“ Positioning Malaysia as an International Financial Centre Hotel Marriot, Putrajaya Datuk Seri...

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Positioning Malaysia as an International Financial Centre

Hotel Marriot, Putrajaya

Datuk Seri Panglima Andrew L.T. ShengTun Ismail Ali Professor of Monetary and Financial Economics

Faculty of Economics and AdministrationUniversity of Malaya

National Economic Action CouncilFriday, 5 May 2006

2

Contents

1. Role of Financial Centre in National and Global Context

2. How Hong Kong defended and enhanced position as largest international financial centre ex-Japan

3. Key issues in building IFCs

4. Potential for Malaysia

3

Efficiency of economies all about efficiency of urban centres, e.g. New York vs. Mexico City

Cities are knowledge centres

Art, culture, politics, trade, news

Must have rich hinterland, linked by superior communications, e.g. river, sea, road, rail, air

Exchanges and Technology

Pre-telegraph, 100+ US exchanges,

Advent of radio, 22 (1935)

Advent of computers - 7 (1995)

Cities and Financial Centres

4

Metcalfe’s Law - “The value of a network goes up as the square of the number of users”

Economies of Scale

Supply side - Biggest producer wins

Demand side - Biggest buyer determine standards

Critical Mass

Aggregation of local knowledge and skills

Best combination of skills create economies of scale

Critical Mass = Clusters = skills concentration

Supply Chain Management - where in the chain is real value?

Financial Markets are Networks

5

• Financial Innovation

Evolution of derivatives, options & futures

• Technology & Telecommunications

Global 24 hours markets

From market place to market space

Deregulation

Lines of traditional businesses blurring

Changing Structure of Financial Markets

6

Finance is Derivative of Real Economy, Value defined by information + Knowledge

• Commoditization means that low-knowledge products and services have high competition, low prices and are easily duplicated and therefore “taken away”.

• Markets are all about “branding” and “high knowledge content products”. Knowledge content needs governance - value creation needs total inputs at production, design, packaging and marketing levels.

• Network Economy demonstrates “winner-take-all” situation. Financial markets converge on key hubs, e.g. New York taking American time zone business, London taking European time zone business

7

Reliable InformationEssential for Quality of Markets

• Quality Markets require real time and reliable information to make sound risk management decisions in highly volatile environment

• High quality information requires :– Good accounting and auditing standards

– Reliable & timely statistics/reporting processes

– Infrastructure to process information for making decisions critical to competitive success

• Bad accounting = distorted information = poor decision making = bad risk management financial crisis

8

Hierarchy of Information

Wisdom

Knowledge

Information

Data

Value

•Robert W Lucky, “Silicon Dreams: Information, Man and Machine”, St Martin’s Press, 1991.

9

Sequencing and Hierarchy of Domestic Financial Markets

Asset-backed securities and

derivatives

Corporate bond and equity markets

Government bond market

Treasury bill market andforeign exchange markets

Money market

Source: Karacadag, Sundrarajan & Elliot, 2003

10

Market DisciplineKey for Corporate Governance

• Quality of markets depends on quality of corporate governance in listed companies

• Corporate governance is about three key disciplines:– Self discipline - ethics & fairness

– Regulatory discipline - a level playing field

– Market discipline - competition & accountability

• Asia traditionally stressed first two disciplines at the expense of market discipline

• The key to capital market development is to promote and enforce these disciplines based on reliable information

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• Free Entry of Participants and Products

• High degree of transparency/low information asymmetry

• Efficient Operations by solvent participants under international rules of the game at low transaction costs

• Absence of incentive distortions or bias that moves markets in unhealthy direction e.g. moral hazard or subsidies

• Efficient regulation at low regulatory costs;

• Orderly exit of insolvent participants [obsolete products and insolvent operators create huge dead costs on market]

Accountability [feedback and exit for bad players]

Efficient Markets require:

12

Malaysia already has balanced financial sector(% of GDP)

