ASEAN Financial and Capital Markets —Policies and Prospects of Regional Integration—

By Satoshi Shimizu Senior Economist Economics Department Japan Research Institute

Summary 1. Asia is moving toward increasing economic integration in the run-up to the establishment of the ASEAN Economic Community at the end of 2015. This process includes the acceleration of intraregional financial integration through the liberalization of capital transactions. There has been considerable progress toward the development of financial and capital markets in ASEAN. However, the markets are still relatively small and vulnerable to external shocks. Moreover, this situation has been responsible for the continuing existence of restrictions on capital transactions, which have impeded progress toward regional financial integration. That is why regional financial integration has moved forward more slowly than integration at the real economic level. From this perspective, efforts to move toward regional financial integration as a way of creating an integrated and functionally efficient regional financial system are centering primarily on the liberalization of financial services and capital transactions, the development of settlement systems, and the development and integration of capital markets. 2. There is wide variation in the both types of financial systems in ASEAN countries and also in their level of development. To achieve regional integration, member countries will therefore need to strengthen the competitiveness of their domestic financial and capital markets and financial institutions, and to improve their financial regulations and other systems. As far as banks are concerned, the specific areas in which efforts are needed include the improvement of operating efficiency, the development of new business, human resource development, and the facilitation of inter-bank mergers. Stock and bond markets will also require improvements, including increases in the numbers of issuers and investors, human resource development, the development of financial products, the development of market infrastructure, systems and regulations, and the improvement of liquidity in secondary markets. The expansion of domestic investors will also be extremely important from the perspective of coping with capital flows. Growth in the numbers of issuers and investors involved in cross-border transactions can also be expected to accelerate market expansion and development. 3. A key requirement when developing financial systems is to ensure that systems contribute to economic development. Funds need to be allocated to productive purposes, and a particular priority within the ASEAN region at present is infrastructure finance. To accelerate intraregional financial integration, it will be necessary not only to strengthen each country’s markets, but also to implement measures to facilitate integration, such as the development of cross- border investment products, the modification and harmonization of regulations and systems, and the liberalization of capital transactions. 4. Intraregional financial integration also leads to escalating competition and is unlikely to bring benefits to all participants. The adjustment of national interests within the region and support for less developed countries will therefore be important priorities. To minimize the risks of intraregional financial integration, sound macro-level policy management and the development of domestic financial and capital markets, as well as the creation of crisis management systems, must be treated as prerequisites for the liberalization of capital transactions. The most important priority in the immediate future will be to raise the standard of financial systems in each country. This will facilitate intraregional financial integration and ensure that markets are ready to absorb capital flows from outside of the region. There is strong demand for funds in ASEAN countries, especially for infrastructure development, and the region will inevitably remain reliant on external funds to some extent.

2 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Introduction markets and bond markets, and the outlook for integration in each of these areas, as well as some of Capital flows into developing countries in Asia the issues that exist at present. Part 3 describes ap- and other regions have expanded rapidly in recent proaches that could contribute to economic devel- years. In addition to the benefits that these capital opment and facilitate regional financial integration flows have brought, there have also been signifi- by describing specific examples, such as infra- cant negative consequences, including increased structure finance and funds passport schemes. Part public and private sector debt, and greater volatil- 4 begins with a retrospective analysis of Europe’s ity in capital flows. In May 2013, indications that experience of financial integration and the lessons the United States was about to change its quan- that can be learned from it. This is followed by titative easing policy triggered a shift in capital some important approaches to regional financial inflows into developing countries, which had pre- integration. viously been expanding rapidly. There are no indi- Financial systems in ASEAN countries are cations that developing countries are likely to face small by international standards, and there is also a crisis situation in the foreseeable future. How- considerable variation among countries within the ever, there is a renewed awareness of the need to region. Progress toward regional financial inte- be prepared for risks. gration would bring many benefits, including the This situation requires a multifaceted response reduction of reliance on external funds because of from developing countries. First, they need to the increased circulation of funds within the re- strengthen their liquidity support systems for gion, an enhanced presence for the region result- emergencies, mainly by accumulating foreign cur- ing from economies of scale, and improvements rency reserves and expanding bilateral and mul- in the standard of regional financial systems and tilateral currency swap agreements. Second, they the quality of financial services. However, the must to ensure appropriate macroeconomic policy achievement of integration in the ASEAN region management. Third, they need to improve their is likely to take considerable time because of the domestic financial systems. need to reconcile national interests, and reduce All of these measures are used in response to in- disparity within the region by assisting relatively creases in capital inflows, but restrictions on capi- less developed countries with financial technol- tal transactions also merit consideration as a way ogy. of curbing inflows. In Asia, however, efforts are Financial integration in ASEAN basically focusing on the achievement of ASEAN financial means the expansion of local banks into other integration with the establishment of the ASEAN countries in the region, and an increase in cross- Economic Community at the end of 2015. For this border securities transactions. These changes reason, the best strategy would be to accelerate would require the liberalization of capital trans- regional financial integration by moving forward actions and the adjustment and harmonization of with the liberalization of capital transactions, financial regulations, systems and market infra- while working to reduce reliance on capital from structure. This opening up would also entail risks, advanced countries and build robust markets. and sound macro-level policy management and In this article we will examine the current state the development of domestic financial and capi- of financial systems in ASEAN countries and ana- tal markets are prerequisites for the liberalization lyzes some of the challenges that confront them as of capital transactions. To minimize the risks, it they move toward regional integration. Part 1 pro- would also be necessary to develop and harmonize vides a detailed analysis of the content of regional financial regulatory and supervisory structures, a financial integration in ASEAN. Part 2 looks first process that would require sustained efforts at the at the strategies needed to achieve regional finan- regional level. This balancing of integration and cial integration. This is followed by an examina- risk management would be a key priority. tion of the situation in the banking sector, stock One of the most important requirements is to

