Future Pm Di Asean

8/8/2019 Future Pm Di Asean

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Outline

Where are our capital markets today?

How has Asian growth strategy shaped ourfinancial systems?

How have our financial markets performed theirfour key functions of resource allocation, pricediscovery, risk management & corporategovernance?

What are implications of global financiallandscape changes on Asian financial markets?

What conditions are required for regionalintegration?


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Asian Contrasts

Asia - More than half of globalpopulation, but only 1/3 of global GDP

and 1/4 of world exports , but only 16%

of global market cap [7% ex-Japan]

High savings - FX reserves exceed US$1trillion, but still importing capital

Asia accounts for 25% of global FX

trading [US 19% and EU 53%] Insufficient internal growth engines, still

awaiting growth from US and Europe


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MSCIPPP-GDP Exports Population Weighting

Japan 7.3 6.0 2.1 9.38

4 Tigers 3.3 9.4 1.3 1.82

China 12.1 4.0 21.0 0.26

India 4.7 0.9 16.7 0.12

Other Asia* 5.4 4.5 14.5 1.57

Total ASIA* 32.8 24.8 55.6 13.15

US 21.4 13.6 4.6 55.30

EU 19.9 37.7 6.2 17.14

Others 25.9 23.9 33.6 14.41

TOTAL 100.0 100.0 100.0 100.00

*Excluding Australia and New Zealand

Source: IMF, World Economic Outlook, April 2002

Asia in Global Economy(GDP, % of world, 2001)


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Asia still Dependent on BankFinancing (% of GDP)

Remark: *1999 figureSources: FIBV, CEIC, Bloomberg, various central banks and government websites

Bank Assets Equity Market Bond Market1998 2001 1998 2001 1998 2001

China 139 160 25 45 12 28

Hong Kong 214 215 206 313 32 28

India 69 133 24 26 21 28Japan 145 139 64 55 101 153

Korea 233 233 35 46 53 67

Singapore 220 243 112 135 20 41

Taiwan 226 262 97 104 41 20Thailand 176 134 30 32 23 39

Germany 273 155 51 58 97 90

US 65 63 158 136 141 148


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Asias Financial Structure

The financial system is a derivative of the real sector Dualist mercantilist model drove Asian development

Development led by highly efficient export sectoropen to international competitionFinanced by protection of domestic natural

resources, services and financial sectors Banking system protected from foreign competition,

mobilised bulk of savings and was guided in lending

Fish-trap mentality welcomed FDI, and delayed capital

account opening, resulting in periodic asset bubbles Stock markets were short-term speculative and also

restricted foreign listings

Corporate sector was state- or family-dominated, so

corporate governance reflected ownership behaviour


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Key Resource Allocation Issues

Too much savings in Asian banking systems: 80 140% of GDP, compared with 60% in US

Lack of credit culture, and collateral-based lendingbehaviour, coupled with excess liquidity caused byfish-trap policies fuelled property and stock bubbles

Huge NPLs represent waste of savings NPLresolution cost up to 50% of GDP in Asian crisiseconomies

Development of bond, equity and derivative markets

would help to diversify risk away from banking systemand impose greater market discipline in theintermediation of savings


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Poor Price Discovery

Openness to trade meant that traded consumer prices werestable at competitive global prices

But capital controls and supply distortions, eg lending/listingguidelines led to distortion in key financial prices, egexcessively low domestic interest rates relative to risks andhigh PE ratios

Bank herding with cheap loans fuelled property asset bubble,and small free float fuelled stock prices

Credit risk not properly priced with bank spreads of 1.5 2 %points with NPLs at between 1050% of total assets

Bond spreads have recovered close to pre-crisis levels,although NPLs have not been cleaned up

PE ratios remained around 80 in Japan, as the Nikkei 225plunged from 38,000 to 10,000. China: peaked around 60 in2001, now down to 30+

Mispricing meant that large Asian savings wasted ininefficient investments


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Weak Risk Management

Asian Crisis showed lack of risk diversification

avenues as savings were concentrated in bankingsystem and residents were not allowed to hold foreignassets

Bank-dominated systems with high NPLs and relatively

low capital carried high moral hazard risks throughexplicit/implicit deposit insurance

