Potentia ial fo l for B Bankin ing a and Potentia ial fo l - - PowerPoint PPT Presentation

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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

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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

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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

*Excluding Australia and New Zealand Source: IMF, World Economic Outlook, April 2002

Asia 55% of global population, 25% of trade weight, but small in financial markets (% of world, 2001)

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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

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• 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

limited growth in capital market skills

Asian Capital Markets – where are we now?

6 Other Asian Economies G8 ASEAN 44.2% 1,063.2 13.9% 335.0 55.6% 1,338.2 339.6% 8,172.7 Germany n.a. n.a. 70.4% 1,266.0 n.a. n.a. 346.8% 6,235.0 UK 67.4% 7,414.1 67.6% 7,438.0 82.5% 9,075.3 67.1% 7,380.6 US 2.4% 14.1 n.a. n.a. n.a. n.a. 74.7% 433.1 India n.a. n.a. n.a. n.a. 0.3% 0.27 77.7% 61.6

Philippines

n.a. n.a. n.a. n.a. n.a. n.a. 134.4% 138.7 Indonesia 8.3% 11.9 7.1% 10.2 10.2% 14.5 126.5% 181.1 Thailand 19.2% 19.9 56.4% 58.5 19.5% 20.2 207.0% 214.7 Malaysia 341.1% 534.3 17.7% 27.7 6.0% 9.3 225.0% 356.8 HK 1.5% 20.5 1.1% 16.0 7.8% 110.2 217.6% 3,073.8 China 20.1% 121.6 n.a. n.a. 25.6% 154.8 151.2% 915.4 Korea n.a. n.a. 57.3% 2,463.0 45.2% 1,941.0 159.9% 6,862.2 Japan 221.3% 202.1 66.6% 60.9 48.0% 43.9 270.8% 247.4 Singapore % of GDP US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP US$ bn Mutual Funds Pension Funds Insurance Companies Banks

Assets of Banks, Insurance Companies, Pension Funds and Mutual Funds (end 2003)

Sources: CEIC, EFRP, OECD, various central banks and government websites.

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Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP)

77.7 126.5 207 270.8 0.3 10.2 19.5 48 7.1 56.4 66.6 8.3 19.2 221.3 50 100 150 200 250 300 Philippines Thailand Malaysia Singapore Banks Insurance Companies Pension Funds Mutual Funds

159.9 346.8 339.6 67.1 45.2 55.6 82.5 57.3 70.4 13.9 67.6 44.2 67.4 100 200 300 400 Japan UK Germany US

ASEAN G-8

Other Asian Economies

225 151.2 217.6 74.7 6 25.6 7.8 17.7 1.1 341.1 20.1 1.5 2.4 100 200 300 400 HK S.Korea China India

n/a n/a n/a n/a n/a n/a n/a

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Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP)

77.7 126.5 207 270.8 0.3 10.2 19.5 48 7.1 56.4 66.6 8.3 19.2 221.3 50 100 150 200 250 300

Philippines Thailand Malaysia Singapore

Banks Insurance Companies Pension Funds Mutual Funds

n/a n/a

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Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP)

159.9 346.8 339.6 67.1 45.2 55.6 82.5 57.3 70.4 13.9 67.6 44.2 67.4

50 100 150 200 250 300 350 400

Japan UK Germany US

Banks Insurance Companies Pension Funds Mutual Funds

n/a n/a n/a

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Bank assets vs. Assets of insurance companies, mutual and pension funds (% of GDP)

225 151.2 217.6 74.7 6 25.6 7.8 17.7 1.1 341.1 20.1 1.5 2.4

50 100 150 200 250 300 350 400

HK S.Korea China India

Banks Insurance Companies Pension Funds Mutual Funds

n/a n/a n/a

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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

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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

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Financial System intermediates between savers and users of savings

Source: Nomura Institute Capital Markets Research

Individuals Individuals Individuals Individuals Bank loans Bank loans Bank loans Bank loans Risk transfer Risk transfer Risk transfer Risk transfer Securities Market Securities Market Securities Market Securities Market Funds Funds Funds Funds Personal Investment Accounts Personal Investment Accounts Sales Sales Sales Sales

Product Product creation creation

Companies Companies Companies Companies

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• 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?

Asian Capital Markets remain problematic

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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:

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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

Recent Key Market Trends in Asia

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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 doing about this?

Key Capital Market Trends

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8,000 hedge funds with US$1 trillion in assets under management – leveraged around 2-3 times Trading velocity much higher than mutual funds - currently account for 40-50% of turnover in US and EU Fees around 1-2% of AUM + 20% of profits Larger funds around US$10-15 bn in AUM Depend upon prime brokerage for transactions and funding - if we do not allow in prime brokers, how can emerging markets benefit from hedge fund activities? Highly skilled business - talents drawn from fund managers and investment banks (ie difficult to home grow)

Hedge Funds are driving the business

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3,000 private equity funds with unknown total assets under management – leveraged levels also unknown More involved in direct equity investments rather than trading Fees around 1-2% of AUM + 20% of profits Longer lock-ups Larger funds of around US$5-10 bn in AUM In 1H2004, Asia raised US$5 bn, compared with US$3.3 for 2003 and US$3 bn for 2002 (compared with US$17.9 bn in 2000 and US$9 bn in 2001) – overall private equity investments in Asia estimated at US$8.6 bn Roughly 10% of UK pension funds invested in private equity - still early days for Asian pension funds

Private Equity Funds are the reborn merchant banks without regulation

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Relationship between ASEAN & EU is another Total Equity Return Swap

• ASEAN GDP growth (5%) and savings (27%) about five

times that of EU (1%; 5.2%) in 2003

• ASEAN & EU are in two different demographic cycles:

former has labour surplus & young capital market, while latter has scarce labour, capital surplus and financial market skills.

• Since ASEAN has both labour surplus & capital excess,

but has not yet developed skills of global financial markets, mutual swap of savings and skills is win-win for all parties

• ASEAN can provide natural resources, cheap labour,

investment opportunities and excess funding for EU markets

• EU can provide funding and investment/corporate

governance skills to take ASEAN to next level of development

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Opportunities are huge!

• Established European institutions can tap

surpluses by providing financial products and services that are lacking in ASEAN.

• ASEAN financial markets can gain technical

knowledge and financial deepening.

• Surpluses can be intermediated within region and

between EU-ASEAN region more efficiently.

• Balanced market development helps risk

management and promotes stability

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Concluding Thoughts

• Globalization has benchmarked all domestic financial
• systems. Compete according to global performance,
• therwise you become marginalized.
• Getting foreign skills involved in building domestic strength

is inevitable. Closed systems cannot compete against open systems.

• Corporate strength cannot be built without strong financial

services sector. Financial services area requires strong external partners.

• Complete markets essential for stable and sustainable growth

and prosperity.

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Thank y you v very m much Thank y you v very m much