Regional Cooperation on the Integration of Asian Financial Markets

1
Regional Cooperation on the Integration of Asian
Financial Markets

• Hongzhong Liu
• Department of International Finance, Fudan
  University
• hzliu_at_fudan.edu.cn.
• Haiqing Zheng
• Department of Finance, East China Normal
  University
• haiqingzheng_at_hotmail.com
• July 20,2007
• The first draft for the Emerging Asian
  Regionalism Ten Years After the Crisis
  Technical Workshop on 19-20 July, 2007, Bangkok,
  Thailand. We are grateful to Prof. Peter Petri,
  Giovanni Capannelli and Jenny Corbett for their
  comments.

2

• 1. Introduction
• 2. Current State of Financial Cooperation
• 3. Obstacles to Financial Integration
• 4. Creating Conditions for Financial Market
  Integration
• 5. Possible New Measures for Strengthening
  Financial Market Cooperation
• 6. Concluding Remarks
• References
• Appendix  
•  

3

• Introduction ----why do we need cooperation?
• A broad consensus that collective response is
  needed to overcome and prevent the crisis.
• Asian financial markets are more globally than
  regionally integrated, but the potential welfare
  gains of risk sharing from financial integration
  are huge, 1.2 of permanent consumption in a
  10-year horizon and 4.11 and 7.61 with 30- and
  50-year horizons (see appendix).
• Huge amounts of foreign reserves, regional
  financial market can serve as a good way to
  mobilize the savings.

4

• 2. Current State of Financial Cooperation----at
  Its Early Stage
• 2.1 Financial Regulatory Cooperation
• 2.2 Bond Market Cooperation
• 2.3 Stock Market Cooperation
• 2.4 Derivatives Market Cooperation

5

• 2.1 Financial Regulatory Cooperation (Bilateral
  multilateral)
• Bilateral signing bilateral MOUs
• 90 countries and regions of IOSCO members signed
  more than 1000 MOUs for bilateral cooperation
• For example
• Chinas CSRC have signed 37 MOUs with 34
  economies by June 2007, including 9 within the
  region.
• Hong Kongs SFC has concluded 44 formal
  cooperative arrangements with 33 overseas
  regulators by June 2007, including 10 within the
  region.

6

• Multilateral signing IOSCO MMOU and some
  proposals.
• Nine Asian economies have become or have
  committed to become a signatory to IOSCO MMOU,
  the first global information-sharing arrangement
  among security regulators.
• Asian BIS (Fraser, 1995) and An Expanded
  EMEAP-Proposal? ( Rajan, 1999 Girardin, 2004)
• Asian Financial Institute (AFI)-Proposal ?
  (Eichengreen, 20012002) on the platform of
  ASEAN3, providing technical assistance to
  national agencies seeking to strengthen
  prudential supervision and regulation running
  training programs for bank inspectors etc.
  encouraging the efficient pooling of knowledge
  and expertise providing reserve management,
  clearing and settlement services.

7

• 2.2 Bond Market Cooperation
• Asian Bond Markets Initiative (ABMI) ----supply
  side
• Asian Bond Fund (ABF) ----demand side
• ABMI
• Focus on two areas
• (i) Facilitating access to the market through a
  wider variety of issuers
• (ii) Enhancing market infrastructure to foster
  bond markets in Asia.
• Solution six voluntary working groups (WG) and a
  Focal Group (FG)

8

• ABF
• ABF1 US1 billion, investing in U.S.
  dollar-denominated government and
  quasi-government bonds of eight ASEAN3
  countries.
• ABF2 US2 billion, investing in local
  currency-denominated sovereign and
  quasi-sovereign bonds of eight ASEAN3 countries.