24.10.424.94.438.929.8Indonesia

157.2122.0131.657.558.859.6US

43.936.8123.085.2115.087.8UK

80.351.642.221.796.753.8Germany

38.99.772.329.279.756.8Thailand

58.627.8149.095.8104.474.3Singapore

89.369.8152.6100.788.752.1Malaysia

74.934.156.148.268.832.6Korea

181.685.973.2121.7120.5100.0Japan

31.719.948.410.451.131.4India

28.31.5486.3107.2299.3205.6Hong Kong

29.48.540.3n.a.177.875.6China

200419902004199020041990

Bond MarketEquity MarketBank Deposits

Source : World Bank Financial Sector Dataset, February 2006

13

August 1998: HK Govt intervened with US$15 billion in stock market to stop hedge fund speculation

Immediate action: Rebuild Market Credibility Close Gaps with London/New York:

better regulation, more products, greater liquidity Build Stronger Links with China and Asia:

more research, better marketing, closer connections

Medium and long-term: Greater integration with Pearl River Delta to

compete against Yangtze River Delta/Shanghai Wall Street in Asia

Case Study: Hong Kong as IFC after 1998 Stock Market Intervention

14

Low Transaction Costs Rule of law with advanced property rights system Free and open economy with world-class financial

system Low tax rate and simple tax system

Low Exchange Rate Risk and Uncertainty Fully convertible currency Exchange rate linked firmly to USD Fully open and deep capital market

Next to Rapidly Growing Southern China Potential for lowering production costs Potential for expanding turnover Potential for servicing new wealth

Strengths of Hong Kong

15

Pre-WTO, Hong Kong had premium as external window for China and East Asia, when access to markets and knowledge was poor

Franchise is eroding when China gains access to WTO and through Web

However, biggest value added is “Localization of Global Knowledge” - add value by being:

Preferred financial centre in Asian Time Zone

Best logistics centre in ATZ

Importing external skills [e.g. marketing, finance, technology and tailoring for local markets

Understanding Strengths and Weaknesses

16

Lessons from Shanghai and Singapore: Clear vision, sound strategy and detailed blueprint Effective coordination among local and central

governments and business No economic borders to residents or outsiders

Lessons from Japan, Taiwan and other Asian economies: Political stability key to stable growth Protectionist policies only delay pain People and capital move faster than policy changes

Implications for Hong Kong: Economic and financial integration of Hong Kong

(finance), Southern China (manufacturing) and Taiwan (technology).

Hong Kong could provide the best service for Mainland, Taiwan, Asia and international business

Learning from Competitors

17

Hong Kong domestic market alone too small to have critical mass

In areas where HK has critical mass, play dominant player strategy

e.g. Financial services - improve quality to capture value in Supply chain management

In areas where HK has no critical mass, cooperate and affiliate

e.g. Move manufacturing where there is cheap labour

e.g. cooperate with others to achieve economies of scale [airports, power, environment]

Competition & Co-operation Strategies

18

The greater the friction cost, the more the market moves to areas with lower friction costs

The lower the friction cost, the higher liquidity

Friction costs depend on the following:-

Time [speed to market]

Factor costs [Labour, Capital, Taxes]

Infrastructure costs - how good is physical utilities?

“Government costs” - are rules & policies costly?

Barriers to Entry - competition policy

Markets are a function of Liquidity & Friction Costs

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Structural Costs Compared

HKSAR China US Japan

Production Costs High Low High HighTransaction Costs Low High Low Medium

Infrastructure Cost High Medium Low MediumSaving Rate Medium High Low HighExpected InvestmentReturn Low High Medium Low

Speed to market Slowing Improving Good Slow“Government Costs” Low High Low HighBarriers to Entry Rising Lowering Low High

20

– Market reform: SEHK and HKFE were demutualized and merged to form the HKEx in Mar 2000, listed on 27 Jun 2000

• Infrastructure reform: fully electronic web-friendly world-class high tech infrastructure by 2002/2003

• Legislative reform: Securities and Futures Ordinance passed in 2001

Complete Corporate Governance and Enforcement overhaul 2001-2005

Hong Kong’s 1999 Three-Pronged Reform Programme

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Hong Kong – Largest Market in Asia ex-Japan, 1988-2006 (US$ bn)

0

200

400

600

800

1,000

1,200

1,400

China Hong Kong Australia Taiwan Korea Singapore

Market Cap (US$ bn)

end 1988end 2000end 2001end 2002end 2003end 2004end 2005end Mar 20066.2x

16.3x

N/A

12.3x

4.1x

8.0x

Remark: x = increase from end 1988 to end Mar 2006Sources : WFE and IFC

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Capitalization and Turnover of Major Markets(end Mar 2006, US$ bn)

