Transcript The Development of Global Financial Centres

“The Development of Global Financial Centres”
by
Datuk Seri Panglima Andrew L.T. Sheng
Tun Ismail Ali Professor of Monetary and Financial Economics
Faculty of Economics and Administration
University of Malaya
The Puteri Pacific Hotel, Johor Bahru
Thursday, 18 May 2006
1
Contents
1. Role of Financial Centre in National and
Global Context
2. How Hong Kong defended and enhanced
position as largest international financial
centre ex-Japan
3. Key issues in building IFCs
4. Potential for Malaysia
2
Cities and Financial Centres

Efficiency of economies all about efficiency of
urban centres, e.g. New York vs. Mexico City

Cities are knowledge centres


Art, culture, politics, trade, news

Must have rich hinterland, linked by superior
communications, e.g. river, sea, road, rail, air
Exchanges and Technology

Pre-telegraph, 100+ US exchanges,

Advent of radio, 22 (1935)

Advent of computers - 7 (1995)
3
Financial Markets are Networks
Metcalfe’s Law - “The value of a network goes up as
the square of the number of users”



Economies of Scale

Supply side - Biggest producer wins

Demand side - Biggest buyer determine standards
Critical Mass

Aggregation of local knowledge and skills

Best combination of skills create economies of
scale

Critical Mass = Clusters = skills concentration
Supply Chain Management - where in the chain is real
value?
4
Changing Structure of Financial
Markets
• Financial Innovation

Evolution of derivatives, options &
futures
• Technology & Telecommunications


Global 24 hours markets

From market place to market space
Deregulation

Lines of traditional businesses blurring
5
Finance is Derivative of Real Economy,
Value defined by information + Knowledge
• Commoditization means that low-knowledge
products and services have high competition, low
prices and are easily duplicated and therefore
“taken away”.
• Markets are all about “branding” and “high
knowledge content products”. Knowledge
content needs governance - value creation needs
total inputs at production, design, packaging and
marketing levels.
• Network Economy demonstrates “winner-takeall” situation. Financial markets converge on key
hubs, e.g. New York taking American time zone
business, London taking European time zone
business
6
Reliable Information
Essential for Quality of Markets
• Quality Markets require real time and reliable
information to make sound risk management
decisions in highly volatile environment
• High quality information requires :
–
Good accounting and auditing standards
–
Reliable & timely statistics/reporting processes
–
Infrastructure to process information for making decisions
critical to competitive success
• Bad accounting = distorted information = poor
decision making = bad risk management
 financial crisis
7
Hierarchy of Information
Wisdom
Knowledge
Value
Information
Data
•Robert
W Lucky, “Silicon Dreams: Information, Man and Machine”, St Martin’s Press, 1991.
8
Sequencing and Hierarchy of Domestic
Financial Markets
Asset-backed
securities and
derivatives
Corporate bond and
equity markets
Government bond market
Treasury bill market and
foreign exchange markets
Money market
Source: Karacadag, Sundrarajan & Elliot, 2003
9
Market Discipline
Key for Corporate Governance
•
Quality of markets depends on quality of
corporate governance in listed companies
•
Corporate governance is about three key
disciplines:
– Self discipline - ethics & fairness
– Regulatory discipline - a level playing field
– Market discipline - competition & accountability
• Asia traditionally stressed first two disciplines at
the expense of market discipline
• The key to capital market development is to
promote and enforce these disciplines based on
reliable information
10
Efficient Markets require:
•
Free Entry of Participants and Products
•
High degree of transparency/low information
asymmetry
•
Efficient Operations by solvent participants under
international rules of the game at low transaction costs
•
Absence of incentive distortions or bias that moves
markets in unhealthy direction e.g. moral hazard or
subsidies
•
Efficient regulation at low regulatory costs;
•
Orderly exit of insolvent participants [obsolete products
and insolvent operators create huge dead costs on
market]
•
 Accountability [feedback and exit for bad players]
11
Malaysia already has balanced financial sector
(% of GDP)
Bank Deposits
Equity Market
1990
2004
1990
2004
1990
2004
China
75.6
177.8
n.a.
40.3
8.5
29.4
Hong Kong
205.6
299.3
107.2
486.3
1.5
28.3
India
31.4
51.1
10.4
48.4
19.9
31.7
Indonesia
29.8
38.9
4.4
24.9
0.4
24.1
Japan
100.0
120.5
121.7
73.2
85.9
181.6
Korea
32.6
68.8
48.2
56.1
34.1
74.9
Malaysia
52.1
88.7
100.7
152.6
69.8
89.3
Singapore
74.3
104.4
95.8
149.0
27.8
58.6
Thailand
56.8
79.7
29.2
72.3
9.7
38.9
Germany
53.8
96.7
21.7
42.2
51.6
80.3
UK
87.8
115.0
85.2
123.0
36.8
43.9
US
59.6
58.8
57.5
131.6
122.0
157.2
Source : World Bank Financial Sector Dataset, February 2006
Bond Market
12
Case Study: Hong Kong as IFC after
1998 Stock Market Intervention