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 3 ensure that as many participants as possible can tensified, and in October 2003 agreement was benefit from regional financial integration. This reached at the 9th ASEAN Summit in Bali to es- requires deeper debate among participants about tablish an ASEAN Community by 2020. It was how integration should be approached. The most decided that the three core components of this important priority at present is likely to be mea- community would be the Political-Security Com- sures to raise the level of financial systems in munity, the ASEAN Economic Community (AEC) member countries. Attention to this aspect will and the Socio-Cultural Community. enhance the achievability of ASEAN financial in- At the 13th ASEAN Summit, which was held tegration, which is a major policy goal, while also in Singapore in November 2007, members de- helping to build robust financial systems and decided to bring forward the creation of the ASEAN velop structures to accommodate capital inflows Community to 2015. This decision resulted from from outside of the region. ASEAN countries have growing awareness of several factors, including a a voracious demand for funds, especially for in- rapid rise in economic interdependence within and frastructure development, and they will inevitably beyond ASEAN, and the increased urgency of ef- continue to rely on funds from outside of the re- forts to reduce economic disparity within ASEAN gion to some extent. through the establishment of the AEC. It was at this time that ASEAN adopted the AEC Blueprint as its roadmap for regional integration. In Decem- 1. Moves toward the Establish- ber 2008 ASEAN was given legal status with the ment of the ASEAN Economic adoption of the ASEAN Charter. Community and ASEAN Finan- The AEC Blueprint identifies ① a single mar- cial Integration ket and production base, ② a highly competitive economic region, ③ equitable economic develop- (1) Creating the ASEAN Economic ment, and ④ full integration into the global econ- Community omy as the four key characteristics of the AEC. These four characteristics are broken down into 17 core elements and 176 targets (Fig. 1). It was In this section we will examine policy moves further decided that 2009, 2011, 2013 and 2015 toward the formation of the ASEAN Economic should be the milestone years for measuring prog- Community and ASEAN financial integration. We ress in each of these areas. will begin with an overview of the ASEAN Eco- Unlike the EU’s single market, the AEC will nomic Community. be neither a tariff union nor a full common mar- ASEAN was formed in 1967 by Indonesia, ket. However, the creation of a single market and Malaysia, the Philippines, Singapore and Thai- production base will bring a number of benefits, land. These five original members were subse- including economies of scale and more efficient quently joined by Brunei in 1984, Vietnam in production networks. Countries at varying stages 1995, Laos in 1997, Myanmar in 1997, and Cam- of economic development will be included in the bodia in 1999. While continuing to achieve eco- AEC, and those countries will be able to play dif- nomic growth, ASEAN members have sought to ferent roles within production networks. Market strengthen ASEAN as a group by working active- and production base integration will lead to the ly to overcome a variety of conflicts of interest, expansion of intraregional trade and investment and by moving toward economic integration. The (Fig. 2). ASEAN’s giant consumer market will benefits of economic integration are likely to in- also be attractive to investors. clude improved international competitiveness and While the establishment of the AEC will bring enhanced attractiveness to investors outside of the major benefits, however, it will also require region. changes, including the removal of barriers to in- Enthusiasm for integration has gradually investment and the trade in goods and services, and

