For each, I shall review events and developments briefly within the context of liberalisation and globalisation. Then I shall touch on the challenges facing them. Where appropriate, I shall illustrate my points with examples from a jurisdiction that I am most familiar with the Malaysian capital market.
Perhaps the clearest sign of the liberalisation and globalisation is the recent surge of private capital flows into the region and the effects it has had on capital markets. The search for higher yields by institutional investors and the growing practice of international diversification have released a flood of global funds in the last few years, much of which has washed into this region. In addition to a four-fold increase in foreign direct investment in 1990-94, countries in East Asia alone have seen net equity capital flows rise eleven times, to US$18 billion, and net bond flows surge twelve times, to nearly US$8 billion.
As a result, Asia-Pacific markets are arguably more integrated than ever, not just with global markets but also with each other. And they have grown many times bigger and deeper in a very short space of time-so much so that for many of the region's developing stockmarkets, the term "emerging" is beginning to sound decidedly quaint. In terms of capitalisation, Asia-Pacific stockmarkets excluding Japan are now worth some US$2 trillion (about 9% of world capitalisation) and list stocks in over 5,000 companies . On average, each market is just under one-and-a-half times the size of its domestic economy, although some are over three times as large. Consequently, the region and some its individual markets are now key components in any global index.
But is size everything? The answer is likely to be No unless it is accompanied by market breadth. Current challenges to several Asia-Pacific stockmarkets, now that they have grown so large, include how to maintain their lead over regional rivals. One possible approach is by liberalising listing requirements for companies registered outside the home market. Hong Kong as we know already trades the stocks of foreign companies. Singapore and Malaysia has joined it to an extent by allowing foreign-company listing subject to certain conditions. In Malaysia's case, for now only foreign-based Malaysian-owned companies may list on the Kuala Lumpur Stock Exchange. Another approach is to allow trading not in the stocks themselves but claims on them. One such case is Taiwan, which apparently plans to begin the trading of Taiwanese depository receipts.
You will have noticed that among all this crowing about size and depth, bond markets have hardly been mentioned. What of those curious instruments to which Asians are reputedly so highly averse? Certainly, they are the smallest of all financial markets: at the end of 1994, the total capitalisation of East-Asian bond markets amounted to US$338 billion, or 22% of GDP; that of equity markets was US$1.1 trillion or 71% of GDP, while the total assets of the banking system amounted to US$1.4 trillion or 92% of GDP. But where bond markets lack in absolute size, they make up for in growth. At the end of 1989, the outstanding value of East Asian bonds stood at less than US$170 billion; by the end of 1994, the market had doubled. By comparison, bond markets of the United States, Japan, Germany and Britain grew by just over two-thirds.
Moreover, regional bond markets developments in the region have not been confined to receiving portfolio bond flows. Developments have also included a growing tendency by East-Asian issuers, in particular, to float debt securities in global bond markets. The significance of such international issues, in terms of markets, currencies, maturities and other factors, are said to provide.
East-Asian companies have raised substantial amounts in recent years: during 1991-93, issues of fixed-income and convertible securities raised about US$33 billion, or about 30% of all developing-country bond issues. And growing global interest in the region's debt markets has prompted first-time ratings for many companies, the awarding of investment-grade sovereign ratings by established rating agencies, and the establishment of regional rating agencies in China, Indonesia, Malaysia, the Philippines and Thailand. Therefore, I believe that it has become something of cliché to say that Asians do not like bonds.
That said, the woeful inactivity of secondary markets is hampering bond-market development in the region, particularly among Far-Eastern countries. A particular problem is that the fiscal-surpluses of these governments have made benchmark yields for each jurisdiction so difficult to identify. This has limited the market's ability to assess the risk of issue and so price them. Another problem is that where bellwether interest-rate structures do exist, their maturities do not extend much beyond 3-5 years. Nevertheless, I still hold to my belief that Asians are no different than other investors and that, with the right packaging, Asia-Pacific bond markets will realise their significant role in regional financing.
Rise of institutional investors
Indeed, part of the rising demand for longer-term, fixed-income securities has been a result of the growing presence of regional institutional investors. Recent moves to deregulate the contractual savings sector has resulted in the lifting of investment controls on state pension funds. For example, Singapore's central provident fund and Malaysia's employee provident fund are now open to professional managers, and both have been given freer investment policies. Thus, local pension and provident funds, and insurance companies have adopted a more regional stance and, by some estimates, amassed funds of over US$80 billion .