August 1998: HK Govt intervened with US$15 billion
in stock market to stop hedge fund speculation
Immediate action:
 Rebuild Market Credibility
 Close Gaps with London/New York:
better regulation, more products, greater liquidity
 Build Stronger Links with China and Asia:
more research, better marketing, closer
connections
Medium and long-term:
 Greater integration with Pearl River Delta to
compete against Yangtze River Delta/Shanghai
 Wall Street in Asia
13
Strengths of Hong Kong

Low Transaction Costs




Low Exchange Rate Risk and Uncertainty




Rule of law with advanced property rights system
Free and open economy with world-class financial
system
Low tax rate and simple tax system
Fully convertible currency
Exchange rate linked firmly to USD
Fully open and deep capital market
Next to Rapidly Growing Southern China



Potential for lowering production costs
Potential for expanding turnover
Potential for servicing new wealth
14
Understanding Strengths and
Weaknesses

Pre-WTO, Hong Kong had premium as external
window for China and East Asia, when access to
markets and knowledge was poor

Franchise is eroding when China gains access to
WTO and through Web

However, biggest value added is “Localization of
Global Knowledge” - add value by being:

Preferred financial centre in Asian Time Zone

Best logistics centre in ATZ

Importing external skills [e.g. marketing,
finance, technology and tailoring for local
markets
15
Learning from Competitors

Lessons from Shanghai and Singapore:




Lessons from Japan, Taiwan and other Asian
economies:




Clear vision, sound strategy and detailed blueprint
Effective coordination among local and central
governments and business
No economic borders to residents or outsiders
Political stability key to stable growth
Protectionist policies only delay pain
People and capital move faster than policy changes
Implications for Hong Kong:


Economic and financial integration of Hong Kong
(finance), Southern China (manufacturing) and Taiwan
(technology).
Hong Kong could provide the best service for Mainland,
Taiwan, Asia and international business
16
Competition & Co-operation
Strategies

Hong Kong domestic market alone too small to
have critical mass

In areas where HK has critical mass, play
dominant player strategy


e.g. Financial services - improve quality to
capture value in Supply chain management
In areas where HK has no critical mass, cooperate
and affiliate

e.g. Move manufacturing where there is cheap
labour

e.g. cooperate with others to achieve
economies of scale [airports, power,
environment]
17
Markets are a function of Liquidity &
Friction Costs

The greater the friction cost, the more the market
moves to areas with lower friction costs

The lower the friction cost, the higher liquidity

Friction costs depend on the following:
Time [speed to market]

Factor costs [Labour, Capital, Taxes]

Infrastructure costs - how good is physical
utilities?

“Government costs” - are rules & policies
costly?

