Regional Financial Co-operation:Initiation and Way Forward

Stephen Yan Leung CHEUNG

City University of Hong Kong

Contents

• Update on Asian economies

• Regional Co-operations

• Way forward

The 1997-8 revealed the weaknesses

• Corporate sector

• Financial institutions

• Exchange rate management

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%

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

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

Table 3:Overview of the World Economic Outlook Projections

(Annual percent change unless otherwise noted)2003 Current Projections

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

Table 4: Market Capitalization of Listed Companies

(as a % of GDP) in Selected Asia Economies, 1997-2003 1997 1998 1999 2000 2001 2002 2003

Bangladesh 3.64 2.34 1.88 2.52 2.43 2.5 3.12

China 22.93 24.41 33.39 53.76 44.57 36.57 48.32

Hong Kong, China 238 207.81 379.17 377 310.82 286.7 ..

India 31.24 25.37 41.39 32.36 22.99 25.68 46.6

Indonesia 13.49 23.15 45.79 17.84 16.28 17.34 26.24

Japan 51.28 63.24 101.73 66.27 53.93 53.24 ..

Korea, Rep. 8.92 35.07 88.96 33.6 48.14 45.54 54.45

Malaysia 93.44 136.61 183.2 129.77 135.26 130.65 163.22

New Zealand 45.81 45.86 49.6 36.5 34.6 37.26 ..

Pakistan 17.54 8.67 11.89 10.8 8.41 17.22 24.09

Philippines 38.13 54.16 63.16 67.97 29.57 50.03 29.25

Russian Federation 31.61 7.6 36.85 14.98 24.85 35.88 53.24

Singapore 111.45 115.33 243.8 167.07 138.25 115.43 ..

Sri Lanka 13.92 10.76 10.09 6.55 8.45 10.14 14.64

Thailand 15.57 31.2 47.74 24.03 31.42 36.33 84.44

Turkey 32.3 16.83 61.47 34.98 32.84 18.49 28.73

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 HK$10.4 billion

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

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

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

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

Box 2

The Hong Kong government has just completed its first securitized bond issue. The HK$6 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 bond’s liquidity and promote retail participation, the issues were listed on the Hong Kong Exchange on 10 May 2004 with the board lot size of HK$50,000, which is around US$6,410.

II. Financial Market Reforms

• Monetary and exchange rate policy

• Bond market

• Equity market

• Risk management of banks

Monetary and Exchange Rate Policy

• Asian Monetary Fund• Chiang Mai Initiatives - currency swap lines

arrangement between ASEAN+3– arrangement between ASEAN+3– 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

ASEAN’S 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.

Bond Market Development (I)

• EMAP – ABF1 and ABF2• ASEA+3 – 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

Bond Market Development (II)

Observation:

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

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

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

AMU (II)

Cons:

• Loss of monetary autonomy for national interests

• Loss of autonomy to operate capital control

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

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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