Remarks: Turnover - for the 12 months ending Mar 2006, P/E ratio - end Mar 2006Due to different reporting rules & calculation methods, turnover figures are not entirely comparableP/E ratio for China is the weighted average of A and B shares markets

Sources: WFE and websites of various exchanges

Market change over Market change over P/E Cap Mar-05 Turnover Mar-05 ratio

Japan 4,775 35.9% 5,186 58.1% 23Hong Kong 1,207 43.3% 543 29.4% 13

Australia 858 18.3% 707 26.1% 18Korea 752 55.1% 1,389 128.8% 11

India 678 86.7% 354 39.1% 20Taiwan 490 11.5% 639 9.7% 18

China 441 4.8% 452 13.4% 18Singapore 294 29.3% 134 34.8% 14

Malaysia 195 11.6% 51 -9.9% 15Thailand 135 9.0% 96 -11.5% 9

Indonesia 100 29.0% 37 6.8% 20Philippines 45 26.9% 7 31.6% 14

US (NYSE) 14,072 11.4% 16,041 33.0% 23

US (Nasdaq) 3,787 15.6% 10,616 17.1% 39UK 3,253 16.2% 6,164 18.4% 13

Germany 1,400 19.0% 2,126 38.7% 16

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Financial Sector Masterplan (FSMP)• A 10-year plan (2001 – 2010) outlining strategic focus & actions, with 119

recommendations and encompassing 6 sectors:• Banking• Insurance• Islamic Banking and Takaful

• Objectives• Create a more efficient (services at lowest cost), effective (broad range of services)

& stable (minimal systemic risks) financial system• Meet socio-economic agenda in an effective & efficient manner• Meet international commitments & prepare domestic financial institutions for global

competition

• Implementation Phases• Phase I (3 years)

- Enhance capacity of domestic institutions to compete- Enhance financial infrastructure

• Phase II (3-4 years)- Intensify competitive pressure in the domestic financial sector- Level playing field with incumbent foreign banks

• Phase III (after 7 years)- Assimilate into global arena- Introduce new foreign competition

Source: Bank Negara Malaysia

•Development Financial Institutions•Labuan IOFC•Alternative Modes of Financing

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Capital Market Masterplan (CMP)• A 10-year plan (2001 – 2010) outlining strategic focus & actions, with 152

recommendations to address 4 key Malaysian capital market challenges:• Lingering effects of the regional financial crisis• Meeting the needs of a growing economy• Heightened global competition for business and investment• Changing demands on the regulatory framework and authorities

• Objectives• To be the preferred fund-raising center for Malaysian companies• To promote an effective investment management industry and a more conducive

environment for investors• To enhance the competitive position and efficiency of market institutions• To develop a strong and competitive environment for intermediation services • To ensure a stronger and more facilitative regulatory regime• To establish Malaysia as an international Islamic capital market centre

• Implementation Phases• Phase I (3 years)

Strengthen domestic capacity, and develop strategic and nascent sectors

• Phase II (2 years)Further strengthen key sectors and gradually liberalise market access

• Phase III (5 years)Further expansion and strengthening of market processes and infrastructure towards becoming a fully-developed capital market, and enhancing international positioning in areas of comparative and competitive advantage

Source: Securities Commission Malaysia

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Global Competitiveness: Malaysia’s Standing

58

29

35

16

23

12

4

2

6

1

2004

763Singapore

312428Malaysia

14109Australia

221United States

343627Thailand

91221Japan

21282Hong Kong

74

17

5

2005

WEF Ranking2

20042005

6959Indonesia

2929Korea, Rep.

411Taiwan

IMD Ranking1

Countries

Source: World Economic Forum (WEF), 2005/06; Institute for Management Development (IMD), 2005

1 IMD World Competitiveness Ranking 2 WEF Growth Competitiveness Index Ranking

26

Malaysia’s Competitiveness Trend

3430313135Infrastructure

16

13

16

16

2004 200520032002

24

24

19

29 8259Economic Performance

251831Business Efficiency

21

14

2001

2828Overall

2624Government Efficiency

IMD World Competitiveness RankingCategory

Source: Institute for Management Development (IMD), 2005

27

Global Competitiveness: Government Efficiency Perspective

7

13

23

15

24

9

10

4

21

Collected Total Tax Revenues

8

3

17

22

18

16

15

10

29

General Govt. Expenditure

26

16

14

46

54

37

19

12

40

Government Budget

1Singapore

15Malaysia

23United States

11Thailand

2Japan

9Hong Kong

Employment in Public Sector

17Indonesia

2Korea, Rep.