4 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Fig. 1 Blueprint for the ASEAN Economic Community

1. Single Market and Production Base 2. Highly Competitive Economic Region ① Free flow of goods ⑧ Competition policy ② Free flow of services ⑨ Taxation ③ Freer flow of capital ⑩ Electronic trading ④ Free flow of skilled labor ⑪ Consumer production ⑤ Free flow of investment ⑫ Intellectual property rights ⑥ Foodstuffs, agriculture, forestry ⑬ Infrastructure development ⑦ Priority sectors for integration

3. Regional Commitment to Equitable Economic 4. Full Integration into the Global Economy Development ⑯ Consistent approach to external economic ⑭ SME development relations (FTAs, etc.) ⑰ Increased participation in global supply ⑮ Initiative for ASEAN Integration networks

Source: Asian Development Bank Institute [2014]

Fig. 2 Intraregional Export Ratios of rations by individual countries. Nor are there any Asian Countries compulsory mechanisms or penalties to ensure (%) that targets are reached.

80 Despite these issues, ASEAN seems to be mak- 69.5 70 ing gradual progress toward the creation of the 60.5 61.4 AEC. However, differences in legal and regula- 60 55.5 52.6 tory systems and the processes used to establish 50 46.3 45.5 laws and regulations are causing bottlenecks in 40 36.2 33.1 the AEC formation process. Progress toward the 30.5 30 liberalization of service transactions and achieve- 20 ment of free flows of skilled labor appears to be

10 slow at present. Furthermore, the scorecard items

0 are not specific, and the scores achieved may not Primary Intermediate Capital Consumer Total fully reflect the actual progress made. goods goods goods goods While the establishment of the AEC at the end 2000 2010 of 2015 will be an epochal event, it can also be Source: Asian Development bank, Asian Economic Inte- seen as simply a milestone on a longer journey. gration Monitor, Jul. 2012 ASEAN’s current targets after almost 50 years of history are macroeconomic stability, the reinforcement of international competitiveness, the reduc- the harmonization of numerous regulations. Other tion of disparity, environmental protection and the essential prerequisites include the development of maintenance of centrality. Having introduced a enhanced infrastructure to improve the efficiency single currency, the EU is now working ultimately of trade, and competitive financial services. The toward political union through a top-down pro- ASEAN countries will need to work very hard to cess. In contrast, ASEAN has adopted a Blueprint achieve the many targets listed in the AEC Blue- that calls for development through a bottom-up print. process. While there is continuing debate about According to the scorecards used to monitor the appropriateness of the contents of the Blue- progress under the Blueprint, ASEAN is moving print, what is clear is that ASEAN needs to deep- forward steadily toward the achievement of these en its integration in order to cope with escalating goals. However, ASEAN has no central organiza- competition from developing countries, especially tion, and scorecard monitoring is based on decla- China and India.

