Asian capital markets hold promise as region recovers
Asian capital markets hold promise as region recovers
SINGAPORE (AFP): Asia's nascent capital markets can attract billions of dollars in pension fund investments if they aggressively pursue reforms alongside those in the banking sector, analysts say.
Following the financial crisis which struck in mid-1997 and battered domestic banking systems regionwide, Asia is weaning itself away from bank borrowing and resorting to capital markets for funding.
But many capital markets in the region, including stock and bond markets, have not been fully developed or are in dire need of reform, analysts told separate financial conferences here last week.
"Government bond markets are still in an embryonic state, but will get a boost as supply grows, especially if policymakers adopt the efficient market practices developed in industrialized countries," said Bernard Eschweiler, head of regional economic research for JP Morgan.
He said the Asian crisis had demonstrated the need for improvements in the region's capital markets.
"The legacy of the crisis includes changes for the better in regulatory standards and business practices, plus a deregulatory drive that is promoting the development of stock and bond markets," he said.
"Hong Kong and Singapore are at the frontier of financial development, but (South) Korea and Taiwan have the most to gain due to their much larger size and catch-up potential," Eschweiler said.
He noted however that despite the crisis, the bulk or 59 percent of total financial assets in emerging Asia amounting to US$5.3 trillion in 1998 were largely still in bank assets.
Equities accounted for 26 percent and bonds 15 percent of the financial assets.
Nicholas Lopardo, chief executive officer of US-based State Street Global Advisors, spelled out the advantages of capital markets over bank-based financing systems.
Capital markets "have greater agility in raising capital, the capacity to speed up corporate restructuring and the ability to digest crises and rebound, far faster than bank-dominated financial systems," he said.
Lopardo said non-Asian pension funds, mutual funds and individual investors offered a multi-trillion dollar source of capital for Asian markets.
"But these investors will demand compelling evidence of continued reform, accurate, reliable financial reporting, and effective regulation before returning in anything like the scale of the middle 1990s," he said.
Pension funds in the United States were now worth seven trillion dollars while savings in private retirement accounts in Australia had soared to $220 billion, Lopardo said.
In Japan, he said, over $10 trillion were locked up in savings institutions.
Eschweiler of JP Morgan said that a growing and more liquid government bond market would boost the development of the corporate bond market, which relies on government bonds as a benchmark for pricing.
Among Asian corporate bonds, only South Korea has achieved some significance but even its market was "relatively segmented and illiquid," he said.
But Eschweiler said traditional banking would remain the largest financial intermediary in Asia, given the relatively low per capita gross national product average of less of $1,000 in the region.