Regional%20Financial%20Co-operation:%20Initiation%20and%20Way%20Forward

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Regional Financial Co-operationInitiation and
Way Forward

• Stephen Yan Leung CHEUNG
• City University of Hong Kong

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Contents

• Update on Asian economies
• Regional Co-operations
• Way forward

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The 1997-8 revealed the weaknesses

• Corporate sector
• Financial institutions
• Exchange rate management

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Economic Growth Indicators (I)

• Region
• Impressive growth rate since the crisis
• Major set back in 2003 Q2
• Recovered strongly
• Example HK grew at 3.35 at 2003 and is expected
  to grow at 7.5

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Table 2 Economic Growth of some selected Asia
Economies during 1996-2003
1996 1997 1998 1999 2000 2001 2002 2003
China 9.6 8.8 7.8 7.1 8 7.5 8 9.1
Hong Kong, China 4.3 5.1 -5 3.4 10.2 0.46 2.27 3.32
Indonesia 7.64 4.7 -13.13 0.79 4.92 3.44 3.69 4.12
Japan 3.43 1.83 -1.13 0.1 2.8 0.41 0.32 2.7
Korea, Rep. 7 4.65 -6.85 9.49 8.49 3.84 6.97 3.07
Malaysia 10 7.32 -7.36 6.14 8.5 0.3 4.19 5.2
Philippines 5.85 5.19 -0.58 3.4 5.97 2.96 4.43 4.52
Singapore 8.15 8.51 -0.86 6.42 9.41 -2.37 3.29 1.09
Thailand 5.9 -1.37 -10.51 4.45 4.76 2.14 5.41 6.74
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Economic Growth Indicators (II)

• Asian region is expected to grow at a faster pace
• Funds needed to sustain high-tech economic growth
• What reforms needed to further enhance our
  regional capital makrets

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Table 3Overview of the World Economic Outlook
Projections (Annual percent change unless
otherwise noted)
2003 Current Projections Current Projections
2003 2004 2005
World Output 3.9 4.6 4.4
Advanced economies 2.1 3.5 3.1
United States 3.1 4.6 3.9
Euro Area 0.4 1.7 2.3
Japan 2.7 3.4 1.9
United Kingdom 2.3 3.5 2.5
Developing Asia 7.8 7.4 7.0
China 9.1 8.5 8.0
India 7.4 6.8 6.0
ASEAN-41 5.0 5.4 5.4
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Table 4 Market Capitalization of Listed
Companies (as a of GDP) in Selected Asia
Economies, 1997-2003
1997 1997 1998 1999 2000 2001 2002 2003
Bangladesh Bangladesh 3.64 2.34 1.88 2.52 2.43 2.5 3.12
China China 22.93 24.41 33.39 53.76 44.57 36.57 48.32
Hong Kong, China Hong Kong, China 238 207.81 379.17 377 310.82 286.7 ..
India India 31.24 25.37 41.39 32.36 22.99 25.68 46.6
Indonesia Indonesia 13.49 23.15 45.79 17.84 16.28 17.34 26.24
Japan Japan 51.28 63.24 101.73 66.27 53.93 53.24 ..
Korea, Rep. Korea, Rep. 8.92 35.07 88.96 33.6 48.14 45.54 54.45
Malaysia Malaysia 93.44 136.61 183.2 129.77 135.26 130.65 163.22
New Zealand New Zealand 45.81 45.86 49.6 36.5 34.6 37.26 ..
Pakistan Pakistan 17.54 8.67 11.89 10.8 8.41 17.22 24.09
Philippines Philippines 38.13 54.16 63.16 67.97 29.57 50.03 29.25
Russian Federation Russian Federation 31.61 7.6 36.85 14.98 24.85 35.88 53.24
Singapore Singapore 111.45 115.33 243.8 167.07 138.25 115.43 ..
Sri Lanka Sri Lanka 13.92 10.76 10.09 6.55 8.45 10.14 14.64
Thailand Thailand 15.57 31.2 47.74 24.03 31.42 36.33 84.44
Turkey Turkey 32.3 16.83 61.47 34.98 32.84 18.49 28.73
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Box 1(I)

• At the end of 2003, 1,307 companies were listed
  in Hong Kong.
• Total funds raised rose 91.6 from the preceding
  year
• The market capitalization rose 54
• The daily turnover was HK10.4 billion

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Box 1(II)

