Capital Market Reform in Asia: Towards Developed and Integrated Markets in Times of Change


Edited by: Masahiro Kawai & Andrew Sheng

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    List of Tables

    • 1.1 Nominal Increases in Bank Deposits and Credit (as % of cumulative nominal GDP) 7
    • 1.2 Global Saving and Investment 8
    • 1.3 Commercial Banks' Holding of Government and Central Bank Securities (as % of total assets) 11
    • 1.4 Structural Bank Indicators 12
    • 1.5 Role of Banks in Financial Intermediation (as a percentage of GDP) 17
    • 1.6 Contributions to Real Private Credit Growth in Asia 20
    • 1.7 Measuring Currency Mismatches 23
    • 1.8 Cross-Country Determinants of Real Private Bank Credit Growth 28
    • 3.1 Strong Growth across Market Segments 57
    • 7.1 A Modest Recovery from Widespread Recession (OECD area, unless noted otherwise) 107
    • 9.1 Legal Structure for Collective Investment Schemes in Organization for Economic Co-operation and Development Countries 140
    • 9.2 Responsibility for Internal Oversight of Collective Investment Schemes 141
    • 9.3 Legal Measures to Ensure that a Collective Investment Scheme Operates in the Interests of Investors 141
    • 9.4 Codes of Conduct for Collective Investment Scheme Operators 142
    • 9.5 Countries Imposing Other Legal Measures to Address Conflicts of Interest 143
    • 9.6 Measures to Address Conflicts of Interest in Countries with Contractual Schemes 144
    • 9.7 Countries with Statutory or Non-statutory Codes on Voting on Collective Investment Schemes 145
    • 9.8 Entity Authorized to Make Voting Decisions Regarding Shares in Collective Investment Scheme Portfolio 146
    • 9.9 Rules on Delegation of Voting Rights by Collective Investment Scheme 147
    • 9.10 Rules Relating to Disclosure of Voting Guidelines and Actions 149
    • 9.11 Factors Apart from Voting that Influence Monitoring Activities of Collective Investment Schemes 150
    • 9.12 Legal Structures for Life Insurance Companies 152
    • 9.13 Internal Governance Structure of Life Insurance Companies 153
    • 9.14 Legal and Structural Measures to Address Conflicts of Interest in the Insurance Business 156
    • 9.15 Obligatory and Optional Members of the Governance Structure of Insurance Companies 157
    • 9.16 Countries with Statutory or Industry Codes on Voting by Insurance Companies 160
    • 9.17 Entity Authorized to Make Voting Decisions Regarding Shares for Insurance Companies 161
    • 9.18 Life Insurance Companies as Corporate Monitors 162
    • 9.19 Nature of Membership in Pension Funds 164
    • 9.20 Nature of Members' Ownership Title to the Assets in Autonomous Pension Funds 164
    • 9.21 Legal Structures for Pension Funds 165
    • 9.22 Main Governing and Oversight Bodies of Pension Funds 167
    • 9.23 Other Specialist Bodies Participating in the Governance Structure of Pension Funds 168
    • 9.24 Countries with Statutory or Industry Codes on Voting by Pension Funds 170
    • 9.25 Entity Authorized to Make Voting Decisions on Shares Held by Pension Funds 171
    • 9.26 Pension Funds as Corporate Monitors 173
    • 13.1 Key Balance Sheet and Off-Balance Sheet Ratios: Deutsche Bank, Citi, and Westpac 238
    • 13.2 Major Financial Institutions' Write-downs and Credit Losses (Total since 2007, in US$ billion) 244
    • 13.3 US Payments to Settle AIG Obligations after Its Failure 245
    • 13.4 The Externalities of the Unconstrained Equity Culture in Banking 249
    • 13.5 Alternative Structures A, B, and C in Descending Order of Risk 257
    • 14.1 Indicators of Quality of Financial Infrastructure (0 to 10 scale, higher is better) 271
    • 14.2 Standard & Poor's Foreign Currency Sovereign Credit Rating 272
    • 14.3 East Asian Equity Market Capitalization Shares in the Standard & Poor's Global 1200 Index 273
    • 14.4 Foreign Exchange Market Turnover in East Asia 275
    • 14.5 Bank for International Settlements' Foreign Exchange Market Survey 276
    • 14.6 Local Currency–Foreign Exchange Turnover (US$ million, daily average turnover) 277
    • 14.7 Over-the-Counter Derivatives Market Activity in East Asia (average daily turnover, US$ billion, net of local inter-dealer double counting) 279
    • 14.8 Worldwide Assets of Non-US Open-ended Investment Companies (US$ billion) 283
    • 14.9 Exchange-rate Adjusted Changes in Cross-border Loans 285
    • 14.10 An Index of e-Finance Development 296
    • 15.1 Corporate Codes in the Asian Region 308
    • 15.2 Transparency International's Measure of Business Perceptions of Corruption in the Asian Region 309
    • 15.3 Net Assets (US$ billion) and Number of Mutual Funds in the Asian Region 315
    • A1 Summary of International Codes 319
    • 17.1 Infrastructure Investment as Percentage of Gross Domestic Product 335
    • 17.2 Financial Structure in Asia 337