13Taiwan

Public Finance

Countries


28

47

28

20

24

30

10

12

9

19

Public Service

56

32

34

22

51

33

3

25

18

Transparency

51

16

22

25

28

9

1

5

23

Bureaucracy

61Singapore

3622Malaysia

2016United States

445Thailand

2841Japan

947Hong Kong

55

33

30

Government Decision

Institutional Framework

Bribing and Corruption

55Indonesia

33Korea, Rep.

29Taiwan

Countries



29

50

40

35

47

36

34

15

1

9

Access to Capital Market

52

53

37

54

50

43

23

1

15

Foreign Investors

49

42

38

44

43

35

13

1

31

International Transactions

47

27

39

53

58

33

11

4

28

Public Sector

Contracts

7Singapore

50Malaysia

26United States

42Thailand

43Japan

1Hong Kong

Protectionism

57Indonesia

35Korea, Rep.

31Taiwan

Openness

Countries



30

57

44

51

53

31

27

24

4

16

Price Controls

56

19

13

37

46

16

4

2

33

Subsidies

51

30

45

22

21

18

5

1

23

Regulation Intensity

23Singapore

1717Malaysia

413United States

1919Thailand

3021Japan

11Hong Kong

33

4

15

Government Subsidies

Competition and RegulationsEase of Doing

Business

54Indonesia

45Korea, Rep.

8Taiwan

Countries



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Malaysia’s Competitiveness Disadvantages

Macroeconomic Environment

Government surplus/deficit – 96

Government debt – 49

Public Institutions

Irregular payments in public utilities – 47

Irregular payments in exports & imports – 45

Irregular payments in tax collection – 36

Organised crime – 31

Technology

Gross Tertiary enrolment – 63

Telephone lines – 61

Company Operations and Strategy

Nature of competitive advantage – 54

National Business Environment

Extent of bureaucratic red tape – 101

Centralisation of economic policymaking – 80

Others

Freedom of press – 83

Telephone/fax infrastructure quality – 45

Prevalence of trade barriers – 38

Informal Sector – 37

Reliability of police services – 37

Foreign ownership restrictions – 37

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23 Notable Competitiveness Disadvantages (position out of 117

countries)

WEF Growth Competitiveness Index Rank

WEF Business Competitiveness Index Rank

Source: World Economic Forum (WEF), 2005/06

32

Global Competitiveness: Stock Market Perspective

(% of GDP)(US$ bn)

12

58

47

39

52

56

38

40

53

Stock Market Index

21

18

7

11

5

14

16

10

2

Listed Domestic

Companies

56

35

23

34

16

10

14

3

2

Value Traded

(US$ per capita)

51

21

31

3

25

9

5

1

10

42

33

16

26

2

15

27

9

1

Capitalisation

13Singapore

25Malaysia

2United States

17Thailand

31Japan

1Hong Kong

Stock Markets

Financing

39Indonesia

37Korea, Rep.

15Taiwan

Countries


33

53

21

28

34

20

7

4

1

9

Cash Flow

51

39

46

34

54

48

23

25

10

Share-holders’ Rights

51

30

35

40

49

32

13

8

16

Financial Institutions

Transparency

54

50

53

51

41

1

35

21

27

Factor-ing

55

32

35

40

33

21

6

1

11

Corporate Debt

60

34

36

31

29

22

28

16

15

Ethical Practices

59

32

24

25

35

3

13

1

7

Adaptability of

Companies

Singapore

Malaysia

United States

Thailand

Japan

Hong Kong

Indonesia

Korea, Rep.