Barriers to Entry - competition policy
18
Structural Costs Compared
HKSAR
China
US
Japan
Production Costs
Transaction Costs
Infrastructure Cost
Saving Rate
Expected Investment
Return
High
Low
High
Medium
Low
High
Medium
High
High
Low
Low
Low
High
Medium
Medium
High
High
Medium
Low
Speed to market
“Government Costs”
Barriers to Entry
Slowing
Low
Rising
Improving
High
Lowering
Good
Low
Low
Slow
High
High
Low
19
Hong Kong’s 1999 Three-Pronged
Reform Programme
1.
Market reform: SEHK and HKFE were
demutualized and merged to form the
HKEx in Mar 2000, listed on 27 Jun 2000
2.
Infrastructure reform: fully electronic
web-friendly world-class high tech
infrastructure by 2002/2003
3.
Legislative reform: Securities and
Futures Ordinance passed in 2001
Complete Corporate Governance and
Enforcement overhaul 2001-2005
20
Hong Kong – Largest Market in Asia
ex-Japan, 1988-2006 (US$ bn)
end 1988
end 2000
end 2001
end 2002
end 2003
end 2004
end 2005
end Mar 2006
1,400
1,200
Market Cap (US$ bn)
16.3x
1,000
N/A
6.2x
800
8.0x
600
4.1x
400
12.3x
200
0
China
Hong Kong
Australia
Remark: x = increase from end 1988 to end Mar 2006
Sources : WFE and IFC
Taiwan
Korea
Singapore
21
Capitalization and Turnover of Major Markets
(end Mar 2006, US$ bn)
Japan
Hong Kong
Australia
Korea
India
Taiwan
China
Singapore
Malaysia
Thailand
Indonesia
Philippines
US (NYSE)
US (Nasdaq)
UK
Germany
Remarks:
Sources:
Market
Cap
4,775
1,207
858
752
678
490
441
294
195
135
100
45
14,072
3,787
3,253
1,400
change over
Mar-05
35.9%
43.3%
18.3%
55.1%
86.7%
11.5%
4.8%
29.3%
11.6%
9.0%
29.0%
26.9%
11.4%
15.6%
16.2%
19.0%
Market
Turnover
5,186
543
707
1,389
354
639
452
134
51
96
37
7
16,041
10,616
6,164
2,126
change over
Mar-05
58.1%
29.4%
26.1%
128.8%
39.1%
9.7%
13.4%
34.8%
-9.9%
-11.5%
6.8%
31.6%
33.0%
17.1%
18.4%
38.7%
Turnover - for the 12 months ending Mar 2006, P/E ratio - end Mar 2006
Due to different reporting rules & calculation methods, turnover figures are not entirely comparable
P/E ratio for China is the weighted average of A and B shares markets
WFE and websites of various exchanges
P/E
ratio
23
13
18
11
20
18
18
14
15
9
20
14
23
39
13
16
22
Financial Sector Masterplan (FSMP)
• A 10-year plan (2001 – 2010) outlining strategic focus & actions, with 119
recommendations and encompassing 6 sectors:
•
•
•
Banking
Insurance
Islamic Banking and Takaful
•
•
•
Development Financial Institutions
Labuan IOFC
Alternative Modes of Financing
• Objectives
•
•
•
Create a more efficient (services at lowest cost), effective (broad range of services)
& stable (minimal systemic risks) financial system
Meet socio-economic agenda in an effective & efficient manner
Meet international commitments & prepare domestic financial institutions for global
competition
• Implementation Phases
•
Phase I (3 years)
- Enhance capacity of domestic institutions to compete
- Enhance financial infrastructure
•
Phase II (3-4 years)
- Intensify competitive pressure in the domestic financial sector
- Level playing field with incumbent foreign banks
•
Phase III (after 7 years)
- Assimilate into global arena
- Introduce new foreign competition
Source: Bank Negara Malaysia
23
Capital Market Masterplan (CMP)
• A 10-year plan (2001 – 2010) outlining strategic focus & actions, with 152
recommendations to address 4 key Malaysian capital market challenges:
•
•
•
•
Lingering effects of the regional financial crisis
Meeting the needs of a growing economy
Heightened global competition for business and investment
Changing demands on the regulatory framework and authorities
• Objectives
•
•
•
•
•
•
To be the preferred fund-raising center for Malaysian companies
To promote an effective investment management industry and a more conducive
environment for investors
To enhance the competitive position and efficiency of market institutions
To develop a strong and competitive environment for intermediation services
To ensure a stronger and more facilitative regulatory regime
To establish Malaysia as an international Islamic capital market centre
• Implementation Phases
•
Phase I (3 years)
Strengthen domestic capacity, and develop strategic and nascent sectors
•
Phase II (2 years)
Further strengthen key sectors and gradually liberalise market access
•
Phase III (5 years)