9

• 2.3 Stock Market Cooperation (Bilateral,
• Multilateral Cross Listing)
• Bilateral Cooperation
• Figure 1 A Market Linkage Model (Shimizu)

10

• SGX-TSE strategic alliance in October 2001
• ASX-SGX co-trading linkage in December 2001
• TSE and KRX signed Memorandum of Intent of
  cross-border securities trading in August 2005
• TSE and KRX signed a Memorandum of Understanding
  (MOU) on the "Market Alliance Project" on July 7,
  2006.
• TSE spent about 304 million to buy a 4.99 per
  cent stake in the SGX in June 2007

11

• Multilateral Cooperation
• ASEAN committed to develop an inter-linked ASEAN
  securities market by 2010
• East Asian Stock Exchanges Conference (EASEC)
  founded in 1982 to facilitate the exchange of
  information among member exchanges.
• East Asian Oceania Stock Exchanges Federation
  (EAOSEF) founded in 1990, changed into AOSEF in
  2005 and expanded to 17 members currently.

12

• TSE intended to cooperate with stock exchanges of
  10 Asian cities in 2002 on the research of
  constructing a system for the mutual free
  transactions of stock and bonds listed in the 11
  stock exchanges and promoting the cross listing
  for a same enterprise.
• Other forms of cooperation among independent
  supervision organizations in securities industry,
  such as Asian Securities Forum, Asian Securities
  Analysts Federation.
• Financial institutions also play an active role.
  For example, five major Asian Securities Houses
  from four Asian economies formed the first
  Pan-Asian online stock exchange network, Asian
  Stock Exchange Network in April 2000.

13

• Cross Listing
• Eighty-one Chinese companies got listed in eight
  main overseas markets, raising 20.4 billion US
  dollars in 2005. The figures were 86 and 44
  billion US dollars in 2006.
• 340 mainland-based companies have been listed in
  Hong Kong.
• 105 mainland-based companies have been listed in
  SGX by August 2006.
• However, according to IMF Asia-Pacific Regional
  Outlook (September 2005), a few stock markets in
  the region have attracted a large international
  presence, but not from Asia.

14

• 2.4 Derivatives Market Cooperation
• As for foreign exchange trading, derivative
  trading is concentrated in the regions financial
  centers - Japan, Singapore, Hong Kong SAR (de
  Brouwer, 2003)
• Singapore takes the leadership in the region for
  index futures trading based on stock trading in
  other economies.
• 1986, SIMEX, which later was merged with SGX,
  first introduced the Nikkei 225 Index Futures.
• 1997, SIMEX introduced MSCI Taipei,China index
  futures
• 2000, CNX Nifty (India) Index futures
• 2006, FTSE/Xinhua China A50 Index
• Asian Pacific Association of Derivatives (APAD),
  set up in 2004, is an organization comprising
  academics, practitioners and regulators to
  promote research and increase knowledge of the
  use of derivative securities and markets.

15

• 3. Obstacles to financial integration
• 3.1 Diversity of Member Countries
• 3.2 Low Financial Openness
• 3.3 Lack of Infrastructures
• 3.4 Geopolitical Rivalry
• 3.5 Lack of Leading Financial Center
• Pushing Financial Integration

16

• 3.1 Diversity of Member Countries
• Diversity of stages of economic development
• Per capita incomes range from 218 in Myanmar to
  36500 in Japan at current prices in US Dollars
  in 2004
• Exports as a share of GDP range from more than
  100 in Singapore and Hong Kong to a mere 13.6
  in Japan in 2004.
• Diversity of domestic financial markets
• Size of equity markets (see table 1)
• Efficiency of equity markets (see figure 2)

17
Table 1 Size of equity markets

• Source Ghosh(2006)

18
Figure 2 Efficiency of equity markets
19

• 3.2 Low Financial Openness
• A sizable proportion of shares remain
  inaccessible to cross-border investors. As of
  end-2004, foreign investors had no access to
  around 42 percent of the stock market in the
  Philippines, 41 percent in China and 36 percent
  in Thailand. (see table 2)
• Asian economies vary greatly in the freedom of
  capital market (see table 3), categorized as
• high degree of freedom Japan, Hong Kong and
  Singapore
• financial restrictions were greatly relaxed after
  financial liberalization in 1980s but experienced
  a reverse trend after 1997 financial crisis
  South Korea, Thailand, Malaysia and the
  Phillippines
• strict financial restrictions China, India and
  Indonesia

20
Table 2 Foreign Participation in the Stock
Market (2004)(In percentage point)
21
Table 3 Freedom Index of Capital Markets

• Source Economic Freedom of the World 2006 Annual
  Report.