Similar developments have taken place in the region's unit-trust industries. Deregulation of the Thai and Malaysian markets, for example, led to a 10-fold increase in funds managed during 1992-94 to about US$10 billion. Further deregulation and liberalisation by Malaysia have allowed its unit trusts to invest in a broader range of instruments-including derivatives-and to participate in securities lending. Of course, these measures are subject to certain conditions to ensure sufficient investor protection and financial integrity of market intermediaries, and I will consider this issue of re-regulation shortly.
Demand for risk-management facilities
That regional investment is increasingly conducted by professionals on a large scale suggests that we should be seeing greater demand for risk-management tools and facilities. We have seen financial derivative exchanges sprout around the region in the last couple of years. After Singapore's SIMEX and the Hong Kong Futures Exchange, Malaysia established the Kuala Lumpur Options and Financial Futures Exchange on December 15th 1995, trading in equity-based products, and the Malaysian Monetary Exchange on May 28th 1996, trading rate-based instruments. South Korea's stock exchange followed suit with Korea share-price index futures on May 3rd 1996, while the Philippines re-established its defunct futures markets.
But it is still not clear that institutions are driving the demand for exchange-traded derivatives. Volume in Malaysia's two markets has been modest, and even in South Korea, where the market traded over 4,500 contracts a day by only the sixth month, liquidity has been due largely to retail investors. Institutional demand is, however, more obvious in the region's burgeoning over-the-counter market. The need for currency-hedging in light of more relaxed foreign-exchange controls has led to growing liquidity in both exotic and plain-vanilla currency derivatives. The easy exposure to the region's stockmarkets and lower costs offered by equity swaps have made them increasingly popular with global fund managers.
Thus, the challenge to fledgling Asia-Pacific derivative exchanges is in gaining critical mass to develop liquidity. The traditional approach has been to go for it alone, in the hope of establishing a niche market. An increasingly popular approach by local exchanges is to foster links with developed markets. A likely development therefore is an acceleration of regional time-zones for established global commodity, equity, interest-rate and currency products.
Regulatory developments
Finally, I should like to turn briefly to recent developments in regulation. The rapid growth of capital markets and growing competition for global funds have prompted regulatory rationalisation throughout the region. Efforts at lowering regulatory costs and ensuring regulatory consistency have led many jurisdictions to establish a single regulatory agency that, in addition to being "one-stop shops", invariably play a significant role in market development. Indeed, Malaysia's Securities Commission has an explicit mandate to do so.
Recent developments have also seen changes in regulatory approach and there are two, in particular, that I wish to draw to your attention. The first is that, with the establishment of securities commissions, market institutions are being asked to lead as self-regulatory organisations. This essentially complements supervisory regulation by affording greater rights and responsibilities to market participants. The second change is a growing reliance on market forces to guide regulatory supervision. In the area of securities issues, certain jurisdictions are beginning to eschew traditional merit-based approaches for the gradual adoption of full-disclosure requirements.
Conclusion
The trends that I have just considered are already being replaced with new ones. That is the beauty of participating in this region's dynamic, effervescent capital markets. As the saying goes, the only constant here is change. So perhaps it is fitting that I conclude my address this morning with some lessons from the experiences of the past and an eye towards future developments.
I shall take the latter first. I believe that further growth of Asia-Pacific capital markets will be driven primarily by bond markets. Bond-financing and long-term investment will become more popular and, as a result, secondary-market activity will increase. Trends such as market institutionalisation and risk-management will continue, as markets achieve greater depth and breadth. A development that I have not touched upon but which I believe will become more significant is the blurring of activities by financial institutions. The businesses of banking, merchant-banking, securities-broking, insurance and fund-management institutions will become increasingly difficult to separate and will prompt the pursuit of functional regulation by jurisdictions region-wide.
Then again, there is the mammoth challenge of electronic networks and developments in information technology, to which industry and regulators alike have to respond, and on which I have spoken at length in recent speeches and will therefore not expand on here. Let me just say the challenge is real, urgent and far-reaching; we have to move fast.
Just as much the region's markets will be deregulated and liberalised, there will be as much, if not more, re-regulation to keep up with changes. Within Malaysia alone we are grappling with applying new capital adequacy requirements that more fully reflect the risks of stockbrokers' activities; the systemic-risk implications of establishing new markets like KLOFFE and MME; the introduction of new retail financial products, such as equity-linked insurance products and so-called guaranteed-funds, that do not fit so readily into the current regulatory framework. I am sure that other jurisdictions are beginning to face similar conundrums.
And lessons from the experience of globalisation and liberalisation of late? I can think of five:
- Disintermediation is the name of the game.
- If you don't do it, somebody else will.
- If you restrict certain activities, the chances are that they will do it elsewhere.
- There is fierce competition for global funds.
- But the pie for financial services is growing, and there is enough for everyone.