Further expansion and strengthening of market processes and infrastructure towards
becoming a fully-developed capital market, and enhancing international positioning in
areas of comparative and competitive advantage
Source: Securities Commission Malaysia
24
Global Competitiveness: Malaysia’s Standing
Countries
IMD Ranking1
WEF Ranking2
2005
2004
2005
2004
1
2
3
9
11
21
28
29
27
59
1
6
2
4
12
23
16
35
29
58
2
28
6
10
5
12
24
17
36
74
2
21
7
14
4
9
31
29
34
69
United States
Hong Kong
Singapore
Australia
Taiwan
Japan
Malaysia
Korea, Rep.
Thailand
Indonesia
Source: World Economic Forum (WEF), 2005/06; Institute for Management Development (IMD), 2005
1 IMD
World Competitiveness Ranking
2 WEF
Growth Competitiveness Index Ranking
25
Malaysia’s Competitiveness Trend
Category
IMD World Competitiveness Ranking
2001
2002
2003
2004
2005
Economic
Performance
9
29
25
16
8
Government
Efficiency
24
19
14
16
26
Business
Efficiency
31
24
18
13
25
Infrastructure
35
31
31
30
34
Overall
28
24
21
16
28
Source: Institute for Management Development (IMD), 2005
26
Global Competitiveness:
Government Efficiency Perspective
Public Finance
Countries
Employment
in Public
Sector
Government
Budget
General Govt.
Expenditure
Collected
Total Tax
Revenues
United States
Hong Kong
23
9
40
12
29
10
21
4
Singapore
1
19
15
10
Taiwan
13
37
16
9
Japan
2
54
18
24
15
46
22
15
Korea, Rep.
2
14
17
23
Thailand
11
16
3
13
Indonesia
17
26
8
7
Malaysia
Source: Institute for Management Development (IMD), 2005
27
Global Competitiveness:
Government Efficiency Perspective
Institutional Framework
Countries
Government
Public
Bribing and
Transparency
Bureaucracy
Decision
Service
Corruption
United States
16
18
19
23
20
Hong Kong
47
25
9
5
9
Singapore
1
3
12
1
6
Taiwan
30
33
10
9
29
Japan
41
51
30
28
28
Malaysia
22
22
24
25
36
Korea, Rep.
33
34
20
22
33
Thailand
5
32
28
16
44
Indonesia
55
56
47
51
55
Source: Institute for Management Development (IMD), 2005
28
Global Competitiveness:
Government Efficiency Perspective
Openness
Countries
Public
Access to
International Foreign
Protectionism Sector
Capital
Transactions Investors
Contracts
Market
United States
26
28
31
15
9
Hong Kong
1
4
1
1
1
Singapore
7
11
13
23
15
Taiwan
31
33
35
43
34
Japan
43
58
43
50
36
Malaysia
50
53
44
54
47
Korea, Rep.
35
39
38
37
35
Thailand
42
27
42
53
40
Indonesia
57
47
49
52
50
Source: Institute for Management Development (IMD), 2005
29
Global Competitiveness:
Government Efficiency Perspective
Competition and Regulations
Countries
Government
Subsidies
Subsidies
Price
Regulation
Controls
Intensity
Ease of
Doing
Business
United States
13
33
16
23
4
Hong Kong
1
2
4
1
1
Singapore
3
4
24
5
2
Taiwan
15
16
27
18
8
Japan
21
46
31
21
30
Malaysia
17
37
53
22
17
Korea, Rep.
4
13
51
45
45
Thailand
19
19
44
30
19
Indonesia
33
56
57
51
54
Source: Institute for Management Development (IMD), 2005
30
Malaysia’s Competitiveness Disadvantages
WEF Growth Competitiveness Index Rank
WEF Business Competitiveness Index Rank
24
23
Notable Competitiveness Disadvantages (position out of 117 countries)
Macroeconomic Environment
Company Operations and Strategy
Government surplus/deficit – 96
Nature of competitive advantage – 54
Government debt – 49
National Business Environment
Public Institutions
Extent of bureaucratic red tape – 101
Irregular payments in public utilities – 47
Centralisation of economic policymaking – 80
Irregular payments in exports & imports – 45 Others
Irregular payments in tax collection – 36
Freedom of press – 83
Organised crime – 31
Telephone/fax infrastructure quality – 45
Technology
Prevalence of trade barriers – 38
Gross Tertiary enrolment – 63
Informal Sector – 37
Telephone lines – 61
Reliability of police services – 37
Foreign ownership restrictions – 37
Source: World Economic Forum (WEF), 2005/06
31
Global Competitiveness:
Stock Market Perspective
(% of GDP)
Value
Traded
(US$ per
capita)
Listed
Domestic
Companies
Stock
Market
Index
1
10
2
2
53
1
9
1
3
10
40
Singapore
13
27
5
14
16
38
Taiwan
15
15
9
10
14
56
Japan
31
2
25
16
5
52
Malaysia
25
26
3
34
11
39
Korea, Rep.
37
16
31
23
7
47
Thailand
17
33
21
35
18
58
Indonesia
39
42
51
56
21
12
Capitalisation
Stock
Markets
Financing
(US$ bn)
United States
2
Hong Kong
Countries
Source: Institute for Management Development (IMD), 2005
32