22

• 3.3 Lack of Infrastructures
• Efficiency of Asian financial markets would hinge
  on well-developed regional transaction systems of
  payment, clearing, settlement and depositary
  services that ensure real time gross settlement
  with delivery versus payment for cross-border
  transactions.
• At present, the requisite infrastructures for
  regional financial market hardly exist and it may
  take years to build them.

23

• 3.3 Geopolitical Rivalry
• The potential rivalry between China and Japan for
  regional hegemony
• China and Japan have different interests and
  hence different strategies for economic
  integration in East Asia
• Political tensions between Japan and its
  Northeast Asian neighbors over history issues
• ASEAN has made great efforts in pushing the Asian
  economic and financial integration, but its
  economic and political power, especially that of
  respective country, falls far behind of China and
  Japan.

24

• 3.5 Lack of Leading Financial Center Pushing
  Financial Integration
• Though having three important regional financial
  centers, Tokyo, Hong Kong and Singapore, Asia
  still lacks an anchor country or financial center
  that can mediate financial transactions within
  the region, helping to attract regional investors
  into the regional securities markets.

25

• 4. Creating conditions for financial market
  integration
• 4.1 Deepening Economic Integration
• 4.2 Further Capital Account Liberalization
• 4.3 Infrastructures Building
• 4.4 Cooperation and Coordination among
• China, Japan ,Korea and ASEAN
• 4.5 Development Strategy of Financial
• Centers

26

• 4.1 Deepening Economic Integration
• Trade integration and financial integration are
  closely linked.
• Asias trade openness has increased over the
  years
• The aggregate share of emerging Asia in world
  trade increased from about 13 percent in 1990 to
  20 percent in 2004.
• Over the past two decades, intra-regional trade
  share of total trade nearly doubled to about 41
  percent, a level comparable to that in NAFTA
  countries.
• Signing of FTAs

27

• 4.2 Further Capital Account Liberalization
• Researchers have found that capital account
  liberalization has a positive role in the
  integration of financial markets, such as
  Chelley-Steeley and Steeley (1999), Eichengreen
  and Park (2005)
• Trairatvorakul (2001) argues that cross-border
  flows of capital in financial markets should be
  liberalized to enable participating markets to
  fully benefit from the regional capital market or
  some kinds of stock exchanges alliances.

28

• 4.3 Infrastructures Building
• Linking Clearing And Settlement Systems creating
  an International CSD (Central Securities
  Depositories) for Asia (AsiaClear)
• Regional Credit Rating Agency Association of
  Credit Rating Agencies in Asia (ACRAA), 22 credit
  agencies as members from 12 economies in the
  region
• Credit Guarantees combination of securitization
  and credit enhancement mechanisms is considered
  as a model for the Asian bond market and to
  reduce the gap between borrowers credit standing
  and investors requirements.

29

• 4.4 Cooperation and Coordination among China,
  Japan and ASEAN
• hot economics and cold politics
• The role of China and Japan in East Asia s
  integration process is synonymous with that of
  France and Germany in Europes integration
  process (Sakakibara ,2001)
• ASEAN might act as a coordinator and propellant
  for cooperation between China and Japan.

30

• 4.5 Development Strategy of Financial Centers
• Hong Kong can attract more Asian companies to be
  listed in Hong Kong and play the role of
  integrating Asian equity markets as a leading
  regional and world financial center.
• TSE in dire need of a systems upgrading to
  attract more foreign listings.
• Singapore is trying to become the center of
  futures and derivative trading in Asia, with 100
  hedge funds managing about 6 billion assets.