Taiwan

Countries


Global Competitiveness: Stock Market Perspective

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World Bank: Doing Business Global Index

14382.72269Malaysia

5250.92358Taiwan

3212636313China

217.31478Thailand

11232.66012Korea

8338.52305Hong Kong

3212.31212Australia

9241293Singapore

Registering Property (days)

Cost of license (% of income

per capita

Getting licence (days)

Start business no. of

proceduresCountry

Source: World Bank, 2006

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Bottom Line: Malaysia already has the Plans + HR + Infrastructure to be IFC

• Its not about Vision, Mission or Infrastructure• Advantage 1: We have spent RM3 billion and 10 years to

make Labuan a viable Offshore Financial Centre• Advantage 2: KL has the lifestyle and infrastructure to be

attractive Asset Management Centre for Asia• Advantage 3: Malaysia is already leading Islamic

Banking Centre • Advantage 4: Over 15,000 Malaysian professionals in

Hong Kong alone, excluding Singapore and elsewhere - global talent is recruitable

• Advantage 5: Malaysian costs are lower than other regional financial centres.

EXECUTION and IMPLEMENTATION is key to success.

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Finance is not a zero-sum game in Asia. Malaysia can offer niche

services at lower costs• Malaysia can be Global Islamic Financial Centre -

watch the competition.• KL can be Asset Management Centre for Asia -

Labuan is already booking centre. • We can be outsource subcontractors in

accounting, secretarial, cartoons, sound, film, book production etc to high cost centres.

• Need focused implementation and constant benchmarking to international standards, plus partners from all over the world.

• Outsourcing and Services business needs widespread and stable broadband.

37

Development and Growth is a Process: To have Sustainable Growth, you need a Process to

Manage Development Process

• Development is complex, because those who face most problems are those who are closest to the problem [the poor, SMEs, private sector, grass root public servants].

• It’s not about QUANTITY OF GROWTH, BUT QUALITY.

• In the past, development has been top-down. Aid, not trade. Today, we understand that we have to use market forces to lead growth.

• Therefore, the key to sustainable growth is to have inclusive, transparent and accountable processes to manage the growth process.

• This is a co-operative venture, not public-private competition. This includes using national + global talent and skills.

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ABC of Knowledge EconomyACADEMIA - Holders of Knowledge, but bogged

down in teaching. Segmented from market or government

BUSINESS - Close to market, but do not use Academia for R&D and sees Civil Service as hindrance rather than partner

CIVIL SERVICE - Holder of massive public information and resources that can help growth. Currently, rarely uses Academia for R&D and policy work. Focuses more on regulation rather than BUSINESS facilitation. Competing internationally means that transactions costs of doing business and “time to market” in Malaysia must come down. Its all about teamwork. We have to operate as truly Malaysia Inc.

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Change Management is Tough

• Clarity of Role and Objectives

• Rules have no meaning unless they are enforced

• It’s the outdated processes that must change

• Prioritization of “Doables”

• Getting staff and public buy-in

• The whole world is adjusting - pain is inevitable

• Deliver small winners to achieve credibility - the big winners will take care of themselves

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Focus and Prioritize

“Pick important problems and fix them and tell everyone”..

“The essence of the [regulatory] craft lies in picking the right tools for the job, knowing when to use them in combination, and having a system for recognizing when the tools are inadequate so that new ones can be invented.”

Professor Malcolm Sparrow, The Regulatory Craft, Harvard University.

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Fixing the Problem

Old-style regulators: “Nitpicking, unreasonable, unnecessarily adversarial, rigidly bureaucratic, and incapable of applying discretion sensibly.”

It is often the obsolete and defective systems, not the people, that create

problems.

Change is the constant. Be prepared to change.

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Enforcement of Laws, not Laws per se, is critical

OECD - “Too often, legislators issue laws as symbolic public action, rather than as practical solutions to real problems. Regulatory inflation erodes the effectiveness of all regulations, disproportionately hurts small and medium businesses, and expands scope for misuse of administrative discretion and corruption.”

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FIRST CLASS SERVICE

• As small open economy, Malaysia has already reached Middle-Income Status. We are caught in middle bulge. Not big enough to have economies of scale, but not too small to be marginalized.

• Korea learnt key lesson from Asian crisis: the governance structure of DEVELOPED COUNTRY status is very different from EMERGING MARKET status. Korea paid for this lesson.

• Go for quality of service, not quantity. Go for value, not size. Quality of governance at both public and private sector key to success.

• To reach 2020 DEVELOPED economy status, we are already benchmarked against global standards.

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Thank youQuestions to

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