    List of Figures

    • 1.1 Foreign Exchange Reserves Minus Currency Held by the Public as a Percentage of M2i and Public Sector Domestic Debt 10
    • 1.2 Moody's Bank Financial Strength Ratings 15
    • 1.3 International Lending to Asia (International and local claims, net cross-border bank claims, amounts outstanding, in US$ billion) 21
    • 1.4 International Bank Claims in Selected Asian Economies 25
    • 3.1 Malaysia's Capital Market Grew 11% Per Annum from 2000 to 2010 56
    • 3.2 Well-developed Local Currency Bond Markets 58
    • 3.3 High-growth Investment Management Industry 58
    • 3.4 Malaysia is Widely Recognized as a Center for Innovation in Shariah-compliant Capital Market Products 60
    • 5.1 Marketable and Non-marketable Central Government Debt in the OECD Area (Amounts outstanding at the end of 1998 and 2008) 77
    • 5.2 Long-term Interest Rates on Sovereign Borrowing in the OECD Area: 1998–2010 78
    • 5.3 Composition of OECD Central Government Debt: 1998–2008 (in %) 83
    • 5.4 2008 Shares of Marketable and Non-marketable Government Debt in OECD Countries 83
    • 5.5 2008 Central Government Debt as a Percentage of GDP in OECD Countries 84
    • 7.1 Interbank Money Markets: Systemic Stress 100
    • 7.2 Allotment above Benchmark 103
    • 7.3 Central Banks' Balance Sheets 104
    • 13.1 Consolidated Balance Sheet Structure of Conglomerates (in % of assets) 236
    • 13.2 Issuance of Collateralized Debt Obligation Index Tranche Volumes (delta adjusted, quarterly) 240
    • 13.3 Issuance of Collateralized Debt Obligation Index Tranche Volumes by Issuer (delta adjusted, quarterly) 241
    • 13.4 Issuance of Collateralized Synthetic Obligations (delta adjusted, quarterly) 241
    • 13.5 Issuance of Collateralized Synthetic Obligations by Issuer (delta adjusted, quarterly) 242
    • 13.6 Credit Default Swaps Outstanding 243
    • 13.7 Capital Adequacy and Leverage versus Losses 255
    • 14.1 Derivatives Trade in East Asia (gross) 280
    • 14.2 Net Private Capital Flows to the Five Crisis-affected East Asian Economies 284
    • 14.3 Net Private Capital Flows to Other Asian Emerging Markets 285
    • 14.4 Bank Consolidated Claims on Emerging East Asia, Including Hong Kong, China, and Singapore Offshore Financial Centers 286
    • 14.5 Bank Cross-border Consolidated Claims on Emerging East Asia (PR China, Indonesia, Republic of Korea, Malaysia, Philippines, Taipei, China, and Thailand) 287
    • 14.6 Japanese Banks' Cross-border Consolidated Lending to Emerging East Asia 288
    • 17.1 Private Sector Investment Commitments in Asia (1990–2007) 335

    List of Abbreviations

    ABF-2Asian Bond Fund-2
    ABMFAsia Bond Mutual Funds
    ACGAAsian Corporate Governance Association
    ACMFASEAN Capital Markets Forum
    ADBIAsian Development Bank Institute
    AECMAggregate Effective Currency Mismatch
    AIFAsian Infrastructure Fund
    ANUAustralian National University
    AOBAudit Oversight Board
    APECAsia-Pacific Economic Co-operation
    APRCAsia-Pacific Regional Committee
    ASICAustralian Securities and Investments Commission
    BFSRBank Financial Strength Ratings
    BISBank for International Settlements
    CALPERSCalifornia Public Employees' Retirement System
    CAPMCapital Asset Pricing Model
    CDSCredit Default Swaps
    CEOChief Executive Officer
    CISCollective Investment Schemes
    CMP1Capital Market Masterplan
    CMP2Capital Market Masterplan 2
    CSOCollateral Security Obligation
    CSRCChina Securities Regulatory Commission
    ECBEuropean Central Bank
    EMEAPExecutives' Meeting of East Asia-Pacific Central Banks
    EMUEuropean Monetary Union
    ERISAEmployee Retirement Income Security Act
    ETFsExchange Traded Funds
    ETSElectronic Trading System
    FASBFinancial Accounting Standards Board
    FDIforeign direct investment
    FIMMFederation of Investment Managers Malaysia
    FoBFFund of Bond Funds
    FSAPsFinancial Sector Assessment Programs
    FSBFinancial Stability Board
    FSDFFinancial Sector Development Fund
    GDPGross Domestic Product
    G20Group of Twenty
    HNWIHigh Net Worth Individuals
    IBInvestment Bank
    ICMIslamic capital market
    ICTInformation and Communications Technology
    IFIInternational Financial Institution
    IIFInstitute of International Finance
    IMFInternational Monetary Fund
    IOSCOInternational Organization of Securities Commissions
    IPOInitial Public Offering
    ISDInvestment Services Directive
    KLSEKuala Lumpur Stock Exchange
    LCRLiquidity Coverage Ratio
    LoLRLender of Last Resort
    MASMonetary Authority of Singapore
    MMOUMultilateral Memorandum of Understanding
    MNCMultinational Corporation
    NBFInon-banking financial institution
    NFCANet Foreign Currency Assets
    NOHCNon-operating Holding Company
    NSFRNet Stable Funding Ratio
    ODAOfficial Development Assistance
    OECDOrganization for Economic Co-operation and Development
    PAIFPan-Asian Infrastructure Forum or Pan-Asian Bond Fund Index
    PPIPrivate Participation in Infrastructure
    PPIAFPublic–Private Infrastructure Advisory Facility
    PPPPurchasing Power Parity
    PPPPublic–Private Partnership
    PRPublic Relations
    PRIProperty Rights Infrastructure
    QSPEsQualifying Special Purpose Entities
    REITsReal Estate Investment Trusts
    ROSCReport on Standards and Codes
    SAAJSecurities Analyst Association of Japan
    SACShariah Advisory Council
    SCSecurities Commission
    SCIShanghai Composite Index
    SESCSecurities and Exchange Surveillance Commission
    SFIPCSecurities and Futures Investors Protection Centre
    SIDRECSecurities Industry Dispute Resolution Center
    SPEsSpecial Purpose Entities
    SROSelf-regulatory Organization
    STRIPSSeparate Trading of Registered Interest and Principal of Securities
    TDRIThailand Development Research Institute
    VIEsVariable Interest Entities
    WPDMWorking Party on Public Debt Management
    ZIRPZero Interest Rate Policies


    Since 1999, the Organization for Economic Co-operation and Development (OECD) and the Asian Development Bank Institute (ADBI) have been jointly running a series of annual roundtable meetings on Capital Market Reform in Asia, in the aftermath of the 1997–98 Asian financial crisis. These meetings offered a valuable forum for discussion among Asian securities regulators, practitioners, scholars, and experts from international organizations on specific topics of main interest from the viewpoint of capital market reform in Asia.

