Fragments of Asia
The structural development of Asia’s capital markets is failing to keep pace with economic growth. Until that gap closes, it is unlikely the region’s markets or its financial institutions will fully realise their potential to compete more effectively with the west.
For banks, action by regulators to foster closer cross regional cooperation and development can’t come soon enough.
The economics on transactions in Asia-Pacific are a fraction of those on similar sized deals in the west. On some IPOs, for example, investment banks can expect to make up to six times the fees on deals listed in New York compared to Hong Kong. This disparity in fees is almost as pronounced in debt, currency and commodity markets. As a result of low fees, many banks are struggling even to fund themselves in Asia-Pacific, let alone turn a profit.
To a certain extent, there are cultural differences that mean Asia will probably always pay a little less to banks. Even the most senior bankers are generally seen by their clients as service providers and treated as such, often much to their annoyance. Companies and their founders continue to call the shots and while they do, they will continue to squeeze their bankers. But there are things regulators could be doing to make the investment story for the region as a whole more compelling and competitive in the long term. At the moment, for banks, the collective efforts of regulators serve mainly to encourage pockets of cyclical success and failure; where good returns in one country or area make up for a dearth of opportunity elsewhere.
Asia’s intra-regional trade is growing, and economic slowdowns in Europe and the US only highlight its increasing importance, as regional economies look to diversify away from traditional Western export markets. Increasingly this trade will be denominated in local currencies, requiring local currency intermediation and hedging products. That assumes a higher level of market innovation than current regulations allow.
As regional securities association Asifma points out in a recent white paper, a common thread across all asset classes is the importance of convergence and harmonization in a region that has no overarching governmental or even a single pan regional organization to drive such a process. "The historical tendency to compete between the region’s jurisdictions may no longer serve the best interests of market development. Instead, the region will benefit more from common standards and approaches that foster region wide development and growth," the association says.
Already bankers are speaking more frequently of a North Asia versus South East Asia battle for revenue and returns. They would do better to encourage efforts at closer ties across the Asia-Pacific rather than contributing in their zeal for short-term profits to a regional fragmentation of liquidity.