Capital Market Reform in Asia: 9th Roundtable

The 9th OECD-ADBI Roundtable on Capital Market Reform in Asia: Ten Years after the Financial Crisis: Prospects towards the Future was held on 26-27 February 2008 at the Asian Development Bank Institute in Tokyo. It is the ninth of the Roundtable series which started in 1999 as a forum for discussion on emerging and outstanding issues related to capital market reform in Asia. About 60 participants representing capital market authorities, ministries of finance, central banks/monetary authorities, and private sector from selected OECD and East Asian countries participated in the two-day event.

The Roundtable discussed the recent development of Asian capital markets, best practices on capital market regulation and corporate governance, progress of regional initiatives on capital market development and integration, the roles of capital markets in supporting public-private partnership (PPP) in infrastructure investment, and challenges to mitigate financial market turbulences. Key findings and outcomes are summarized below. Speaker's presentations are available on OECD's website.^*

Significant progress has been made on capital market reforms, including adoption of international standards to capital market practices (financial reporting, trading, clearing and settlement processes), adoption of National Capital Market Master Plans (in a number of Asian countries), and the streamlining of regulatory infrastructure to facilitate greater efficiency of surveillance and enforcement. Due to the various stages of capital market development in the region, however, promoting capital market efficiency requires a proper balance between competition and regulation which should take into account the characteristics of market participants, the products and services offered, and the structure of each market.

Bond markets in emerging Asia have advanced significantly with total local currency bonds outstanding in emerging East Asia expanding from US$400 billion in 1997 (11% of GDP) to US$3 trillion (57% of GDP) at end-June 2007. During the same period, corporate bond markets continued to expand and increase its share of total local currency bonds from 28% to 41%. The development in East Asian bond market has also benefited from regional initiatives such as the (ASEAN+3) Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund (ABF).

The equity markets in East Asia have also expanded substantially with their market capitalization increasing from about US$840 billion in 1997 to US$4.7 trillion in 2006. Access to equity markets has improved with new capital raised through initial public offerings (IPOs) reaching US$66 billion in 2006. Development of equity markets has recently been given greater priority by many developing countries in Asia in an effort to adjust their economies to better benefit from regional economic integration. In particular, ASEAN has adopted an initiative to develop an interlinked ASEAN securities market by 2010. While some progress has been made on linkages of trading platforms, regional clearing and settlement system and harmonization of market standards and practices, it was noted that for the initiative to have a real impact on (increasing) intra-regional investment, further capital account liberalization may be needed, particularly on selected capital account measures that are currently limiting cross-border investment flows. ADB has been providing some technical support to this initiative including facilitating the dialogue among the various stakeholders concerned.

Various recent studies put estimates of infrastructure investment needs for Asia and the Pacific at between USD 228 billion and 600 billion a year. Based on these estimates, a financing gap of USD 180-200 billion a year is expected. While public funding will remain the major source of infrastructure financing going forward, some governments may face difficulties in maintaining their same level of funding capacity due to their limited fiscal space relative to the expected size of infrastructure investment needs and hence filling this financing gap would require an increase in private sector investment. Capital market can play a significant role in facilitating access to financing by private sector investors, including through infrastructure funds. Pension funds and other institutional investors in Australia, Europe and North America have been active in infrastructure investments in the OECD countries and have recently shown growing interests in emerging markets. In Asia, infrastructure funds activity has been limited but is expected to intensify over the next decade as Asia is increasingly becoming a key region for infrastructure investors.

Despite the significant advances of financial and capital market development over the past decade, the US subprime crisis highlighted still the lack of proper understanding and monitoring of the risks involved in the securitization process and hence the need for greater transparency and disclosure as well as for better risk assessment and risk management among financial institutions, regulators and credit rating agencies. It is also necessary to strengthen the capacity of central banks and regulatory authorities in monitoring and addressing near-term stresses and longer-term financial stability, including their capacity to react quickly to changes and greater sharing of information on cross-border financial transactions.

On the positive side, the subprime crisis has so far had limited impacts on Asian markets and created an opportunity for Asian Sovereign Wealth Funds to acquire higher stakes in crisis-affected financial institutions. In the longer term, the private sector views remain positive in light of the trend towards greater integration and higher share of the region in the global economy.

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