Ladies and Gentlemen,
1. It is a great pleasure for me to welcome you to this
conference on "East Asian Financial Markets - The Next Frontier".
It is also an honour for the Hong Kong Monetary Authority to be
co-hosting this event with the World Bank to discuss the findings
of its latest Regional Financial Sector Flagship Study and the
future development of the financial markets in Asia. The World Bank
has been very supportive of economic development in the region and
I particularly welcome the focus in its recent work on financial
markets. Here in Asia, considerable efforts have been made at the
individual economy and regional levels to further develop our
financial markets. Much remains to be done, however, so it is with
great anticipation that I look forward to the discussions,
conclusions, and recommendations that will emerge during the coming
two days.
2. The title of the conference, "East Asian Financial Markets -
The Next Frontier" is, I believe, very fitting. Each part of it
carries an important message. The focus on financial markets
reminds us that a well-functioning financial system is increasingly
important for economic development. This is not only the case for
economies like ours here in Hong Kong where financial services
constitute a substantial proportion of GDP, but equally for
economies that rely on other sectors, be they manufacturing,
mining, or agriculture, for the bulk of economic activity.
3. There are many reasons for this. First, a well-functioning
financial system helps allocate capital to the most productive
individuals, firms, and sectors through the process of
intermediation between households that engage in savings and
entrepreneurs who require funds to carry out investment projects.
Second, broad financial markets permit risk sharing and
diversification, thereby reducing the exposure of investors to
idiosyncratic risks. Third, structured financial products allow the
transfer of risk to entities that are most capable of bearing it.
This makes it possible for economic agents to offload risks that
they are not well equipped to deal with and specialize in
activities which constitute their comparative advantage. Last but
not least, a financial system makes it possible to shift purchasing
power across time as individuals build up financial assets while
they are working to sustain a comfortable living standard in
retirement.
4. Considerable progress has been made by many regional
economies in revamping and strengthening the financial markets
since the Asian financial crisis. However, there is still a general
lack of diversity in the channels of financial intermediation, with
a significant over-reliance on the banking system. In spite of the
brisk primary and secondary market activities in a few stock
exchanges in the region, capital markets, in particular the bond
market, remain rather underdeveloped. There is much more to be
done, therefore, to further develop the financial markets by the
regional jurisdictions.
5. The second part of the conference title - 'The New Frontier'
- also contains an important message. Globalisation and the
revolution in information technology have fundamentally altered the
dynamics of international finance. Such changing dynamics raise
concerns among many of us about the manner in which a sizable
portion of gross savings in Asia finds its ways into financial
obligations of the developed markets before they are recycled back
to Asia. As the capital inflows into the region tend to be more
volatile, the recycling process may have implications on monetary
and financial stability in the region. Another aspect of the
dynamics of international finance is contagion. World interest
rates have until recently stayed at record lows. In search of
higher yields, hedge funds and other institutional investors have
scoured the world for assets generating higher returns, driving up
asset prices and driving down credit spreads. As the interest rate
outlook has become uncertain, fund managers may be reassessing the
risks of emerging market assets, as reflected in the recent
correction in world equity and commodity prices. A sudden exit of
capital could leave those economies with weaker financial systems
even weaker, with spillover effects on other parts of the region.
All these developments highlight the need to explore and develop a
new frontier of regional cooperation in Asia, particularly for the
development and integration of financial markets, and build a
bigger market to cope with the changing dynamics of international
finance.
6. The development of deep and sound financial markets must
start at home. Only the relevant authorities within each
jurisdiction have the ability to establish a regulatory and
institutional framework that will permit and encourage the growth
of a vibrant private financial sector. All of us in the region
understand this and are working individually to improve our
domestic markets, albeit from very different starting points, which
explains the differences that still exist among us in the size and
sophistication of our financial markets. But the development of the
financial sector in each economy is limited by the size of our
domestic markets unless we open our borders to international trade
in financial services and the establishment of foreign financial
institutions on our territories. Banking and finance are subject to
economies of scale and scope, so the expansion of the effective
market size is necessary to make the provision of financial
services more efficient.