    The primary objective of this publication is to chart the progress of capital market development in Asia in the years after the 1997–98 Asian financial crisis and, in this process, to understand the issues of capital market reform, to highlight the emerging risks, and challenges facing Asian capital markets and their regulators. In addition, it focuses on ways to enhance the capacity of Asian capital markets in mobilizing domestic savings into investment projects, both nationally and regionally, an issue that has gained greater urgency as the rest of the world grapples with formulating a new financial architecture.

    I take this opportunity to thank the authors for their contributions towards this publication and to my co-editor, Andrew Sheng, and his team for their effort in collating the papers into an excellent book that will contribute to the literature on capital markets in Asia.



    MasahiroKawai and AndrewSheng

    Why is capital market reform so hard to implement? Financial markets are all about people trading products, using processes or platforms under a set of prudential rules. Markets are human institutions and behavior is not formed overnight. Changing them requires a complete understanding of the political economy and what drives behavior. Failure to understand history, the big picture and the micro-institutional details is what led to the repeat of financial crises.

    Since 1999, the OECD–ADBI Roundtable Conference on Capital Market Reform in Asia has been an annual forum sponsored and organized jointly by the Organization for Economic Co-operation and Development (OECD) and the Asian Development Bank Institute (ADBI). There was recognition after the Asian financial crisis of 1997–98 that policymakers and practitioners from the region needed to strengthen regional dialogue and co-operation.

    The primary objective of the Roundtable is to provide a platform for capital market regulators in Asia, financial experts and practitioners of stock exchanges, securities houses, financial analysts, research institutes and international organizations to address topics and issues relating to the development of capital markets in Asia. The past twelve Roundtables have analyzed and discussed the evolution of capital market reform in Asia through presentations and papers prepared by invited experts from the OECD and the Asian region. This book compiles a selection of papers that captures the essence of the ideas and issues that contributed to capital market reform in the region.

    This book is divided into four broad sections. The first section on “Development of Capital Markets in Asia” reviews the transformation of Asia's banking system since the Asian financial crisis of 1997–98 and seeks to summarize the complex market and policy forces and challenges encountered in the process of financial market development.

    The second section on “Issues of Capital Market Reform” draws on the strategic policies that shaped the development of the government securities markets in the OECD area. These policy debates are enriched by the country experiences of Malaysia in designing and implementing its capital market master plan and the People's Republic of China (hereafter referred to as PR China) in reforming its politically sensitive non-tradable shares system in order to liberalize the capital market.

    The third section on “Emerging Risks and Challenges of Regulation, Supervision and Corporate Governance” addresses the core issues of governance and regulation of capital markets as mapped out by the International Organization of Securities Commissions (IOSCO) standards. This section benefits from a comparative review of governance regimes for institutional investors in the OECD area and a survey of investor protection in the Asia and the Pacific member countries of IOSCO's Asia-Pacific Regional Committee. The practicality and adequacy of these international standards and core principles for supervision are challenged in two other chapters in this chapter. The need to restore trust in the financial system could not be more relevant today after witnessing the shortcomings of global institutions in the advanced economies in 2007–09.

    The fourth section calls for “Regional Co-operation and Integration of Capital Markets in Asia” by exploring the options for closer financial integration in the region and reviews the progress of various regional financial co-operation initiatives. These measures include the issuance of local currency bonds through the Asian Bond Fund-2 (ABF-2) of EMEAP, and the adoption of an Implementation Plan to promote an integrated capital market in ASEAN as part of the ASEAN Economic Community Blueprint 2015. The role of capital markets in financing infrastructure in the Asian region is also explored.

    Lessons from the Two Crises: The Asian Financial Crisis and the Global Financial Crisis

    The Asian financial crisis of 1997–98 taught us many lessons, especially with regard to financial risk. First, large current account deficits financed by unhedged short-term capital inflows can be a source of financial risk. Second, excessive reliance on commercial banks for domestic financing can be another source. And third, a country's exposure to the “double mismatch” problem (a currency and maturity mismatch) brought about by using short-term capital in foreign currency for financing long-term local currency investment, is a major risk.

    A major policy lesson was the need to develop Asia's traditionally weak capital markets, and promote regional integration of banking and capital markets. This can improve financial resilience by ensuring that we have two wheels, not one, on the financial system, that is, a well-developed capital market as well as a sound banking sector.

    The global financial crisis of 2007–09 has delivered further important lessons. In particular, while Asian economies have benefited tremendously from export-led growth centered on US and European markets in recent decades, this will no longer be possible. US consumer spending may remain sluggish for many years to come. The sovereign debt crisis in Greece and other European countries with associated problems of the eurozone may pose a significant risk to the European economic recovery. Thus, Asian economies need to adapt their development strategies to this more difficult environment and to take up the challenge of “rebalancing growth” toward greater reliance on domestic and regional demand.

    In this post-crisis context, more developed and integrated capital markets could play an important role in Asia. They could facilitate the mobilization of Asian savings for Asian investment. In particular, well-developed, liquid, transparent capital markets can mitigate “information asymmetry” between investors and corporations. The suppliers of funds seek attractive investment opportunities but cannot tell between good and bad projects. The users need funding for their good investment projects but cannot convince investors that the projects are good.

    The stakes are high. East Asia's infrastructure needs are estimated to amount to some US$8.3 trillion between 2010 and 2020. And the rapidly ageing populations in the advanced parts of Asia—like Japan, the Republic of Korea, Hong Kong, China and Singapore—also need attractive long-term investment opportunities within Asia for their wealth diversification and post-retirement consumption.

    The crisis has also provided greater momentum to plans to reform and expand social protection programs. Rapid ageing and large, informal labor markets pose fundamental challenges for Asian social protection, while making the role of the state even more essential. In this context, capital markets could provide opportunities for institutional investors like pension funds and insurance companies.