Lack of specialist and derivative markets, such asventure capital, futures and options markets, point toneed to develop a wide range of financial instruments

and markets, and allow participation of different typesof specialist market intermediaries

Choice of financial instruments improves assetallocation, and allows the hedging of market risks thatin turn increases the risk-bearing capacity of the

economy and, hence, growth


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Weak Corporate Governance

Structure of Asian markets reflect failure of financialmarkets to check against poor corporate governance

Need to upgrade accounting, auditing and disclosurestandards to improve checks and balances on corporategovernance

Dominance of SOEs or close corporate-bankrelationships marginalised minority shareholderinterests

Domestic institutional investors have close links withcorporations, while foreign investors not inclined toimpose governance

Entry barriers to foreign strategic investments protecteddomestic companies from takeovers/restructuring

Preference for merger of failing institutions than

liquidation or opening up to foreign participation.


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Self-discipline, Regulatory Disciplineand Market Discipline

Corporate governance requires all three disciplines toprovide checks and balances for healthy companies

Self-discipline works if controlling shareholders have highintegrity and treat minority shareholder fairly

Regulatory discipline acts as backstop when management

and board lack integrity and ethics, by setting out clearrules and through effective enforcement

Market discipline works best because global competitiondemands management professionalism and observance ofglobal standards of quality, code of conduct and accountingand disclosure rules

Markets buy or sell stocks based on company performancebenchmarked against transparent global standards.

Enhance management accountability to shareholders.


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Globalization means Dualistic Domestic

Sectors are also Marked to Market

Consolidation of Financial Intermediaries Advances in technology, de-regulation, and WTO opening of

domestic markets means huge competition to domestic financialinstitutions from large complex financial institutions offeringbanking, insurance, asset management & derivative services

Ability of domestic policies to protect domestic financial

sectors limited as:-WTO and IMF rules push for market openingSophisticated domestic investors seek global risk

diversification

Liquidity begets LiquiditySmaller domestic players do not have same capitalbase, technology and market reach as global giants

Improvements in accounting and disclosure meansdomestic inefficiencies are revealed as NPL etc

Smaller players are marginalized


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Trends in Domestic Exchanges

Vertical Consolidation - Exchanges aredemutualizing to align interests with market They are also merging or cooperating with Clearing Houses

to optimize fixed investment economies of scale

Horizontal Consolidation Exchange merge or allywith each other to optimize geographical and

product reach

Accenture estimates that merger of trading, clearing

and settlement in Europe may concentrate liquidityand reduce clearing and settlement costs by US$1

bn annually


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Global Three Time Zone Market

New York (US$12.8 trn or 50% of global marketcap) now services global + Latin Americancapital markets

European financial markets consolidating

under EU and euro Asia has tremendous savings, but fragmented

financial markets

Asias capital markets still retail driven -insufficient local institutional investors

Liquidity begets liquidity in a virtuous circlethat benefits issuers, investors, intermediaries


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East Asian Miracle is DemographicallyDriven

Source: Jeffrey G. Williamson, Demographic Shocks and Global Factor Flows


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Aging Population requires efficientPension and Retirement Fund

Management

North Asia aging, slowing growth and requiring moreretirement funding

South-east Asia still young, but must avoid North Asianretirement funding mistakes time to develop deep and

well diversified retirement institutional funds If retirement funds have over-priced bonds and equity,

the retiring generation pay for this generations fundingmistakes

Deep and well-diversified retirement funds will develop

institutional savings, improve liquidity of bond andequity markets, and play role in corporate governance

Existing retirement funds allow policy makers option tocover up mistakes [e.g. retirement funds helping in

corporate rescue]


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Relationship between Third World &OECD

The Third World & OECD in two differentdemographic cycles: former has laboursurplus & capital shortage, while latter hasscarce labour & capital surplus.

However, Asia has both labour surplus &capital excess, but excess is funding OECDmarkets

Would policy makers allow labour and capital

markets to make intergenerational transfers? How can Asia institutionalise savings within

Asia for better resource allocation?

