Deep, liquid and efficient capital markets are critical to the continued development of Asia’s economies. Encouraged by regional organisations such as APEC, ASEAN and the ADB, Asia’s markets have benefited from increased openness and a range of reform efforts over the last two decades. However, while the pace of economic growth in Asia continues to exceed that of other regions, the structural development of its capital markets has not kept pace.
Key challenges remain to be addressed for Asia’s growth to continue in a sustainable fashion. The substantial infrastructure still needed to spread development geographically, improve productivity and sustain rising wages is straining government fiscal limits, and requires the efficient mobilisation of private capital.
Asia’s intraregional trade is growing, and economic slowdowns in Europe and the US only highlight its increasing importance, as regional economies look to diversify away from traditional Western export markets. Increasingly, this trade will be denominated in local currencies, requiring local currency intermediation and hedging products, that in turn assume a higher level of market innovation than current regulations allow.
Success will be strongly influenced by government policy responses, market innovation and the availability of appropriately priced capital to support growth. To ensure this kind of access to capital, Asian capital markets should offer a wider and deeper array of financing and investment possibilities to complement the current bank-lending model.
Trade flows are increasingly intraregional, creating a more balanced and stable growth model in the future. In addition, pension and social security pools with longer-term investment horizons are starting to mobilise domestic savings, aiding investment in infrastructure.
However, for real sustainability, capital markets should become more harmonised, transparent, flexible and liquid. National jurisdictions need to ensure genuine cross-border flexibility to stimulate investor interest and commitment, while removing restrictions on market access in favour of a more open and innovative environment.
There are five specific recommendations to create deep, liquid and efficient capital markets in Asia:
1. Asian financial markets should harmonise and converge to encourage mutually beneficial growth
A common thread across all asset classes is the importance of convergence and harmonisation in a region that has no overarching governmental or even a single pan regional organisation to drive such a process. The historical tendency to compete between the region’s jurisdictions may no longer serve the best interests of market development. Instead, the region will benefit more from common standards and approaches that foster region-wide development and growth. Mutual recognition agreements and moves towards implementing a substituted compliance regime throughout the region will pave the way for establishing global standards that work for Asia. Greater co-operation and participation by Asian - at global multilateral forums such as IOSCO, G20 and the FSB may also help this process. There seems to be a real need for a more assertive regional voice amongst Asia’s regulators to ensure the views and concerns of market participants and regional governments are heard, understood and acted upon at the global level.
2. Increase regional levels of transparency and corporate governance
To enhance investor confidence and promote successful capital raising across asset classes, there is a need to continue promoting common standards and lifting the general level of corporate governance across the region. Better transparency in reporting and disclosure, along with convergence in accounting standards, will ensure that regulators are operating in a more unified fashion based on shared data, thus improving capital market quality, consistency and resiliency. A more co-ordinated and common approach toward listing rules, multiple share classes and the relaxation of restrictions on foreign investors will also enhance the region’s capital raising environment.
3. Continue economic and policy reforms to stimulate capital markets growth
Markets across Asia operate under a wide variety of laws, rules and restrictions. Reforms that permit the development of more market competition are likely to stimulate larger and more liquid capital markets for all types of investments. Policymakers will want to consider trade-offs that may exist between measures that protect existing local market structures and those that may stimulate growth in new areas with which they may be less familiar.
4. Develop infrastructure to support intraregional market transactions and risk management
Changes now underway as a result of Basel III and other measures are intended to drive fresh attitudes and approaches toward risk. Asian markets may become beneficiaries of some of these changes if they are able to create logical and efficient structures for intraregional transactions. This will require a co-ordinated and consistent approach to new requirements for regional trading, central clearing, trade reporting and regionalised risk management.
5. Collectively address laws with extra-territorial implications in Asia from a regional perspective
The application of extra-territorial laws (Dodd-Frank, Volker, EMIR, MiFID, etc) that will impact Asian markets represents a source of concern across all markets and asset classes. Regional governments should exert greater collective efforts to maintain the momentum required to address these extra-territorial encroachments. The shift of economic power to Asia puts regional policymakers in a far stronger position today, especially in light of desire to consolidate risk management responsibility more closely with locales where transactions actually arise.
Mark Austen is chief executive of ASIFMA