• Mainland companies accounted for 43.4 of market
  turnover
• 27.4 of the new listings
• 25 of total equity funds raised
• More important role
• Bank financing plays an important role in ten
  region
• Bond market is underdeveloped

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Asian Crisis

• Currency mismatching
• Maturity mismatching
• A high quality bond market with sufficient
  market depth could have long-term economic
  development and reduce the probability of future
  crisis

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Table 5 Financing Structure of Asian Economies
and Selected Countries in 1995 and 2003
1995 2003
Country/ Economy Bank Loans Stock Market Bond Market Bank Loans Stock Market Bond Market
As of total financing As of total financing As of total financing As of total financing As of total financing As of total financing As of total financing
Hong Kong 39.6 55.6 4.8 23.3 69.7 7.0
Indonesia 60.2 38.0 1.7 42.9 51.3 5.8
Korea 44.6 29.4 26.1 45.7 23.9 30.4
Malaysia 22.4 65.3 12.4 29.7 47.9 22.4
Philippines 30.1 64.9 4.9 47.9 47.3 4.7
Singapore 31.5 60.0 8.4 32.5 47.5 20.0
Taiwan 62.9 31.2 5.9 42.5 43.1 14.4
Thailand 50.8 43.9 5.3 38.3 40.2 21.5
Total 45.0 44.5 10.6 36.8 44.6 18.5
United States 21.1 30.4 48.5 19.5 33.2 47.2
Japan 43.4 27.8 28.8 33.7 21.9 44.4
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Box 2

• The Hong Kong government has just completed its
  first securitized bond issue. The HK6 billion
  worth of bonds issued are backed by the net
  revenue from five tunnels and a bridge owned by
  the government. The issues were over-subscribed
  almost half are now owned by the general public
  with an oversubscription rate of 2.13 times and
  the rest by the institutional investors with an
  oversubscription rate of 3.1 times. In order to
  enhance the bonds liquidity and promote retail
  participation, the issues were listed on the Hong
  Kong Exchange on 10 May 2004 with the board lot
  size of HK50,000, which is around US6,410.

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II. Financial Market Reforms

• Monetary and exchange rate policy
• Bond market
• Equity market
• Risk management of banks

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Monetary and Exchange Rate Policy

• Asian Monetary Fund
• Chiang Mai Initiatives - currency swap lines
  arrangement between ASEAN3
• arrangement between ASEAN3
• swap network, regional surveillance, monitoring
  of capital flows, and training of personnel
• Observation the amount of money is small
  relative to the reserves and the liquidity of the
  markets

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ASEANS surveillance system to Encourage the
Coordination of Macroeconomic and Financial
Policies

• Early warning system???
• The nature of crisis is changing
• Hard to use historical pattern to predict future
  crisis
• Observation whether governments in the region
  can really share sensitive economic information.

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Bond Market Development (I)

• EMAP ABF1 and ABF2
• ASEA3 New securitized debt instruments,
  issuance of debt by international financial
  institutions, regional credit guarantees and
  enhancement facilities, local and regional
  credit-rating agencies
• APEC Development of Securitization and Credit
  Guarantee Markets

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Bond Market Development (II)

• Observation
• Efforts in overlapping areas. Interdepartmental
  coordination needed between Central Bank,
  Ministry of Finance and Securities Commission for
  local market.

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Equity Market Development

• Institute of Directors of East Asia network was
  formed
• The guideline of good corporate governance
  practices was endorsed by APEC ministers 2001
• Future projects
• scorecard on corporate governance
• training initiative

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AMU (I)

• Monetary and exchange rate stability- Asian
  Monetary Union
• Pros
• Boost up trade volume
• Insulated from speculative attacks
• Collective discipline on monetary stability, open
  capital markets, and fiscal prudence
• Eliminate competitive depreciation
• Enlarged, unified financial markets

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AMU (II)

• Cons
• Loss of monetary autonomy for national interests
• Loss of autonomy to operate capital control

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AMU (III)

• AMU may not too far and may not be the only
  solution
• strengthening the CMI arrangement
• developing further the bond markets in the region
• extending free trade agreements
• cooperating in the pursuit of exchange rate
  stability

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Capital Market Development

• Legal and regulatory framework
• Information transparency
• Market infrastructure
• Corporate governance
• Credit agencies
• Investor education
• Cooperation and alliance of stock exchange

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• END