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.