    Capital Market Reform in the Past Decade

    Since the Asian financial crisis, Asian regulators and policymakers have taken positive steps to restructure their banking systems and to deepen their capital markets. Apart from Asia's international financial centers—like Hong Kong, China, Singapore and Japan—the relatively sophisticated markets in the Republic of Korea and Malaysia have been more successful in deepening their domestic bond markets and in further strengthening their equity markets, making them more internationalized than others. And while other countries in the region are lagging behind, overall bond market size in emerging East Asia compares favorably with bond markets in economies with similar per capita GDP.

    Thanks to domestic reforms and collective regional efforts, emerging East Asia's bond market has come a long way since the Asian financial crisis in terms of market depth, and regulatory and market infrastructure. Asian bond markets have been performing well through the global financial crisis; government fiscal stimulus packages contributed to growth in government bonds, and corporate bonds have also grown. And the bond markets are attracting investor interest, particularly by foreigners due to Asia's fast economic recovery, the prospect of monetary policy tightening, and potential for currency appreciation.

    Notwithstanding the impressive development and deepening of emerging East Asia's bond markets, there exists room for further development of corporate bond markets and improving market liquidity. There is ample recognition that Asian capital markets have the potential to become a significant financial hub if they were more integrated. Currently, they remain small and fragmented, and lack the liquidity and capacity to compete globally. By integrating, they would be able to strengthen financial intermediation and build the capacity to channel the large amounts of regional savings into productive investment in the region.

    The Asian financial crisis provided the impetus for greater political will for regional financial integration through such initiatives as the bilateral swap arrangements of ASEAN+3 countries under the Chiang Mai Initiative (which expanded into meaningful multilateral swaps under the Chiang Mai Initiative Multilateralization), the Asian Bond Markets Initiative of ASEAN+3 and the EMEAP-led Asian Bond Funds.

    Within ASEAN, the ASEAN Capital Markets Forum (ACMF), comprising the chief executives of the ASEAN securities regulators, has made significant progress. It paved the way for subregional financial integration under the ASEAN Economic Blueprint 2015 by focusing on harmonized or mutually recognized standards across the ASEAN region and drawing up an Implementation Plan to Promote the Development of an Integrated Capital Market in ASEAN for adoption by the ASEAN Finance Ministers in 2009. Nevertheless, further progress towards regional financial market integration will not be easy because ASEAN member countries are at different stages of economic and financial development and will always face the dilemma of opening up for greater integration versus protecting domestic interests.

    Core Issues of Capital Market Reform

    To understand why reform is so tough, we must go back to basics. Capital markets help efficient resource allocation through transparent price discovery, sound risk management and good corporate governance. The recent global financial crisis has reminded us that financial markets will collapse when the links between good governance, institutions, property rights and incentives are broken. Resource allocation became distorted through excessive leverage, especially in the banking system. Price discovery became inflated through loose money and aggressive credit creation, as interest rates, asset prices and risk spreads no longer reflected sound fundamentals. Risk management became convoluted by over-reliance on flawed risk models with incomplete and flawed data. And corporate governance, the glue that holds together institutions, became unsound through excessive greed, bad incentives and even capture by vested interests.

    The latest global financial crisis has renewed the focus on corporate governance issues, especially in the areas of risk management, oversight, accountability, executive remuneration practices and transparency (Cooper, Chapter 8).

    No crisis is identical, although there are common elements. The current global financial crisis needs to be viewed not only as a crisis of governance, but also as a network crisis from the regulatory perspective (Sheng, Chapter 2). It is a network crisis because deregulation, financial reforms and technological and financial innovations have created highly interconnected markets. When one market fails, the contagion spreads rapidly as markets have not only become interconnected, but also interdependent and interactive (or pro-cyclical). The fundamental flaw in our inability to predict the recent crisis was its complexity and the fact that we are so specialized and compartmentalized in our disciplines and jurisdictions that we failed to see the globalized markets as one single network, whereas laws, regulations, and policies are applied within national boundaries. A major lesson is that policymakers need to strengthen top-down macro-prudential supervision, complemented by bottom-up micro-prudential supervision.

    It seems that while the global financial crisis appear to be over, we may be in for a long haul of slower growth. Although there is wide support from the international community for major reforms of regulatory regimes, the appetite for domestic reforms can easily recede with time. In this race to the top for tighter regulations so as to restore trust in financial markets, we are reminded (Grenville, Chapter 10) that while formal rules and regulation are an integral part of the framework for market discipline, they are costly to administer and could introduce distortions. The more comprehensive the rules are, the easier it is to cast blame on the rule-makers when things go wrong, as surely they will. Restoring trust in markets by more regulations may therefore be the wrong starting point. What should be restored is caution and skepticism, whether it is realistic to expect markets to change due to regulation alone. What is more realistic is to rely on rules of good governance and to encourage managers and investors to be accountable and responsible for their own decisions.

    As governance is about behavior, the current global crisis is already triggering considerable changes in the way we think about the behavior of markets, the proper role of regulation and the importance of co-ordination within and between governments. Behavioral change comes only with a change in mind-set and the restoration of good value systems.

    The Future Direction of Capital Market Reform in Asia

    It is one of the tragedies of history that the advanced economies did not learn much from the lessons of the Asian financial crisis of 1997–98. The sophisticated policymakers and regulators failed to appreciate that their financial markets had transformed profoundly into highly leveraged, interconnected and systemically fragile wholesale systems. How to disentangle the spaghetti is another story, as the debate continues to rage over whether to limit the size of banks and the scope of their activities.

    Likewise, Asia must not waste lessons learnt from the recent global financial crisis in resetting its compass for future capital market reform, even though the crisis did not originate in Asia. Changes will have to take place against dramatically different macroeconomic conditions in the next decade. Economic growth in emerging Asia will not be as rapid as pre-crisis as export demand from the advanced economies will remain subdued. Given the deleveraging in the international financial markets, foreign direct investment will be more selective, going more into the larger population markets in Asia where there is better growth potential. Hence, there will have to be greater reliance on domestic demand to spur growth. How to stimulate domestic consumption and reduce domestic imbalances remains a major challenge to Asian policymakers (Kawai and Lee, 2010).

