East Asia only has itself to blame for the fact that so much of its enormous savings flow overseas rather than financing investment in the region, according to a new study by the World Bank.
Policy-makers need to give priority to developing domestic capital markets - bond markets especially - if this outflow of funds is to be brought under control and a more balanced financial system to emerge, the report suggests.
Eight Asian nations (China, Indonesia, Korea, Malaysia, the Philippines, Thailand, Hong Kong and Singapore) have accumulated $1.6 trillion in foreign exchange reserves. But even this pales alongside the total $9.6 trillion of assets they hold in their financial sectors, mostly in banks. These assets are equal to a quarter of those in US financial markets and a half of those in Japan.
The way such funds are channeled is unbalanced. Financial systems in the eight countries are still dominated by banks, with an aggregate $5.5 trillion in assets, despite consolidation in the banking sector since the Asian financial crisis. “A key challenge is further development of securities markets, especially bond markets,” said Swati Ghosh, lead author of the report.
Corporate bond markets in particular remain under-developed in some of the countries and often only those companies with at least a double A credit rating can raise bond financing, noted Homi Kharas, the World Bank’s chief economist for East Asia and the Pacific Region. East Asian bond markets generally comprise a smaller proportion of GDP than equity markets, in contrast to the situation in developed economies.
Several initiatives to develop cross-border, regional bond markets in Asia have been launched in recent years – by the ASEAN+3 group of countries, the EMEAP group of Asia-Pacific central banks, the Asian Development Bank and others. But the World Bank believes that reform should be focused at national level first, Ghosh said.
East Asia’s equity market has tripled in size since the 1997 financial crisis, and reached a total capitalization of $2.8 trillion in 2005. Stock markets in the region now compare “very favourably” with those in advanced industrial countries in terms of GDP-relative size. They are bigger in this regard in Hong Kong, Singapore and Malaysia than those of the US, Britain or Germany. But bond markets are under-developed by comparison. Bonds outstanding across the region were worth just $1.5 trillion in 2005 and the bulk of these were government paper.