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 5 (2) Outline of ASEAN Financial Inte- domestic financial services and capital transac- gration tions, and the harmonization of regulations. In other words, ASEAN aims to achieve integration ① Motivation for Regional Financial In- through liberalization and harmonization. Finan- tegration, the Overview Depicted in the cial and capital markets in individual ASEAN AEC Blueprint are small, and this approach will allow them to We will look next at ASEAN financial integra- achieve economies of scale. In addition, competition, which is being pursued as part of the AEC tion among markets within the region will help to Blueprint. Although there has been significant strengthen financial systems and financial institu- progress toward the improvement of financial and tions. This will in turn improve the efficiency with capital markets in ASEAN, the markets are still which funds are allocated and ensure that appro- relatively small and vulnerable to external shocks. priate financial services are available for a wide This is reflected in the existence of restrictions on range of domestic and cross-border economic capital transactions, which have been an obstacle activities. With these achievements, the aim of to regional financial integration. That is why prog- regional financial integration is to reduce depen- ress toward regional financial integration has been dence on external capital and financial systems slow compared with economic integration (Fig. and to allocate regional savings to regional invest- 3). The integration of labor, goods and money is ment. commonly linked together, but there are particular However, the achievement of financial integra- problems in the area of money, including the dif- tion in Europe has taken over 50 years, and ba- ficulty of differentiating capital flows, and the risk sically there appears to be no reason why Asia of capital outflows. The development of policies should approach the process in a hasty and slip- to allow regional financial integration will there- shod way. Because of the variation in the eco- fore involve considerable effort. nomic and financial development stages of Asian The basic plan for ASEAN financial integration countries, ASEAN’s position is that priority must calls for the integration of all ASEAN financial be given to national sovereignty and preparations and capital markets through the liberalization of to deal with the risks that will result from integration, and that variation in the pace of integration Fig. 3 Intraregional Investment Ratios in different countries is acceptable, especially be- of Asian Countries tween the original five members and Brunei, Cam- (%) bodia, Laos, Myanmar and Vietnam (BCLMV). Financial systems in ASEAN countries are gen- 35 33.0 30.1 erally small, and the level of development varies 30 28.1 28.5 27.0 from country to country. Approaches to regional 25 financial integration will need to take these char- 20.8 20.4 19.8 acteristics into account. 20 17.9 16.7 15.3 The ASEAN financial integration initiative is 15 12.0 based on the Roadmap for Monetary and Finan- 10 cial Integration (RIA-Fin), which was endorsed at

5 the 2003 ASEAN Finance Ministers Meeting (Fig. 4). The plan outlined in the AEC Blueprint on this 0 2001 2007 2009 2010 2011 2012 basis is described below. These items have been (Calender years) identified as steps required for the creation of a Long-term bonds Stocks single market and production base. The goal is to Notes: Investment sources: Hong Kong, Indonesia, South create an integrated regional financial system ca- Korea, Malaysia, the Philippines, Singapore, Thai- land Investment recipients: The above countries pable of functioning efficiently. plus China and Vietnam Source: IMF, Coordinated Portfolio Investment Survey First, financial services liberalization (FSL) will

6 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Fig. 4 The ASEAN Integration Process

ASEAN VISION 2020 (declared in 1997) 4 long-term goals ① Harmony in ASEAN, ② partnership in dynamic development ③ A community of equitable societies, ④ an outward-looking ASEAN ↓ Bali Concord Ⅱ(declared in 2003) Establishment of an ASEAN Community consisting of the triple pillars of economic (RIA-FIN) cooperation, political and security cooperation, and socio-cultural cooperation by ⇒ 2020 ↓ AEC 2015 Blueprint (agreed to in 2006) (FSL, CMD, CAL) Target date for establishment of economic community brought forward to 2015 ⇒ ↓ ACMF Implementation Plan 2015 (adopted in 2009) Concrete strategy for realization of Blueprint

Source: Singh [2009] be achieved after the development and stabiliza- be deemed to have been achieved. tion of the financial sector. Countries can liber- Third, as with financial services liberalization, alize as soon as their preparations are complete, ASEAN will proceed cautiously with capital ac- and the liberalization process will be based on count liberalization (CAL). The plan emphasizes respect for each country’s policy goals and level the need to avoid the risks of liberalization while of economic and financial development. The spe- ensuring that all member countries share the ben- cific action required is the achievement of some efits. The plan calls specifically for liberalization degree of liberalization by 2015. The ultimate tar- in areas that will help to promote direct invest- get year is 2020, by which time countries should ment and capital market development. However, have achieved large-scale deregulation regarding progress under the plan is likely to be extremely all of their financial service sectors. This process gradual, since the goal for all items is to “progres- is to be based on a liberalization plan consisting sively liberalize, where appropriate and possible.” of a list of “pre-agreed flexibilities.” The lists that The ASEAN Secretariat is monitoring progress make up the plan have been compiled in stages toward financial integration using a scorecard sys- covering the periods to 2015 and 2020 and from tem. It has also commissioned the Economic Re- 2020 onwards. This means that full liberalization search Institute for ASEAN and East Asia (ERIA) may not be achieved by 2020. Moreover, the defi- to assess the plan. According to ERIA, the key nition of “full liberalization” is not entirely clear. components of financial integration should be Second, the following targets have been set con- implemented from 2015 onwards. However, the cerning capital market development and integra- establishment of the AEC at the end of 2015 is tion (CMD) in the period to 2015: ① facilitation certain to provide a strong impetus for progress of harmonization of rules concerning bond issu- toward financial integration. ance, information disclosure and sales of securities, ② mutual recognition of qualifications, edu- ② Liberalization of Finance Services cation and experience of market professionals, ③ In April 2011, the central bank governors of increased flexibility with regard to language use ASEAN countries formulated the ASEAN Finan- and enabling laws for securities issuance, ④ reas- cial Integration Framework (AFIF). This frame- sessment of withholding tax systems relating to work provides an overall picture of ASEAN’s ap- bonds, and ⑤ market efforts toward the linkage of proach to financial liberalization and integration securities exchanges and bond markets, including as it works toward the establishment of the AEC. cross-border issuance. It is not entirely clear what The aim is to create a semi-integrated financial steps need to be carried out before these goals can and capital markets by 2020.

