Friday 20 February 2009

Asia’s capital markets are hopelessly inefficient

Asia has better than world-class savings but a truly ‘third world’ system for collecting and investing them, however efficient payment and settlement may be.

1 comment:

Guanyu said...

Asia’s capital markets are hopelessly inefficient

By ANTHONY ROWLEY
14 February 2009

At a time when just about everything is crashing about our ears - output, employment and investment - it was interesting to hear a group of financial luminaries gathered in Tokyo this week congratulating themselves on the fact that the Asian payments and settlements system has survived the crisis intact. So it has, but this is like taking comfort in observing that the body’s vascular system is still working even though the heart has stopped beating.

Somehow it typified the abysmally laidback attitude of Asian policymakers towards reforming the region’s economic and financial systems - even now that the folly of over-reliance upon global trade and capital flows has been exposed. While some innovation is admittedly being introduced into ensuring money flows smoothly among counter-parties to the myriad financial transactions that take place in Asia every day (that is, payment and settlement systems), the sad fact is that this region remains hopelessly inefficient in terms of employing its own savings for investment and for monetary support purposes.

If anything was needed to underline the dangers of this situation, then the present crisis is doing so as it transmits shocks through an ever-growing number of channels from the Western world to Asia. The most egregious example is the fact that Asia is about to suffer a capital-flows shock as more of its economies run into current account problems and as they try to finance infrastructure and other government stimulus.

Looming current account problems are apparent from a glance at the downward trend caused by plunging exports. Admittedly, imports are falling too but South Korea has already plunged into deficit while Indonesia is on the borderline, and Thailand and the Philippines are close to it. How long before they join the ranks of Eastern European and other emerging economies lining up for support from the International Monetary Fund (IMF)?

Korea has managed to avoid doing so only by agreeing to large bilateral currency swaps with Japan and China but there is a limit to how far these can be expanded to cover others in need. Asian nations are suspicious of the IMF after their traumatic experiences with its harsh loan conditions at the time of the 1997 crisis, and yet they fall back on plaintive arguments about the need for ‘consensus’ when it comes to organising an alternative mechanism. Instead of striking out and launching an Asian Monetary Fund, nations of this region experiment timidly with a quasi-fund called the Chiang Mai Initiative, and even then they tie most of its lending to borrowers being vetted first by the IMF. The absurdity of this is shown by the fact that even the IMF has now removed all strings from its short-term crisis lending as Masahiro Kawai, dean of the Asian Development Bank Institute noted at the Tokyo meeting.

But there is an even bigger problem looming on the financial front and this is the fact that private capital flows to emerging regions of the world have, to use what is becoming a rather overworked phrase nowadays, ‘gone off a cliff’. This is really bad news for Eastern and Central European nations (as well as Russia) that have borrowed heavily and incautiously from foreign banks.

But Asia has little room to feel smug. The demand for capital in this region is going to be strong as governments seek to finance infrastructure projects and other stimulus. Some have ‘fiscal room’ for manoeuvre but others will be turning to international banking and bond markets for funds at a time when risk aversion is high and when Western governments (not least the US) will be crowding out the rest by their own borrowing.

Thus, the cost of capital - and in Asia’s case of not developing its own capital markets - will be high. Yet here again, policymakers in this region seem to think that they have the luxury of time to deal with the problem and to amble along with bond market development at a leisurely pace that ignores the imminent funding crisis.

Why not a regional summit now, to give a push to bond market development and the launch of a true Asian Monetary Fund? As head of HSBC’s payment and cash management division Navin Gupta pointed out during the Tokyo meeting, Asia’s financial systems are also horribly inefficient when it comes to serving the small and medium- sized enterprises (SMEs) which are said to represent 99 per cent (by number) of all companies in Asia and perhaps three quarters of the region’s total industrial output.

He took as an example the fact that Japan is trading increasingly with India nowadays and yet, whereas the cost of capital to a large importer in Japan is around one per cent, SME suppliers in India need to pay 15-20 per cent. The same goes for small business financing across most of this region (including Japan).

Asia has better than world-class savings but a truly ‘third world’ system for collecting and investing them, however efficient payment and settlement may be.