New era for Asian exchanges

New era for Asian exchanges

By Sahala Sianipar

JAKARTA (JP): The movement of capital across national borders
has increased significantly thanks to the acceleration of the
free trade area in the Asia Pacific region. Last November,
leaders of the Asia Pacific Economic Cooperation (APEC) reached
agreement in Osaka on several economic areas although the process
will be done according to each member's capability.

Following the APEC summit, members of ASEAN met in Bangkok to
discuss on the future of ASEAN Free Trade Agreement or AFTA.
ASEAN has set the course to achieve a free trade area in the
region by the Year 2003, an ambitious target date for such a
diversified group. The objective of AFTA is to prepare its member
economies for the target dates of 2020 where countries in the
region will have to dismantle their protective measures.

The point here is that countries in the Asia Pacific region
are currently challenged to evaluate their current and future
position in the regional market. At the heart of the changes in
today's global market is the capital market industry. The capital
market industry serves as an alternative entry door for both
domestic and foreign investment in a country. Policymakers in the
region have to address the issues regarding their economies'
competitiveness that will essentially help to provide a conducive
environment for investment activities.

The intensified process toward the free trade area in the
region contributes to the recent drives by regional exchanges to
reposition themselves in the global market. One example is the
measures introduced by the Stock Exchange of Singapore (SES) and
Kuala Lumpur Stock Exchange (KLSE) aiming to attract more
potential overseas firms. The SES introduced new regulations to
ease the listing process for overseas firms and infrastructure
projects in the foreign board. Furthermore, in late 1995 Minister
of Finance of Malaysia Anwar Ibrahim issued several deregulation
measures aiming to position KLSE as the financial center in the
Asia Pacific region that would attract fund managers, brokers,
and banks from Singapore and Hong Kong.

In the last three years, we have witnessed a strong surge of
private capital flow into emerging markets such as Kuala Lumpur,
Bangkok, and Jakarta in the form of portfolio investment.

According to the report prepared by the International Monetary
Fund (IMF) in 1995, the private capital flows in the form of
portfolio investment reached US$37.1 billion, a tremendous
increase of 7,320% from $0.5 billion in 1990. True, foreign
direct investment (FDI) still dominated the type of flows into
APEC developing economies with $39.5 billion in 1995 which was an
increase from $12.1 billion in 1990 (226%). While FDI takes place
through sovereign borders and government, the movement of capital
in the form of portfolio investment does not recognize any
sovereign borders. Information technology along with the
increasing competition for capital between emerging exchanges
contribute to the rapid growth of portfolio investment among
emerging economies of APEC.

The new era faced by Asia Pacific exchanges is characterized
by the continuous and unrestricted flow of capital across
national borders thanks to the information technology products
(e.g. Internet, teleconference system) that help to accelerate
the flow of information among decision makers worldwide.
Furthermore the establishment of the World Trade Organization
(WTO) that will oversee the implementation of free and non-
discriminative trade and investment practices worldwide helps to
shape the new era.

What does the new era bring to emerging exchanges? One thing
for sure is the need for emerging exchanges to improve upon their
competitiveness as investment vehicles in their respective
nations. In developed nations where the majority of people invest
in the capital market either through unit trusts, pension funds,
or mutual funds, the drive to increase the market's
competitiveness as an investment vehicle can result in more
complex products (i.e. futures funds, index funds) without
spending too much effort on educating the public about the
capital market. This is not the case in many developing countries
where the majority of people have not embraced the idea of
allocating their savings to the capital market. Essentially the
minimum involvement of domestic investors contributes to the slow
growth of emerging markets unless there is a heavy intervention
from foreign funds.

As mentioned previously, the flow of portfolio capital across
national borders does not recognize national borders which
contributes to the uncertainty and volatility in many emerging
markets. It is highly imperative to have strong support from
domestic investors as a prerequisite for sustainable growth among
emerging exchanges. However in many emerging exchanges, there is
a gap in terms of knowledge and perception of the capital market
among the public in developing countries.

Therefore it is a challenge to shift people's savings mode
from traditional time deposits to mutual funds or other
investment vehicles in the capital market. Realizing the great
difficulty in mobilizing domestic resources, government of
developing countries have taken the initiative to introduce
various incentive schemes aiming to boost the domestic capital
market. An example of the well-focused strategy to boost the
domestic market is Malaysia and Singapore.

Besides the compulsory employment provident funds, domestic
investors can allocate their savings through unit trusts and
mutual funds. In fact, one of the world's largest investment
banks, Morgan Stanley, has recently introduced a mutual funds
aiming at retail investors in Singapore where the funds will
basically be invested in selected markets in the region. Mutual
funds or unit trusts in Malaysia and Singapore began with an
aggressive educational and marketing campaign using the mass
media. Permodalan Nasional Bhd, a Malaysian government agency in
charge of unit trust, launched its first unit trust in the late
1960s with a comprehensive educational campaign covering both
urban and rural areas in Malaysia. As the result, in 1992,
Permodalan Nasional Bhd, managed more than M$ 14 billion. One of
the funds called Amanah Saham Nasional had 2.460.977 unit holders
in 1990.

The key to success in Malaysia and Singapore lies on the
effective collaboration between the government and capital market
players in developing the domestic market. The privatization
program of state-owned enterprises prioritizes the domestic
market through various incentive schemes given the existence of
unit trusts and mutual funds in both countries.

So what is the challenge in the new era for emerging exchanges
in the Asian Pacific region? The challenge is to embrace an
effective cooperation between market participants to mobilize
domestic resources as the prerequisite for sustained domestic
markets. At the same time, information needs to be disseminated
to encourage greater level of awareness and participation in the
domestic market. Today's information technology products should
help to accelerate the learning process among domestic investors.

A comprehensive communications campaign should be embraced to
disseminate information effectively to the public. All market
participants should cooperate to execute the campaign that
incorporates the mass media and information technology products.
At the same time, the role of the government will be more
critical in providing the conducive investment atmosphere for
existing and potential investors. This is the homework for many
emerging exchanges in the region if they wish to emerge as
winners in the year 2020.

The author is a graduate from the International Business and
Communications from Ohio University, Athens, Ohio, United States.

Window: Therefore it is a challenge to shift people's savings
mode from traditional time deposits to mutual funds or other
investment vehicles in the capital market.