    Looking forward, fiscal capacity will be restrained after implementing the large stimulus packages of 2008–09. Monetary policy will be preoccupied with the delicate operation of exit strategies as quantitative easing and zero interest rate policies will have to be unwound eventually. Portfolio flows will be volatile, as carry trades will increase or reverse, depending less on market fundamentals, but more on policy measures or errors and market sentiment. Within Asia, asset price bubbles are already forming and when they deflate, there will be problems of non-performing loans and financial distress in selected sectors and economies.

    At the 11th OECD–ADBI Roundtable on Capital Market Reform in Asia, held in Tokyo on 22–23 February 2010, one key topic was on how global reforms and growth rebalancing would impact capital market development in Asia. No one could have predicted that three years after the failure of Lehman Brothers in September 2008, the credit rating of the United States would be downgraded, whilst Europe would become engulfed by a fiscal crisis.

    Although there was greater confidence that Asian growth would recover, there was greater uncertainty on what ultimate architecture would be adopted in the Asian capital markets, considering that the advanced market models have been found to be wanting. Indonesian Bapepam Chairman Fuad Rahmany expressed the view in one Roundtable that international regulatory standards should not forget that emerging markets are still fairly rudimentary and that the new standards should focus on the fundamentals, rather than sophisticated models and rules that are too advanced for most emerging market institutions to adopt.

    There was a sense that there can be no “one-size-fits-all” approach towards financial market standards or reform. Whilst there is greater inclusiveness in terms of emerging market representation in the Group of Twenty (G20), there is no consensus on the right way forward for financial market reforms at the country level.

    Asians must find their own solutions. Asian capital markets will have to adopt variable geometry and speed in attaining greater regional and global integration through domestic and international efforts.

    The underlying reason why capital market reform is so hard without crises is that it strikes at the political economy of institutional reform. Reform is tough because it creates winners and losers, or at least the losers can easily hold the system to hostage by refusing to change. Reformers will have to persuade everyone that the reforms are likely to bring greater future benefits—or lower future losses—than maintaining the status quo. Because the benefits of the future are uncertain or unpredictable, there is always bias towards maintaining the status quo. But the status quo is perhaps the riskiest position to be in, when the whole world is changing before our eyes. To the extent that crises change the payoffs to market players, regulators, average people on the street and all other stakeholders, the hope is that reform is easier now.

    Financial sector reform is more an art than a science, because it will fundamentally shape changes in the real economy. Thus, unless capital market reformers understand the political economy and also the architecture of the real economy, they will not be able to persuade others of the need for change. Globalization has changed the ball game, because for small emerging markets, shocks are more likely to emanate externally than from within. Given the fierce competition globally for resources and human talent, most emerging markets face tough choices in attaining international standards. With the advances in technology and financial engineering, no emerging market is likely to be able to reform or change without external expertise and resources. There is greater international pressure for conformance with international regulatory and accounting standards. At the same time, there is considerable resistance to opening up because of fear that new competition would destroy domestic interests.

    No change can be totally externally enforced. The best reforms are those that are owned and implemented locally because it is shrewd to understand that self-reform is always superior to crisis or externally driven change.

    As Asia now looks beyond the global financial crisis, its new challenge is to rebalance its economies away from excessive reliance on US and EU export markets towards more domestically and regionally driven growth. More efficient and integrated capital markets can make a major contribution to this objective through, in particular, facilitating greater investment of Asia's high savings within the Asia region.

    And as the recovery from the global economic crisis has demonstrated, Asia's position as the world's growth leader is likely to be reinforced in the years ahead. This high growth potential brings with it great investment opportunities. Better developed capital markets would provide a better range of instruments for international investors to help finance and accelerate this growth.


    The editors are very grateful to all the paper contributors for supporting the project and reviewing, updating, and rewriting their papers for publication. Hopefully, this will be the first of a series of publications that will advance the literature of financial market reform for academics, market participants, and policymakers alike. We would also like to thank the many presenters and Roundtable participants whose papers we are unable to include in this pilot project.

    We are particularly grateful to Dr. Mario Lamberte, Worapot Manupipatpong, John West, and their colleagues at the ADBI for their contributions to the production process of this book, and Mrs. Tan Wai Kuen, Professor Kwek Kian Teng and Ms. Theresa Chan for their hard work in making this book possible.

    Kawai, Masahiro and Jong-WhaLee, eds. 2010. Rebalancing for Sustainable Growth: Asia's Postcrisis Challenge. Manila and Tokyo: Asian Development Bank and Asian Development Bank Institute.
  • About the Editors and Contributors


    Masahiro Kawai is Dean of the Asian Development Bank Institute (ADBI). Prior to joining ADBI, Dr Kawai served as Head of ADB's Office of Regional Economic Integration (OREI) and Special Advisor to the ADB President. He also worked as Chief Economist for the World Bank's East Asia and the Pacific Region, and as Deputy Vice Minister of Finance for International Affairs of Japan's Ministry of Finance. He has served as a consultant at the Board of Governors of the Federal Reserve System and at the International Monetary Fund, a Special Research Advisor at the Institute of Fiscal and Monetary Policy in Japan's Ministry of Finance, and a visiting researcher at the Bank of Japan's Institute for Monetary and Economic Studies and at the Economic Planning Agency's Economic Research Institute. Dr Kawai has published a number of books and numerous articles on economic globalization, and regional financial integration and co-operation in East Asia. He received his PhD in Economics from Stanford University.