7. In addition to taking advantage of economies of scale and
scope, the case for integrating financial markets across
jurisdictions is simply an extension of the case for developing the
markets within each economy. The gains from financial
intermediation across jurisdictions, from international risk
diversification and risk sharing, and from access to financial
instruments to fund pension schemes are multiplied when we allow
individuals, enterprises and fund managers access to each other's
markets in addition to our own.
8. Clearly there is a case for linking markets together in order
to be better prepared to withstand possible turbulence in global
financial markets. Speaking from experience, there is, I believe,
other things being equal, a non-linear relationship between
vulnerability to financial instability and the size of financial
markets. The very small financial markets are not attractive to
international capital because of the lack of liquidity and so there
is little volatility generated by the inflow and outflow of
international capital. At the other extreme, where financial
markets are very large relative to international capital, sudden
movements of the latter will only lead to ripples, which are not
big enough to cause any financial-stability concerns. The most
vulnerable financial markets, other things being equal, are the
medium-sized ones, which have adequate liquidity to attract
international capital but which are small enough for short-term
trends to be dictated by large operators looking for short-term
gains. Unfortunately, many financial markets in the region fall
into this category.
9. Of course, merely increasing the size of a financial market
cannot be a substitute for sound macroeconomic policies as a guard
against volatile capital flows. Indeed, I believe that the
authorities in the region are committed to prudent monetary,
exchange-rate, and fiscal policies. But I am also convinced that
expanding the effective size of Asian financial markets through
greater integration across jurisdictions, can make our economies
better able to absorb the volatility of international capital as
effectively as the US and European markets. It is therefore
heartening to observe that several initiatives for promoting the
development of the financial markets in the region are bearing
fruit. A notable example is the Asian Bond Fund (ABF) initiative
championed by EMEAP central banks. The ABF has been created
specifically to encourage the development of bond markets in Asian
economies, with the ultimate goal to create an integrated regional
market. In developing the ABF, we have achieved a few firsts,
including the introduction of the first exchange-traded bond index
fund in Asia, arranging for two Asian markets to allow
exchange-traded funds for the first time, and opening up the
renminbi inter-bank bond market for the first time to foreign
investors. The process leading up to the launch of Asian bond funds
has shown that cooperation between central banks in the region can
successfully deal with a number of technical and conceptual issues,
which bodes well for the further development of this initiative as
well as potential initiatives in other areas of financial market
development.
10. The successful experience of ABF has laid a strong
foundation for enhanced regional cooperation by central banks to
promote financial integration in Asia. There seem to be at least
three aspects in which further development of central bank
cooperation may be useful. The first concerns the continuity of the
research and discussion processes in the respective areas of
central bank cooperation. Continuity helps keep track of the
emphases and priorities of regional members and promotes
effectiveness of the ongoing collaboration efforts. The second
aspect concerns the need to follow through cooperative initiatives
that have been agreed upon by central banks in the region. The
follow-through can be done effectively through intensified, and
perhaps more conveniently organised, dialogue and information
sharing. The third aspect concerns the approach towards central
bank cooperation. There are many areas of common areas of interest
among regional central banks, including monetary and financial
stability, payment systems and reserve management, to name just a
few. In short, there is a need to organise central bank cooperation
in a more focused, coordinated and dedicated manner in order to
pursue our common interests.
11. Today, with the World Bank experts and policy-makers,
regulators and private-sector participants of the region gathering
here, the conference will offer us a good opportunity to exchange
views on what is needed to further promote regional cooperation and
financial integration in Asia. We will also cover more specific
subjects including the broadening and deepening of securities
markets, the development of securitization and derivative markets,
and the role of the contractual savings and asset management
industries in the development of capital markets. As I have
suggested at the outset, advances on these fronts will contribute
to the overall gains from financial development through more
effective financial intermediation, more efficient risk sharing and
risk management, and increasing opportunities to make transactions
between time zones smoother. Each requires modifications in
domestic regulations and institutions as well as significant
coordination between jurisdictions. I believe that progress in one
area will be reinforced by progress in the others in a virtuous
circle. I am impressed by the extensive work carried out by the
World Bank in its Flagship study, and I once again thank them for
their contribution to the economic development in the region
through this work.
12. Ladies and Gentlemen, with these brief opening remarks I
hope I have conveyed how important I believe the topic of our
conference is, and how pleased I am to see you all here to
participate in the event. I wish all participants productive
discussion in the coming two days. Thank you.