31

• 5. Possible New Measures for Strengthening
  Financial Market Cooperation
• 5.1 Financial Regulatory Cooperation
• 5.2 Bond Market Cooperation
• 5.3 Stock Market Cooperation
• 5.4 Derivative Market Cooperation

32

• 5.1 Financial Regulatory Cooperation
• Continue the bilateral regulatory cooperation by
  signing MOUs and developing mutual visit system
  and information exchange system by the regulatory
  agencies.
• Multilateral efforts, i.e. to establish a
  regulatory cooperation institution to improve the
  regulation rules and practices
• Eichengreens idea of AFI playing the role of
  developing and implementing common regional
  prudential measures in the financial area.

33

• 5.2 Bond Market Cooperation
• Enhancing the Role of ABMI
• Cultivating the bond market by promoting
  three-level bond issuers, i. e. government, big
  enterprises and SMEs.
• Enhancing market infrastructure through the
  continued work of working groups.
• Improving the Operation of ABF
• ABF1 and ABF2 concentrating on sovereign and
  quasi-sovereign securities.
• ABF3 providing credit support for Asian
  sovereign bonds and other bonds that do not
  receive good crediting to promote the
  securitization of bank assets.
• ABF needs to make further efforts in term of
  size, investment area and currency-denominations.
  
• Private Sector Involvement in Asian Bond Market

34

• 5.3 Stock Market Cooperation
• Cooperation Between Stock Exchanges
• A world trend
• Providing investors and other market participants
  with greater value and more diverse services.
• Cross Listing
• TSE, SGX Hong Kong are taking actions to create
  conditions for the expansion of cross listing,
  especially companies from China and other
  developing countries in the region.

35

• 5.3 Derivative Market Cooperation
• (To be added).

36

• 6. Concluding remarks
• Adopt the principle of sequencing The developed
  markets already started to take bilateral actions
  on market alliances, after the success of
  bilateral efforts, other economies will join
  sequentially.
• Incentives
• Developed markets provide investors and other
  market participants with greater value and more
  diverse services.
• Less developed markets cannot achieve financial
  market integration with tight capital account
  control, then join the process as capital account
  control is lessened, learn from early mistakes
  and feel easier to catch up.

37
References

• Asian and Pacific Department, IMF. Asia-Pacific
  Regional Outlook September 2005.
• Basu, Sankarshan, Bappaditya Mukhopadhyay.
  Derivatives in Asia-Pacific Markets. Journal of
  Emerging Market Finance. 2006(5) 207.
• Cavoli, Tony, Ramkishen S. Rajan, and Reza
  Siregar. A Survey of Financial Integration in
  East Asia How Far? How Much Further to Go?
  University of Adelaide, Center for International
  Economic Studies, Discussion Paper 0401,2004.
• Chaipravat, Olarn, Bhasu B. Supapol and Kanit
  SangsubhanRegional Self-Help and Support
  Mechanisms Beyond the CMI. paper submitted to
  the ASEAN Secretariat 2003.
• Chelley-Steeley, Patricia L Steeley, James M.
  Changes in the Comovement of European Equity
  Markets. Economic Inquiry, Oxford University
  Press, vol. 37(3), pages 473-88, July1999.
• Cowen, David, Ranil Salgado, Hemant Shah,Leslie
  Teo, and Alessandro Zanello,2006, Financial
  Integration in Asia Recent Developments and Next
  Steps, IMF Working Paper, WP/06/196
• De Brouwer, Gordon. Financial Markets,
  Institutions, and Integration in East Asia.
  Source Asian Economic Papers, 1 September 2003,
  vol. 2, no. 3, pp. 161-161(1). Publisher MIT
  Press
• Eichengreen, Barry. Hanging Together? On Monetary
  and Financial cooperation in Asia. World Bank
  Conference on East Asia after the Crisis, 2001.
• Eichengreen, Barry. What to Do with the Chiang
  Mai InitiativeR. Korea AEP conference paper,
  2002.

