14 July 2005 Euro Conference: Expanding ASEAN-EU Economic Links Kuala Lumpur Potentia ial fo l for B Bankin ing a and Potentia ial fo l for B Bankin ing a and Fin inancia ial S l Servic ices in in A ASEAN Fin inancia ial S l Servic ices in in A ASEAN Andrew Sheng Chairman Securities and Futures Commission, Hong Kong 1
Contents • Personal views • Survey of current Asian financial system, with bank dominated system • Globalization, transparency and move to global standards revealing inefficiencies of protected sectors through non- performing loans (NPLs) • Asia is currently struggling with structural problems of adjusting to globalization • Imbalanced model of growth – efficient external sector and inefficient services/protected sectors – is not sustainable • Sustainable growth requires complementary and balanced growth in all sectors, benchmarked to international standards, in partnership with EU and other regions 2
Asia 55% of global population, 25% of trade weight, but small in financial markets (% of world, 2001) MSCI PPP-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 3 *Excluding Australia and New Zealand Source: IMF, World Economic Outlook , April 2002
Asia Still Dependent on Bank Financing (% of GDP, 2002) Bank Loans Equity Market Bond Market Singapore 109 117 63 Malaysia 107 130 88 Thailand 81 36 42 Philippines 32 23 28 Indonesia 22 17 1 China 136 37 37 Hong Kong 150 287 42 Japan 107 51 169 India 36 42* 33 UK 154 182 68 US 78 114 156 * Figures as of 2003 Sources: Table 2.7, Table 3.1, GFSR April 2004, World Bank, IMF, WFE, CEIC, Bloomberg, BIS, various central banks and government websites 4
Asian Capital Markets – where are we now? Finance is a derivative of the real sector – a financial • system is part of the market that delineates, transfers and protects property rights over the whole demographic cycle Asia has tremendous savings, but fragmented financial • markets Risks are diversified outside Asia: Historical total equity • return swap with Europe and US – Asia runs current account surplus with West, places US$2 trillion official reserves (of which US$1 trillion in US Treasuries at 4% pa), and flows return in FDI and FPI, leveraged to earn 10- 15% pa. Asian capital markets remain bank-dominated, with • 5 limited growth in capital market skills
Assets of Banks, Insurance Companies, Pension Funds and Mutual Funds (end 2003) Banks Insurance Companies Pension Funds Mutual Funds US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP ASEAN Singapore 247.4 270.8% 43.9 48.0% 60.9 66.6% 202.1 221.3% Malaysia 214.7 207.0% 20.2 19.5% 58.5 56.4% 19.9 19.2% Thailand 181.1 126.5% 14.5 10.2% 10.2 7.1% 11.9 8.3% Indonesia 138.7 134.4% n.a. n.a. n.a. n.a. n.a. n.a. Philippines 61.6 77.7% 0.27 0.3% n.a. n.a. n.a. n.a. G8 US 7,380.6 67.1% 9,075.3 82.5% 7,438.0 67.6% 7,414.1 67.4% Germany 8,172.7 339.6% 1,338.2 55.6% 335.0 13.9% 1,063.2 44.2% UK 6,235.0 346.8% n.a. n.a. 1,266.0 70.4% n.a. n.a. Japan 6,862.2 159.9% 1,941.0 45.2% 2,463.0 57.3% n.a. n.a. Other Asian Economies HK 356.8 225.0% 9.3 6.0% 27.7 17.7% 534.3 341.1% China 3,073.8 217.6% 110.2 7.8% 16.0 1.1% 20.5 1.5% Korea 915.4 151.2% 154.8 25.6% n.a. n.a. 121.6 20.1% India 433.1 74.7% n.a. n.a. n.a. n.a. 14.1 2.4% 6 Sources: CEIC, EFRP, OECD, various central banks and government websites.
Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP) Banks Insurance Companies Pension Funds Mutual Funds 270.8 300 221.3 250 207 200 126.5 150 ASEAN 77.7 66.6 100 56.4 48 19.5 19.2 50 10.2 7.1 8.3 0.3 0 n/a n/a Philippines Thailand Malaysia Singapore 346.8 339.6 400 300 159.9 200 G-8 82.5 70.4 67.1 67.6 67.4 57.3 55.6 45.2 44.2 100 13.9 n/a n/a 0 Japan UK Germany US 341.1 400 300 225 217.6 151.2 Other 200 74.7 Asian 100 25.6 20.1 17.7 6 7.8 1.1 1.5 2.4 Economies 0 n/a n/a n/a HK S.Korea China India 7
Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP) 300 270.8 Banks 250 Insurance Companies 221.3 207 Pension Funds 200 Mutual Funds 150 126.5 100 77.7 66.6 56.4 48 50 19.5 19.2 10.2 8.3 7.1 0.3 0 n/a n/a Philippines Thailand Malaysia Singapore 8
Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP) 400 346.8 Banks 339.6 350 Insurance Companies 300 Pension Funds Mutual Funds 250 200 159.9 150 100 82.5 70.4 67.1 67.6 67.4 57.3 55.6 45.2 44.2 50 13.9 0 n/a n/a n/a Japan UK Germany US 9
Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP) 400 Banks 341.1 350 Insurance Companies Pension Funds 300 Mutual Funds 250 225 217.6 200 151.2 150 100 74.7 50 25.6 20.1 17.7 7.8 6 2.4 1.1 1.5 0 n/a n/a n/a HK S.Korea China India 10
Aging Population requires efficient Pension and Retirement Fund Management • Mature markets in Europe and North Asia are aging, slowing growth, and retirement/social security funds seeking higher returns from growth regions • South-east Asia still young, with 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 generation’s funding mistakes • Deep and well-diversified retirement funds will develop institutional savings, improve liquidity of bond and equity markets, and play important role in corporate governance 11
Why did Europe overtake Asia during Industrial Revolution? • Four fundamental reasons: – Demographics – Governance – Institutions – Environment • Contemporary Anglo-Saxon economic analysis treats these factors as given assumptions • Same factors facing Asia today 12
Financial System intermediates between savers and users of savings Bank loans Bank loans Bank loans Bank loans Risk transfer Risk transfer Risk transfer Risk transfer Individuals Individuals Companies Companies Individuals Individuals Companies Companies Securities Market Securities Market Securities Market Securities Market Funds Funds Funds Funds Personal Investment Accounts Personal Investment Accounts Product Product Sales Sales Sales Sales creation creation 13 Source: Nomura Institute Capital Markets Research
Asian Capital Markets remain problematic Price discovery – high liquidity and low risk • spreads not reflecting underlying risks Resource allocation – why is Asia still bank • dominated? Risk management – has risk management • really improved? Why do we still have substantial NPLs? Corporate governance – are the banks and • capital markets sufficient checks and balances on borrowers and corporate sector? 14
Efficient Markets require: 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] • 15
Recent Key Market Trends in Asia Deposit-taking Institutions – demographics changing customer pattern – growth of consumer banking, credit cards, demand for structured products Risk-pooling Institutions - still foreign dominated, but demand growing Contractual Savings Institutions - huge liquidity pools, but shortage of professional fund management skills Market Makers - key investment banking skills still dominated by large foreign players, with foreign fund managers as key clients Specialized Sectoral Financiers - policy-based banks shrinking in market size; venture capital and private equity becoming more important Financial Service Providers – exchanges demutualizing 16
Key Capital Market Trends Demographics – around 300 million Asians earn US$5,000 or more annually; by 2020, discretionary spenders will grow to 1.4 billion. Huge demand for asset management and consumer banking needs Wealth management - private banking spreading from those with US$1 million or more to middle income professionals Mutual Funds - in US already US$7.5 trillion market, but becoming more leveraged – no longer just long-only funds; line between mutual funds and hedge funds blurred Market makers - domestic investment banks still small by any standard Outsourcing - over 100,000 jobs moved to India from US, worth US$136 bn in wages – what is SE Asia 17 doing about this? *
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