Global Competitiveness:
Stock Market Perspective
Countries
Shareholders’
Rights
Financial
Institutions
Transparency
Cash
Flow
United States
10
16
9
11
27
7
15
Hong Kong
25
8
1
1
21
1
16
Singapore
23
13
4
6
35
13
28
Taiwan
48
32
7
21
1
3
22
Japan
54
49
20
33
41
35
29
Malaysia
34
40
34
40
51
25
31
Korea, Rep.
46
35
28
35
53
24
36
Thailand
39
30
21
32
50
32
34
Indonesia
51
51
53
55
54
59
60
Source: Institute for Management Development (IMD), 2005
Corporate FactorDebt
ing
Adaptability
Ethical
of
Practices
Companies
33
World Bank: Doing Business Global Index
Start business
no. of
procedures
Getting licence
(days)
Cost of license
(% of income
per capita
Registering
Property (days)
Singapore
3
129
24
9
Australia
2
121
12.3
32
Hong Kong
5
230
38.5
83
Korea
12
60
232.6
11
Thailand
8
147
17.3
2
China
13
363
126
32
Taiwan
8
235
250.9
5
Malaysia
9
226
82.7
143
Country
Source: World Bank, 2006
34
Bottom Line: Malaysia already has the
Plans + HR + Infrastructure to be IFC
• Its not about Vision, Mission or Infrastructure
• Advantage 1: We have spent RM3 billion and 10 years to
make Labuan a viable Offshore Financial Centre
• Advantage 2: KL has the lifestyle and infrastructure to be
attractive Asset Management Centre for Asia
• Advantage 3: Malaysia is already leading Islamic
Banking Centre
• Advantage 4: Over 15,000 Malaysian professionals in
Hong Kong alone, excluding Singapore and elsewhere global talent is recruitable
• Advantage 5: Malaysian costs are lower than other
regional financial centres.
EXECUTION and IMPLEMENTATION is key to success.
35
Finance is not a zero-sum game in
Asia. Malaysia can offer niche
services at lower costs
• Malaysia can be Global Islamic Financial Centre watch the competition.
• KL can be Asset Management Centre for Asia Labuan is already booking centre.
• We can be outsource subcontractors in
accounting, secretarial, cartoons, sound, film,
book production etc to high cost centres.
• Need focused implementation and constant
benchmarking to international standards, plus
partners from all over the world.
• Outsourcing and Services business needs
widespread and stable broadband.
36
Development and Growth is a Process:
To have Sustainable Growth, you need a Process to Manage
Development Process
• Development is complex, because those who face most
problems are those who are closest to the problem [the
poor, SMEs, private sector, grass root public servants].
• It’s not about QUANTITY OF GROWTH, BUT QUALITY.
• In the past, development has been top-down. Aid, not
trade. Today, we understand that we have to use market
forces to lead growth.
• Therefore, the key to sustainable growth is to have
inclusive, transparent and accountable processes to
manage the growth process.
• This is a co-operative venture, not public-private
competition. This includes using national + global talent
37
and skills.
ABC of Knowledge Economy
ACADEMIA - Holders of Knowledge, but bogged
down in teaching. Segmented from market or
government
BUSINESS - Close to market, but do not use
Academia for R&D and sees Civil Service as
hindrance rather than partner
CIVIL SERVICE - Holder of massive public
information and resources that can help growth.
Currently, rarely uses Academia for R&D and
policy work. Focuses more on regulation rather
than BUSINESS facilitation.
Competing internationally means that
transactions costs of doing business and “time to
market” in Malaysia must come down. Its all
about teamwork. We have to operate as truly
Malaysia Inc.
38
Change Management is Tough
• Clarity of Role and Objectives
• Rules have no meaning unless they are
enforced
• It’s the outdated processes that must change
• Prioritization of “Doables”
• Getting staff and public buy-in
• The whole world is adjusting - pain is
inevitable
• Deliver small winners to achieve credibility the big winners will take care of themselves
39
Focus and Prioritize
“Pick important problems and fix them
and tell everyone”..
“The essence of the [regulatory] craft lies in
picking the right tools for the job, knowing
when to use them in combination, and having
a system for recognizing when the tools are
inadequate so that new ones can be
invented.”
Professor Malcolm Sparrow,
The Regulatory Craft, Harvard University.
40
Fixing the Problem