38

• Eichengreen, Barry. The Parallel Currency
  Approach to Asian Monetary integration. 2005,
  http//elsa.berkeley.edu/users/eichengr/research.h
  tml.
• Eichengreen, Barry and Yung Chul Park, 2004, Why
  Has There Been Less Financial
• Integration in Asia Than in Europe? Monetary
  Authority of Singapore Staff Paper No. 28
  (Berkeley Monetary Authority of Singapore).
• Finance and Securities Research Institute, Renmin
  University of China. Study on Asian Financial
  Integration. Beijing Renmin University of China
  Press, 2006.
• Fraser, B W. Central Bank Co-operation in the
  Asian RegionJ. Reserve Bank of Australia
  Bulletin, 1995, (October)
• Fong, Eddy, Chairman of Securities and Futures
  Commission Hong Kong. Positioning Hong Kong in a
  Competitive Global Marketplace, Speech at the
  Hong Kong Securities Institute 19 March 2007.
  http//www.sfc.hk/sfc/doc/EN/speeches/speeches/07/
  ef_ 20070319_hksi.pdf.
• Forbes, Kristin J. and Chinn, Menzie David, "A
  Decomposition of Global Linkages in Financial
  Markets Over Time" (March 2003). NBER Working
  Paper No. W9555.
• Ghosh, Swati R. East Asia Finance The Road to
  Robust MarketsM. Washington The World Bank,
  2006.
• Girardin, Eric. Methods of Information Exchange
  and Surveillance for Regional Financial
  CooperationA. In East Asia in Asian Development
  Bank. Monetary and Financial Integration in East
  Asia The Way ahead Vol 2M. New York Palgrave
  MacMillan, 2004.
• Henning, C Randall. East Asian Financial
  Cooperation. Washington DC Institute for
  International Economics, 2002.
• Herring, Richard J and Nathporn Chatusripitak.
  The Case of the Missing Market The Bond Market
  and Why it Matters for Financial DevelopmentR.
  ADB Institute Working Paper 11, 2000

39

• Ito, Takatoshi. Japan must open up if it is to
  catch its rivals, Financial Times, Thursday, May
  31, 2007.
• Jeon Jongkyon, Oh Yonghyup and Yang Dooyong.
  Financial Market Integration in East Asia
  Regional or Global?R. Korea AEP conference
  paper, 2005
• Karolyi, G.A., The Role of ADRs in the
  Development and Integration of Emerging Equity
  Markets, IMF Working Paper, 2003.
  http//www.internationalmonetaryfund.com/
  external/np/res/seminars/2003/global/pdf/karol.pdf
  .
• Kawai, Masahiro. Regional Economic Integration
  and Cooperation in East Asia, paper prepared for
  presentation to the Experts Seminar on the
  Impact and Coherence of OECD Country Policies on
  Asian Developing Economies, organized by the
  Policy Research Institute of the Japanese
  Ministry of Finance and the OECD Secretariat in
  Paris, June 10-11, 2004.
• Kazuo, Imai. ACRAA and Harmonization under Asian
  Bond Market InitiativeR. Tokyo On the Occasion
  of 6th Tokyo Roundtable on Capital Market Reform
  in Asia, 2004
• Kim, Soyoung, Jong-Wha Lee and Kwanho Shin.
  Regional and Global Financial Integration in East
  Asia.MPRA Paper No. 695, November 2006.
• Kim, Soyoung, Sunghyun H Kim and Yunjong Wang.
  Financial Integration and Consumption Risk
  Sharing in East AsiaR Korea KIEP WP 03-13,
  2003.
• Liu, L.G., Ferri, G., 2001. How do global credit
  rating agencies rate firms from developing
  countries? ADB Institute Research Paper, No. 26.
• Montiel, Peter J. An Overview of Monetary and
  Financial Integration in East AsiaA. In Asian
  Development Bank. Monetary and Financial
  Integration in East Asia The Way ahead, Vol
  1M. New York Palgrave MacMillan, 2004.