    Andrew Sheng, a chartered accountant (FCA, 1972) by profession, is currently the Chief Adviser to the China Banking Regulatory Commission. In addition to this position, he holds several academic, statutory and corporate sector appointments in Malaysia, India and Qatar: Adjunct Professor at the Graduate School of Economics and Management, Tsinghua University, Beijing; Pro-Chancellor of the Universiti Tun Abdul Razak, Malaysia; Adjunct Professor and Third Holder of the Tun Ismail Ali Chair at the Faculty of Economics & Administration, University of Malaya; member of theMalaysian National Economic Advisory Council (NEAC), the Governing Council of the International Centre for Education in Islamic Finance (INCEIF), the Advisory Council of the Iskandar Regional Development Authority and the International Advisory Panel of the Labuan Offshore Financial Services Authority (LOFSA); Director of Khazanah Nasional; Board Member of Sime Darby Berhad, International Advisory Council Member of the China Investment Corporation; Board Member of the Qatar Financial Centre Regulatory Authority, Board Member of the Advisory Council of the National Institute of Securities Market, India (NISM) and member of the Advisory Board of the Emerging markets Forum. Sheng has been Co-Chair of the OECD-ADBI Roundtable Conference on Capital Market Reform in Asia since 2005.

    A central banker by training, he was an Assistant Governor and Chief Economist of Bank and Insurance Regulations at Bank Negara Malaysia. Between 1989 and 1993, he was Senior Manager, Financial Sector Development Department, World Bank. In Hong Kong, China, he was the Deputy Chief Executive responsible for the Reserves Management and External Affairs Departments of the Hong Kong Monetary Authority, followed by seven years as the Chairman of the Securities and Futures Commission of Hong Kong, China from October 1998 until his retirement in September 2005. His span of economic and financial experience are captured in his book From Asian to Global Financial Crisis, published by the Cambridge University Press in 2009.


    Lorraine Allan is Senior Adviser in the Corporations and Financial Services Division of the Australian Government Treasury. From 2006 to 2009 she was the Financial Supervisory Commissioner in the Cook Islands. Prior to that, she worked in a number of Federal Government departments and agencies, including the Treasury, the Australian Prudential Regulation Authority and the Department of Finance. She graduated from the University of Melbourne and the University of Canberra.

    Zarinah Anwar is the Chairman of the Securities Commission Malaysia, a position held since April 2006. She was the Deputy Chief Executive of the Commission since December 2001. Zarinah is also the Vice Chairman of the Emerging Markets Committee of IOSCO, Chairman of the Malaysian Venture Capital Development Council (MVCDC) and the Capital Market Development Fund (CMDF). She is a member of the Labuan Offshore Financial Services Authority (LOFSA), the Financial Reporting Foundation (FRF), the Malaysia International Islamic Financial Centre (MIFC), and the board of directors of the Malaysian Institute Integrity (IIM) and the Asian Institute of Finance Malaysia. She was the Chairman of the ASEAN Capital Markets Forum for a term from 2006 to 2008. Prior to joining the Commission, Zarinah was the Deputy Chairman of Shell Malaysia. A lawyer by profession, she graduated with a LLB (Hons) from the University of Malaya.

    Hans J. Blommestein is Head of the Bond Market and Public Debt Management Unit of the Organization for Economic Co-operation and Development (OECD). He is also currently the Coordinator of the OECD Working Party on Public Debt Management, Manager of the OECD Project on African Debt Management and Bond Markets, and Member of the Technical Advisory Group (TAG) of the World Bank's Debt Management Facility. His areas of expertise cover the financial services industry, public debt management, pension finance and risk management. For a number of years, he was the manager of the Financial Affairs Division of the OECD. Prior to joining the OECD, Dr Blommestein was the CSCE Professor of Economics, Department of Public Administration and Public Policies, University of Twente, Enschede, Netherlands between 1991 and 1995, and, before that, he was the Deputy Head of the International Monetary Affairs Department of the Dutch Ministry of Finance. During his tenure with the Ministry of Finance, Dr Blommestein was a member of the OECD Committee on Capital Movements and Invisible Transactions (CMIT) and a temporary alternate Member of the Monetary Committee of the EC. He has also been a visiting scholar in the research department of the International Monetary Fund and has participated as Advisor in IMF missions to Central and Eastern Europe and the former Soviet Union, Dr Blommestein obtained his PhD in Economics from the Free University of Amsterdam.

    Adrian Blundell-Wignall is Special Advisor to the Secretary General for Financial Markets (and Deputy Director for Financial and Enterprise Affairs) at the Organization for Economic Co-operation and Development (OECD) since February 2007. An Australian by nationality, he held several senior positions in Australia between 1991 and 2002. He was the Director, Head of Equity Strategy Research, Citigroup (Australia, Ltd) in 2002; Executive Vice President, Head of Asset Allocation, BT Funds Management in 2000; Head of Derivative Overlays and Levered Products at Bankers Trust Funds Management in 1993; and in 1991 he was the Head of the Research Department at the Reserve Bank of Australia. Dr Blundell-Wignall has a PhD in Economics (1st Class Honours) from Cambridge University, UK. He has written extensively on financial markets and monetary policy for leading journals and books, including broker analyst studies and reports. Among his achievements is being Founder and Chairman of The Anika Foundation, a rapidly growing and high profile charity which provides education research scholarships in the area of adolescent mental health, depression awareness and suicide.

    Jeremy Cooper is the Chairman of Retirement Income at Challenger Limited, a leading Australian annuities provider. Prior to this role, he chaired the Australian Federal Government's Review into the Governance, Efficiency and Structure and Operation of Australia's Superannuation System, which reported in June 2010. Before the review, he was the Deputy Chair of the Australian Securities and Investments Commission (ASIC) from mid-2004, and his responsibility was to oversee ASIC's teams in the financial services sector. A lawyer by profession (LLB [Hons], SF Fin and FAICD), Cooper was a partner of Australian law firm, Blake Dawson, where he practised principally in mergers and acquisitions and corporate advice.

