMB internationalization can be easily reversed and will cause more problems for China’s monetary authority to solve in the future.

Fortunately, China’s monetary authority has already noticed the subtlety of the distinction between legitimate demand for RMB-denominated assets and hot money. This means that the pace of RMB internationalization could become more measured than international investors have expected.

While internationalization of the RMB is necessary (and inevitable), it should be guided by market principles and pursued in a cautious manner. To get the sequence of policy adjustments right is vital. In any case, the RMB’s path to becoming a truly international currency promises to be a bumpy one.

By Yu Yongding, currently President of the China Society of World Economics, is a former member of the monetary policy committee of the Peoples' Bank of China and former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.
 

Copyright: Project Syndicate, 2011. www.project-syndicate.org