40

• Mori, Junichi. Development of Capital Markets and
  Surveillance in East Asia with Particular
  Reference to Bond Markets. http//www.mof.go.jp/jo
  uhou/kokkin/tyousa/ tyou041h.pdf.
• Nakamoto, Michiyo. Tokyo losing ground as a
  financial center, May 11, 2007 http//www.business
  -standard.com/ft/storypage_test.php?autono284138
  .
• Oh, Gyutaeg and Jaeha Park. Fostering Asian Bond
  Markets using Securitization and Credit
  GuaranteeR. Tokyo material presented at the
  Voluntary Working Group Meeting of the Asian Bond
  Market Initiative, 2003.
• Park, Yung Chul and Doo Yong Yang, Prospects for
  Regional Financial and Monetary Integration in
  East Asia. Korea Korea Institute for
  International Economic Policy (KIEP), 2006
• Park, Yung-Chul and Daekeun Park (2003),
  Creating Regional Bond Markets in East Asia
  Rationale and Strategy, paper prepared for The
  2nd Annual Conference of PECC Finance Forum
  Issues and Challenges for Regional Financial
  Cooperation in the Asia-Pacific, Thailand, July
  8-9.
• Prasad, E, K Rogoff, S Wei and A Kose. Effects of
  Financial Globalization on Developing Countries
  Some Empirical EvidenceR. IMF mimeo, 2003
• Rajan, R. Financial and Macroeconomic Cooperation
  in ASEAN Issues and Policy Initiatives.
  University of Adelaide, Center for International
  Economic Studies, Working Paper, no. 99/29,
  December 1999.
• Rhee, Ghon. Developing an Asian Bond Market
  Rationale, Concerns, and Roadmap, A PECC Finance
  Forum Report On Institution-Building in a World
  of Free and Volatile Capital Flows, Stemming from
  the PECC Finance Forum Work 2002-2004.
• Sakakibara, Eisuke. Regional Integration in Asia
  Challenges and OpportunitiesR. Keio University
  unpublished manuscript, 2001.

41

• Shang, Fulin Chairman of China Securities
  Regulatory Commission, P.R.C.. Challenges Related
  to the Implementation of the IOSCO Principles and
  of the IOSCO MOU in Emerging Securities Markets,
  2006. http//www.iosco2006.org/pdf/EN/panel/
  P4ShangFulin presentation.pdf
• Sheng, A. (2001), Securing the Third Zone of the
  Global markets, speech at the ASAF 2001
  Conference, Hong Kong SAR, 3 December.
• Shimizu, Toshitsugu. Executive Officer, Tokyo
  Stock Exchange, Inc. Regional Cooperation Among
  Securities Markets. http//www.oecd.org/dataoecd/5
  /61/ 33735778.pdf
• Sohn, Injoo, East Asias Counterweight Strategy
  Asian Financial Cooperation and Evolving
  International Monetary Order, Fudan University,
  Shanghai Forum,25-27 May 2007.
• Sorenson, B and O Yosha. International Risk
  Sharing and European Monetary UnificationJ.
  Journal of International Economics, 1998, 45
  211-238.
• Tesar, L L. Evaluating the Gains from
  International Risk SharingR. Carnegie-Rochester
  Conference Series on Public Policy 1995,
  42(June) 95143.
• Trairatvorakul, Prasarn. What are the Prospects
  for a Regional Capital Market in East Asia? Forum
  on East Asian Financial Cooperation, Hong Kong,
  11 September 2001.
• van Wincoop, E. Welfare Gains from International
  Risk SharingJ. Journal of Monetary Economics,
  1994, (34) 175-200.
• van Wincoop, E. How Big Are Potential Welfare
  Gains from International Risk Sharing?J.
  Journal of International Economics, 1999, (47)
  109-135.

42

• Appendix Welfare gains from financial market
  integration
• Benchmark model
• Data and parameters calculation
• Welfare Gains (see the A-table )

43
Benchmark model
44
(No Transcript)
45
(No Transcript)
46
(No Transcript)
47
(No Transcript)
48
Data and parameters calculation
49
Welfare gains
50
(No Transcript)
51
Thank you