Old-style regulators:
“Nitpicking, unreasonable, unnecessarily
adversarial, rigidly bureaucratic, and
incapable of applying discretion sensibly.”

It is often the obsolete and defective
systems, not the people, that create
problems.

Change is the constant. Be prepared to
change.
41
Enforcement of Laws, not Laws
per se, is critical
OECD - “Too often, legislators issue laws as
symbolic public action, rather than as
practical solutions to real problems.
Regulatory inflation erodes the effectiveness
of all regulations, disproportionately hurts
small and medium businesses, and expands
scope for misuse of administrative discretion
and corruption.”
42
Implications for Johore
• Johore has huge advantage by being next
to Singapore, which is already an IFC.
• Key is connectivity: reduction of friction
costs to and from JB - Singapore. Stable
broadband enables outsourcing from
Singapore to Johore.
•
In RMK9, notice that MRT is being
considered. Can MRT link to Singapore be
considered to enable flow of people and
ICT pipes?
43
Implementation of 9th Plan will focus
on Southern Johor Economic Region
•RM12.2 bn allocated to develop SJER,
building up Nusajaya, Danga Bay
waterfront, a transport hub and high speed
rail link from JB to Kuala Lumpur.
•6,480 ha of land will be developed in
Nusajaya, housing Johor’s new
administrative centre, universities, theme
park and industrial/residential estates
•Logistic hub will include Tanjung Pelepas,
Senai Airport and Pasir Gudang.
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FIRST CLASS SERVICE
• As small open economy, Malaysia has already
reached Middle-Income Status. We are caught in
middle bulge. Not big enough to have economies of
scale, but not too small to be marginalized.
• Korea learnt key lesson from Asian crisis: the
governance structure of DEVELOPED COUNTRY
status is very different from EMERGING MARKET
status. Korea paid for this lesson.
• Go for quality of service, not quantity. Go for value,
not size. Quality of governance at both public and
private sector key to success.
• To reach 2020 DEVELOPED economy status, we are
already benchmarked against global standards. 45
Thank you
Questions to
[email protected]
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