Asia’s Seismic Shift: How Can the Financial Sector Serve Better?
IMF Blog, July 21, 2014
Source details
- Canonical URL
- Asia’s Seismic Shift: How Can the Financial Sector Serve Better?
Other formats
Bibliographic details
- Authors: Min Zhu
- Published: July 21, 2014
Overview
- Author: Min Zhu
- Date: July 21, 2014
- Core thesis: Asia is set to be the powerhouse for growth in the next decade, with its share in world output expected to rise from 30 percent to more than 40 percent in the coming decade. The region is shifting from a narrower manufacturing hub to a group of vibrant, diverse and large markets with a rising middle-class population.
- Financial sector role: Critical to facilitating investment, recycling savings, supporting structural change, and managing increasing financial interconnections and complexity.
Serving the real economy and structural change
- Infrastructure needs:
- Urbanization, growing trade, and rising demand for communications and travel imply substantial investment needs—road networks need upgrading, and electricity generating capacity and telecommunications infrastructure lag other regions such as Latin America.
- Capital flows and savings:
- Asia has a large pool of savings, but most currently leave the region despite potentially high returns.
- Critical challenge: ensure no impediments to healthy flow of capital across the region so savers can find the best returns and infrastructure financing needs can be met.
- SME finance:
- Securing small and medium sized enterprises access to finance would support investment and structural transformation.
Serving the demographic shift
- Demographics and capital allocation:
- Efficient financial systems should recycle savings from aging populations saving for retirement to younger populations with investment needs.
- China, Korea, and Japan have rapidly aging populations, even more so than the rest of the world.
- India and Indonesia have younger working age populations and large investment needs.
- Rising middle class:
- A growing middle class will demand a greater range of financial services, including retirement and real estate planning.
- Financial inclusion benefits:
- Increasing access to basic financial services by households and firms can help promote saving, enable household investment in health and education, assist market entry of new firms, improve employment opportunities, and help create conditions to reduce income inequality.
Managing interconnections and integration
- System complexity and cross-border risk:
- As Asia’s financial systems become bigger they are likely to become more complex and interconnected.
- Market development, including shadow banking, and increased complexity can raise risks with potential for problems to spread across borders with an impact beyond Asia.
- Global regulatory changes:
- Big changes in the global regulatory environment are likely to create challenges for markets and regulators, affecting financial flows, the size of banks and shadow banks, prudential ratios, and resolution frameworks.
Navigating the transition — policy priorities and measures
- Broad strategic objective: Achieve structural and demographic goals with careful planning and policy implementation, informed by cross-country experience and lessons from other regions.
- Broaden the investor base:
- Need for a more diversified financial system with deeper and more liquid markets.
- Require a broader and more diverse investor base with greater involvement of long term investors.
- Longer-dated assets and an asset management industry with a longer horizon are needed to meet retirement and real estate planning demands and to provide stable finance for infrastructure projects (for example through unlisted funds).
- Development of appropriate back office support infrastructure is necessary.
- Institutional investors are relatively small in most countries and barriers to investment across borders remain high; this will be a long-term process.
- Build more liquid markets:
- Local currency bond markets have grown since the Asian financial crisis in the late 1990s and have proved resilient even through recent bouts of financial market turbulence.
- Deeper and more liquid bond markets would enhance financial stability and could reduce corporate and sovereign risk premia, lowering the cost of capital to support economic and structural transformation.
- Policy and market measures to improve liquidity:
- A more active role for market makers.
- Development of hedging instruments, including derivatives.
- Development of repo and securities lending markets to generate turnover and improve liquidity.
- Regulatory improvements:
- Enhancements in the regulation of securities markets to strengthen the role of equity markets as stable and reliable sources of financing.
- Address an embryonic legal and regulatory framework for nonbank financial institutions—shadow banks—and a lack of information provision including pricing transparency.
- Enhance regional and global perspectives:
- A regional perspective will be key to address rising regulatory and supervisory challenges as financial systems deepen and integrate.
- Options include forming and strengthening supervisory colleges.
- Regulators and supervisors should encourage innovation while ensuring good cross border cooperation, adequate regulatory powers to act, and vigilance to risks.
- The IMF, with increased focus on interconnections and global impact, can help identify risks, including those emerging from changes in global regulatory policy.
IMF engagement and next steps
- The IMF is seeking to help policymakers in the region navigate the transition by bringing cross-country expertise to the table.
- The IMF hosted a joint IMF–Hong Kong Monetary Authority conference, The Future of Asia’s Finance, in February 2014, and plans to publish a book to drill down more deeply into these topics and continue attention on them.
Content derived from the IMF web page "Asia’s Seismic Shift: How Can the Financial Sector Serve Better?" by Min Zhu, July 21, 2014.
Content in this bundle
- 亚洲巨变：如何提高金融业的服务能力？; iMFDirect博客; 2014年7月21日