    Jenny Corbett is the Executive Director of the Australia–Japan Research Centre, Crawford School of Economics and Government and Professor at the Australian National University, and the Associate Dean for Research in the College of Asia and the Pacific, ANU. She is also Reader in the Economy of Japan at the University of Oxford and a Research Fellow of the Centre for Economic Policy Research (CEPR, London). She has a PhD in economics from the University of Michigan. Her research centers on current macroeconomic and financial policy issues in Japan, regional financial integration and trade in financial services. She currently has an Australian Research Council (ARC) Linkage Project grant on barriers to services trade and works with the newly established ERIA (Economic Research Institute for ASEAN and East Asia) on regional services trade. In 2007 she contributed to the Asian Development Bank's flagship study on regional integration. Since 2008 she has been contributing to research projects on regional integration for ERIA and she is a member of ERIA's Research Institute Networks Experts Group. She is a member of the Australia–New Zealand Shadow Financial Regulatory Committee. Her recent publications include an edited volume with Magnus Blomstrom, Fumio Hayashi and Anil Kashyap on Structural Impediments to Growth in Japan, Chicago University Press for NBER, 2003 and another with Anne Daly, Hisa Matsushige and Dehne Taylor, Laggards and Leaders in Labour Market Reform: Comparing Japan and Australia, London: Routledge, July 2009. In 2006 she received a Commendation from the Foreign Minister of Japan for contribution to Australia–Japan relations presented by the Embassy of Japan in Canberra during the Australia–Japan Year-of-Exchange.

    Gordon de Brouwer is the Associate Secretary of the Domestic Policy Group of the Department of the Prime Minister and Cabinet, Australia. In this position, he oversees the development and coherence of economic, productivity and social policies. From July 2008, he was the Executive Coordinator, and then from March 2009, the Deputy Secretary of the Economic Division of the Domestic Policy Group. Dr de Brouwer has held senior positions in the Australian Government Treasury (1987, 2002 and 2004–08), the Reserve Bank of Australia (1991–99) and the Australian National University (2000–03), focusing on economic analysis and policy. He has extensive practical experience in monetary and fiscal policy, financial markets and institutions, international finance and co-operation, Asian economies and regionalism, and aspects of climate change policy. He has a PhD in Economics from the Australian National University and is an Adjunct Professor at the Crawford School of Economics and Government.

    Xinghai Fang is Director General of the Financial Services Office (FSO), Shanghai Metropolitan Government, and his responsibility is to transform Shanghai into a leading international financial center. Dr Fang was educated in the PR China and in the United States, where he received his BS in engineering from Tsinghua University in 1986 and his PhD in Economics from Stanford University in 1993. Upon graduation from Stanford, he was recruited as an economist/investment officer under the Young Professionals Program of the World Bank Group. At the World Bank, his main responsibilities were macroeconomic management and financial sector development in South-east Asian countries. In 1998, he left the World Bank to return to PR China where he was the Director of Office of Group Coordination, China Construction Bank; Member and Secretary General of the Management Committee, China Galaxy Securities Company; and Deputy Chief Executive Officer of the Shanghai Stock Exchange, before assuming his current position. Dr Fang has played a significant role in the reform of PR China's banking and securities market. He has published several books on PR China's financial sector and economic reform. A leading voice for market-based reform and financial opening, he has written frequently on the Chinese economy for leading business publications such as Caijing, the Financial Times and the Wall Street Journal.

    Stephen Grenville works as a consultant on financial sector issues in East Asia. He is a Director of AMP Capital Investors Limited, a Visiting Fellow at the Lowy Institute for International Policy, and an Adjunct Professor at the Crawford School, Australian National University. Between 1982 and 2001, Dr Grenville worked at the Reserve Bank of Australia, for the last five years as Deputy Governor and Board member. Before that, he was with the Organization for Economic Cooperation and Development in Paris, the International Monetary Fund in Jakarta, the Australian National University and the Department of Foreign Affairs in Canberra (including postings in Indonesia and Viet Nam). Dr Grenville obtained a PhD in Economics from the Australian National University.

    Lynn Hew was an Associate of the Market Conduct Policy Division, Market and Business Conduct Department at the Monetary Authority of Singapore in 2003.

    Mohammad Nizam Ismail was the Deputy Director and Head of the Market Conduct Policy Division, Market and Business Conduct Department at the Monetary Authority of Singapore in 2003.

    Hans-Helmut Kotz was a Member of the Executive Board of Deutsche Bundesbank until April 2010, and was in charge of Financial Stability, Markets as well as the Statistics Departments. He is now based at the Center for Financial Studies, Goethe-University Frankfurt where he is a Senior Fellow. He continues to teach Money and Credit (in the Diploma program) and the Economics of European Integration (in the Master of Finance Program) at Freiburg University, where he is an Honorary Professor in the Faculty of Economics and Behavioral Sciences; he also has teaching engagements in Paris and Harvard University. Professor Kotz, is a member of the boards of several organizations and contributes to their publications: the Konstanz Seminar on Monetary Theory; the Program Council; the Center for Financial Studies, Frankfurt; the Conseil d'Orientation; Revue d'Economie Financière, Paris; the Advisory Board, Blekinge Institute of Technology, Sweden; the Conseil Scientifique; Centre Cournot pour la Recherche en Economie, Paris; and the Scientific Council of the Hamburg World Economic Institute (HWWI), Hamburg. Between 2002 and 2006 he has been appointed, in a personal capacity, to the European Parliament's Panel of Financial Experts. Professsor Kotz has written and edited a number of books.

    Stephen Lumpkin is a Principal Administrator in the Financial Affairs Division of the OECD Directorate for Financial and Enterprise Affairs. His current responsibilities include drafting analytical and policy-oriented papers for the OECD Committee on Financial Markets and for the Insurance and Private Pensions Committee, with regard to the organization and functioning of financial markets, including mergers and acquisitions and other microstructure issues, institutional investors, market oversight, and regulatory design, structure, and conduct. Prior to joining the OECD Secretariat, he worked for many years as a staff economist in the Research and Statistics Division of the Board of Governors of the Federal Reserve System, covering a range of areas including analysis and research in the fields of financial and monetary economics, with special emphasis on U.S. payments systems, the Treasury securities market and the open market operations of the Federal Reserve System, and the analysis of trends and developments in the primary and secondary mortgage markets. Lumpkin holds a PhD in Economics from Washington University, St. Louis, Missouri.

