Matthews Asia Commentary - Asia's Deepening Capital Markets

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Dec 02, 2014

November 2014

Robert J. Horrocks, PhD

In the Monty Python sketch “Vocational Guidance Counsellor,” a chartered accountant passionately makes his case to become a lion tamer. The counselor is unimpressed, describing the man as “irrepressibly drab and awful” and mocking his ability to tame a “huge savage beast.” It turns out that, in Monty Python’s world, the accountant was unaware of the realities of his ambition, and his lack of courage to go through with it. Well, Asia’s accountants are going to have to be a lot braver and, if so, they may get their chance to tame lions. They are a part of the region’s push to develop capital markets; to provide a resource for middle class savers; and to build trust around financial reporting and corporate governance, in order to attract international investors. That is why the number of accountants in places like China and India is growing so quickly. So what reforms are Asia attempting to make to assist in this process?

Administrations across Asia seem to be prioritizing financial sector reform. Perhaps they believe that Asia’s capital markets are still an Achilles' heel for the region. Overreliance on the U.S. dollar always seems to leave the economies vulnerable to speculative attacks despite sound long-term economic growth prospects. Nearly 20 years ago, the Asian Financial Crisis (AFC) exposed flaws in Asia’s capital markets. Fixed exchange rates, underdeveloped bond markets, inefficient banking systems lending to state-backed industry and a lack of long-term domestic equity capital forced the most vibrant enterprises to borrow in U.S. dollars. When over-inflated asset prices started to fall, the economic reckoning took the form of a downward spiral. Falling demand and depreciating currencies raised the burden of foreign debts, causing companies to cut labor and capital expenditures, further worsening demand.

The Needs of the Middle Class

Asia today looks very different. Growth is no longer a consequence of globalization but instead is being sparked from within. Domestic demand is the catalyst as populations are approaching middle class status and driving change in very different ways from in the past. In fact, research suggests that Asia will account for two-thirds of the world's middle class citizens by 2030.

Median ages in Asia have risen over the last 30 years and now range from the mid-20s in the Association of Southeast Asian Nations (ASEAN) and India to between 35 and the early 40s in prosperous North Asia. So, as these wealthy Asians reach their peak earnings years, they have a greater need for trustworthy, efficient capital markets to help them save for retirement. To serve these needs, insurance companies and pension funds require a healthy return with a measure of security to cover their long-term liabilities.

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