The governments of Asia have never trusted financial markets. They view stock exchanges as little better than Chinese gambling dens, and find it hard to comprehend that bond, foreign exchange and money markets are any less dominated by wild speculation. As a result, the regulatory and tax environment for financial markets in Asia is still rooted in the 1960s. Banking systems are rigged in a such a way that banks are forced to provide cheap finance for industry, and allowed little room to develop. The biggest Asian economies have progressed remarkably in technical and managerial competence in the past 20 years, but their financial industries remain appallingly backward.
As Euromoney's journalists travelled Asia in December and January to prepare this Asia special issue, the overriding theme became clear: Asian finance has a long way to go before it approaches the standards of Europe and the us.
Asian companies still rely mostly on internally generated funds to finance expansion. When those are insufficient they turn to trusted relationship banks, but hardly ever to capital markets. This shows little sign of changing. International bond issues by Asian companies have not increased rapidly in recent years. In 1996 they totalled $19.4 billion, an increase of less than $6 billion over the 1993 figure.
By the same token, local capital markets remain woefully underdeveloped. Despite considerable hype by western investment bankers, local-currency bond markets are still tiny. The five largest bond markets in Asia (Hong Kong, Indonesia, Malaysia, the Philippines, Thailand) have grown over the past five years to total $143.9 billion in outstandings at the end of 1995, according to Deutsche Morgan Grenfell. But the rate of growth between 1990 and 1995 totalled only 160% not impressive given the low starting point.
Asia still lacks a deep investor base. The principal buyers of securities in the region are central banks (whose reserves have more than doubled in the past four years), foreign banks and rich individuals. Pension funds, insurance companies and mutual funds are still small beer and, where they do exist, tend to invest solely in their home markets. A number of countries notably Hong Kong, Taiwan and the Philippines are creating new pension schemes or liberalizing existing ones. But it will be years, if not decades, before they become significant investors.
Asia's banks look no stronger. The best regional banks are all foreign: Citibank, HongkongBank, Standard Chartered. Most countries have too many banks and are too regulated to allow innovative, modern banking techniques to develop easily. A number of regional banks (including Bangkok Bank, Development Bank of Singapore and Malaysia's Maybank) are trying to spread across borders and build a pan-Asian presence. But their position at home is not sufficiently dominant to allow this. In Europe, most medium-sized economies have only two or three leading banks; in most Asian countries at least five or six vie for the top spot. Governments have begun to realize this and, in Malaysia for instance, are trying to force a consolidation of the banking industry. But this, too, will take time.
The sad fact is that the region's governments, because they are scared of markets, are doing little to encourage their growth. For example Singapore, south-east Asia's only pure double-a rated country, does all it can to prevent foreign investors from buying its bonds. Taiwan, Korea and others still severely restrict investment in their equity markets. In many countries, foreign banks are limited to representative offices or to a single branch.
There are some good reasons for caution. A rush of hot foreign money into a country's stock market can, it has been shown in several emerging markets, cause an unrealistic boom, followed by a bust as the money leaves. But Asia's economies are now at a stage of development when they can afford to begin to loosen. To prevent upheavals, they can open in a planned, gradual way.
As a demonstration of how the piecemeal unplanned approach fails to work, look at China. It has no blueprint for financial reform, merely a step-by-step opening that smacks of domestic political expedient rather than economic logic. For example, the ministry of finance has created a remarkably sophisticated government bond market with primary dealers, auctions and the other paraphernalia of a modern market. But, at the same time, the authorities have left in place an archaic tax system which, for instance, levies capital gains tax on zero-coupon bonds. No-one actually pays the tax, but its existence spooks potential foreign investors.
Once Asian governments have learnt that markets can have a positive role as an efficient allocator of capital (as well as carrying the risk of speculative froth), the region's financial industry can begin to grow alongside its manufacturing industry. If they continue to be over-protective, they risk turning their economies into mini-Japans where the distortions and inefficiencies caused by excess financial regulation ultimately cause economic gridlock.