    Worapot Manupipatpong is Director for Capacity Building and Training at the Asian Development Bank Institute (ADBI). Prior to joining ADBI, he worked for the ASEAN Secretariat in Jakarta, Indonesia, as a Principal Economist and Director where he coordinated several regional co-operation in finance initiatives (the ASEAN Surveillance Process, the Chiang Mai Initiative and the Asian Bond Markets Initiative), statistics, infrastructure, science and technology. He also coordinated regional integration initiatives such as the Roadmap for Financial and Monetary Integration of ASEAN, the ASEAN Economic Community, the East Asia Free Trade Agreement (Phase II), and the Comprehensive Economic Partnership in East Asia. Prior to joining the ASEAN Secretariat, he worked in the banking and corporate sectors and served as a lecturer in Finance at Sasin Graduate Institute of Business Administration in Thailand. He earned his PhD in Finance from the Wharton School, University of Pennsylvania.

    M. S. Mohanty is a Division Head in the Monetary and Economic Department of the Bank for International Settlements (BIS). Prior to joining the BIS, he worked at the Reserve Bank of India for many years in the capacity of director of several research and policy analysis divisions. He has published extensively on monetary policy, foreign exchange intervention, fiscal policy, banking systems and bond markets in emerging market economies. He was educated in India and the United Kingdom, obtaining a Master of Arts in Analytical and Applied Economics from Utkal University (India) and Master of Science in fiscal studies from the University of Bath (United Kingdom).

    Thirachai Phuvanatnaranubala is the Minister of Finance of Thailand. Prior to his current position, he was the Secretary-General of the Securities and Exchange Commission of Thailand from December 2003 until August 2011. Before his appointment to the Securities and Exchange Commission, he was the Deputy Governor of the Bank of Thailand. During his 26-year career in the Bank of Thailand, his responsibilities covered financial institution supervision, monetary policy and financial markets, including the enactment of many laws related to financial services. Other positions held by Thirachai include the Board of Experts for Interpretation of Tax Code, the Thai Asset Management Corporation (an entity set up to resolve the non-performing loans problem of the Thai banking system), the Thai Institute of Directors, the Financial Institution Policy Board of the Bank of Thailand and the National Credit Bureau Co., Ltd. He also serves on various committees set up by government agencies to study and make recommendations on policy issues. Thirachai studied Economics at the London School of Economics and Political Science and thereafter joined Price Waterhouse, London, and qualified as a Fellow of Chartered Accountants at the Institute of Chartered Accountants in England and Wales.

    Patrick Slovik is an Economist/Policy Analyst at the Organization for Economic Cooperation and Development (OECD). He previously worked as a Statistician/ Research Analyst at the European Central Bank and as a private sector development consultant at the United Nations Development Programme. He is a graduate in International Economics and Finance from Chulalongkorn University and in Finance, Banking and Investment from the University of Economics in Bratislava.

    Philip Turner has been with the Bank for International Settlements (BIS) since 1989. He is currently the Deputy Head of its Monetary and Economic Department, where he is responsible for economics papers produced for central bank meetings at the BIS. He has written extensively on the economics of banking crises, starting from a joint paper with Morris Goldstein on “Banking Crises in Emerging Economies” (1996). Between 1976 and 1989, he held several positions in the OECD, including head of division in the economics department. In 1985–86, he was a visiting scholar of the Bank of Japan's Institute for Monetary and Economic Studies. He read Economics at Churchill College, Cambridge University and has a PhD from Harvard University.

    Atchana Waiquamdee was the Deputy Governor of the Bank of Thailand for six years until October 2011. Prior to her appointment as the Deputy Governor, she served as the Senior Director (1998–2004) and the Assistant Governor (2004–2006) of the Bank's Monetary Policy Group with primary responsibilities in economic research, macroeconomic assessment, and monetary policy recommendation. Before joining the Bank as the Senior Director, Dr Atchana spent nearly twenty years in academia and the private sector. She was at Thammasat University in Bangkok from 1981 to 1991; and was also a senior research fellow at the Thailand Development Research Institute (TDRI), the country's premier think tank. In 1991, she left Thammasat to head research at General Finance & Securities Plc., a private investment bank, where she stayed until the end of 1997, with her last position as the company's managing director of Research and Business Development. During 1994–1996, she served as an Economic Advisor to the Deputy Prime Minister and to the Commerce Minister. In 1998, she worked briefly as Research Director at the Financial Sector Restructuring Authority and a consultant to TDRI. She holds a PhD in Economics from the University of Michigan and a Bachelor's (First class Honor) and Master's degrees in Economics from Thammasat University.

    Gert Wehinger is an Economist at the Organization for Economic Co-operation and Development (OECD), where he has been holding assignments in the Economics Department (1999–2003) and the Directorate for Financial and Enterprise Affairs (since 2003). He is currently working for the OECD Committee on Financial Markets and is the organizer of the OECD Financial Roundtables and editor of the OECD Journal Financial Market Trends. Previously, he was assistant professor in economics at the Vienna University of Economics and Business Administration (WU Wien, 1990–1995) and later joined the research division of the Austrian central bank (Oesterreichische Nationalbank, Vienna, 1995–1999), continuing his lectureships at WU Wien and the University of Applied Sciences, Wiener Neustadt, Austria. He also taught at the Paris-based American Graduate School of International Relations and Diplomacy (2001–2003). He is the author of various publications, including papers and articles on financial market issues, book reviews and a book on high and chronic inflation and stabilization policies. He holds an Economics Master's degree (Karl-Franzens-University Graz, Austria, 1988) and a Doctoral degree (WU Wien, 1995) and is a graduate of the Institute for Advanced Studies, Vienna (1990).

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