17 November 2006
Opening Remarks by Mr Michael Smith, President & CEO
The Hongkong and Shanghai Banking Corporation Limited
'The World Economy Today' Panel Discussion
APEC CEO Summit, Hanoi

At the unlikely risk of being lost for words later, I am going to use my allotted time now to provide a condensed version of my views on the three key questions before this panel.

First, in terms of the state of the global economy, it is - from my perspective - in relatively good shape. That said, there are some obvious uncertainties out there which should concern most of us in here. The prospects of a harder-than-expected landing in the United States is probably the most significant danger. Some economists already believe that the US is teetering on the brink of a recession. I am not that pessimistic. Although I think the US does need to address some of its economic imbalances sooner rather than later.

If the US does manage to pull off a softer-than-expected landing, then there are certainly plenty of other uncertainties lurking around. Things like bubbles bursting, energy prices rising, SARS or bird flu returning, and or global imbalances rapidly unwinding.

Clearly there are also some structural uncertainties to keep in mind. The rapid growth in dispersal of risk through both hedge funds and instruments for risk transfer - credit default swaps for example - has created large risk exposures in complex products. Exposures which are difficult to model and assess.

While these instruments have risk-reducing benefits for institutions and the banking system, we really only have limited knowledge of how they will perform under stress. Simply put, the complexity of the global financial system could make a crisis more difficult to manage and therefore more damaging.

All of which brings me to another question that we are being asked to comment on: threats to global financial stability.

In addition to the aforementioned structural uncertainties, the other big threat to global financial stability is - from my perspective - the herd mentality of many. The reality is that we now live in a world where technology makes it possible to shift billions of dollars into and out of markets with the flick of a key. Where investors have at their fingertips more information on more companies and more economies than ever before. A world where reactions tend to happen much more rapidly and sometimes much more irrationally than ever before, resulting in much more dramatic consequences.

Think back to the mid-1990s. Vietnam was generally tipped to be one of the places to be. However, the Asian Crisis rapidly erased such market sentiment. Simply put, Vietnam -along with a number of other Asian markets - suffered from guilt by geographic association. Asia became a four-letter word, literally and figuratively.

Now almost a decade later, some things have clearly changed while others have not. Asia, for its part, has once again become desirable - although with some Asian economies deemed to be more attractive than others. Vietnam - and rightly so - is one economy which is considered by many to be one of the world's great untapped emerging markets. The herd mentality still lingers, however.

Last but not least, there is the question of what is required to bring the WTO talks back on track. I will resist the urge - at this point - to shrug my shoulders or throw up my hands in despair.

What I will say is that - at the moment - perhaps the best we can hope for is for governments to realise that the so-called 'noodle bowl' approach to free trade may be okay in the short term. But over the longer term, multiple bilateral and multilateral agreements are going to become increasingly messy to manage.

That said, I am a strong believer in the benefits of free trade. And I remain hopeful that a global trade agreement can be salvaged. But I am also rational enough to recognise that for the Doha round to be successful then governments - with the support and perhaps the prompting of business! - will need to make a concerted effort to overcome a multitude of vested interests. Indeed, as others observed after the rise of a number of protectionist-minded Democrats in US mid-term elections: "the world may have reached a temporary plateau in terms of liberalisation of trade."

On that happy note, let me pass the microphone on.