Source: Jeffrey G. Williamson, Demographic Shocks and Global Factor Flows


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Implications for Asian Market Models

Asian market distortions and barriers hindered itsability to intermediate its own savings and manage risk Yen/$ swings caused huge revaluation gains/losses Surpluses flow to US and Europe which return as FDI or

portfolio flows Risks remain concentrated in domestic economies

Japan is largest market, but financial market isrelatively inward looking China has law of large numbers and demand economies

of scale, but banking and enterprise reform still at aglobal selective opening stage

ASEAN markets are small, and face huge external entrypressure, with concerns about marginalization AU/NZ have sophisticated systems but not integrated

with rest of Asia Non-integration is not an option unless one wishes to

be disconnected from global markets


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Bank Reforms must go on - NPLs remain a drag Raise Corporate Governance standards - withfocus on market discipline

Higher standards of Transparency & Disclosure move to IAS, IAuS, & IDS

People - higher skills for investment banking,asset management and risk management Pricing - spreads have to reflect risk Products - wider choice for better risk

management

Platform - better inter-connectivity, inter-operability and common standards Political Will willingness to open up to regional

cooperation

Conditions for Regional Cooperation


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Improving Market Liquidity a Priority

Asias segmented markets fragment liquidity Negative feedback effects of declining liquidity

bad for capital markets

Liquidity depends on common products,

common rules and common markets Can we afford marginalization?

Are we ready to adopt international bestpractices, codes, and standards?

We have common competitive threats, but dowe have common goals?


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Global Markets and Standards

If one wants to be part of global market, one has to playby global rules and standards

Africa and Latin America have fallen behind, as inwardlooking strategies retard their competitiveness in tradeand financial services

Global financial markets are a network of local markets,and are as strong as the weakest link

For successful integration, equivalent standards areneeded to ensure stable, orderly and fair markets

US and EU today set standards for global markets.

Asia can be free riders on these standards, as long aswe can meet all the pre-conditions.

Can we work toward common Asian standards?


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Which Asian Standard?

Asia has no common voice to influence thesestandards. To have a say, we first need to havecritical mass to do proper research and lobby.

Current forums not conducive to common voiceASEAN + 3 not representative of Asia as long asmajor players such as Australia and HKSAR notincluded?

We should recognize that domestic interests

out-weigh regional interests But we must have common forum to debate

these issues, not political but technical

Standardize for liquidity, differentiate for valueadded


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Phased Approach? There is suggestion that four markets - Australia,

HKSAR, Japan and Singapore - work at free trade inservices first, before integrating with others

Not sure that phased approach will work, because itcauses greater market differences and tensions

More realistic to have common forum for technicaldiscussion first

Asian BIS or AMF probably too politically charged

Probably Asian Financial Institute more likely to bethe common forum for debate of issues, standards,

goals and processes EU integration indicates that it was not possible to

cooperate unless there there are not only commongoals, but also common channels of discussion atoperational level. Asia lack latter.


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Conditions for Increasing Liquidity

Common ProductsAre Asian exchanges willing to cross-list? Inter-operability

Common trading and clearing rulesAre they willing to share technology and standards?

Low transaction costStandard tax rates, services and operations throughcommon networks and infrastructure

Inter-connectivityWillingness to allow connections through common

custodians, common participants andintermediariesFree flow of capital by residents and non-residents


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First Steps in a Long Journey

While direction ahead may seem obvious, getting there

is dependent on sovereign decisions which are noteasy to make Requires recognition that it is win-win and not win-lose, or

Nash equilibrium for our markets.

AFI will make journey easier if Asia has an independent

and non-profit making research institute that studiesAsian issues from an Asian rather than a nationalperspective.

The conduct of research on issues with strategicsignificance for Asia would deepen our understanding

of the implications of global developments and providea basis for objective debate on win-win solutions for us.

Such cooperation would help in capacity building for theregion and in building trust, which is essential if we are

to be able to work together for the good of our markets.


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Concluding Thoughts

Asian dualist model must be re-written to globallyefficient and regionally fitting model, where marketsperform their functions well, inherent risks are reduced

Priority is to improve corporate governance, where trustis rewarded, and fraudulent behaviour is punished

The quality of all players has to be enhanced to improvethe quality of our markets

Non-integration is not an option, but we have to play byglobal standards and rules

We can cooperate to set our own standards, have a say

in international standards, and work together toimprove the liquidity of our markets

Or we can continue with our own individual agenda andsee continued marginalization of our markets

Future Pm Di Asean

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