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 7 Financial services liberalization will allow gion’s banks, facilitate the development of closer banks, insurance companies and investment com- cooperative relationships, and contribute to finan- panies in ASEAN countries to provide services in cial sector stability. However, the facilitation of other countries of the region. The aim is to create banking integration will also heighten the system- an environment in which Qualified ASEAN Banks ic risk by deteriorating financial performance of (QABs) that have reached a certain standard in foreign banks operating in ASEAN countries due terms of competitiveness and other factors will be to their lack of understanding about the local mar- treated on an equal footing with local banks. The ket characteristics in the host country. Other dan- ASEAN Banking Integration Framework (ABIF) gers that have been highlighted include increased was created, together with the AFIF (see above), volatility in capital flows due to speculative cross- as a structure within which QABs can be recog- border transactions, and dominance of host coun- nized. tries’ markets by foreign banks. That is why the Asian Development Bank [2013] explains fi- harmonization of prudential regulations and the nancial services liberalization in terms of three creation of international risk response systems are elements. First, the QAB framework will allow so important. Phased liberalization is needed be- banks from ASEAN countries to operate in other cause of the different amounts of time required to countries in the region. To eliminate the concerns strengthen the banking sector in each country. of host countries, QABs will be required to meet ASEAN members are negotiating over details rigorous standards of soundness. Not many banks of financial services liberalization through the in the region will be able to qualify under these Working Committee on Financial Services Liber- standards, which will function both as targets to- alization. Stage 6 of these negotiations has been ward which banks in ASEAN countries should as- completed, and the Committee has now entered pire, and also as guidelines for the establishment Stage 7. As far as can be gauged from the progress of prudential regulations by the banking authori- of these negotiations, ASEAN is moving forward ties. steadily with the liberalization of financial servic- Second, it will be necessary to treat banks moves, including insurance sector. ing into markets on an equal footing with local banks. Third, to ensure the proper functioning of ③ Capital Account Liberalization this framework, it will be necessary to move to- The regulations that currently govern capital ward the harmonization of banking regulations in transactions in ASEAN countries can be summed member countries. It will also be necessary to de- up as follow. First, while some countries, such as velop financial infrastructure in each country, in- Singapore, Cambodia and Indonesia, already have cluding rating agencies, credit guarantee facilities extremely open systems, other ASEAN members and inter-bank markets. Capacity development still maintain a certain level of regulation. Second, will be a priority for countries that have not yet most of these regulations target capital outflows developed this infrastructure, and those countries rather than inflows. This situation will need to be will not be able to accept QABs until after this reconsidered from the perspective of facilitating has been achieved. This means that the framework regional integration, since it has the potential to cannot be applied at the same time in every coun- limit capital flows among ASEAN countries while try. Moreover, the more advanced countries within facilitating inflows of funds from outside of the the region will need to provide less developed region. Third, while most ASEAN members are countries with assistance on financial technology. covered by IMF Article VIII, they still impose re- Progress toward regional banking integration strictions on current account transactions. Fourth, (defined here as the expansion of banks from most ASEAN countries restrict the use of their ASEAN members into other countries within the currencies overseas. Fifth, there are few restric- region) will enhance the efficiency with which tions on inward investment in securities, but there funds are allocated. It will also strengthen the re- are numerous restrictions on overseas borrowings,

8 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 and overseas lending denominated in domestic In relation to capital market settlements, the Asian currencies. Sixth, many ASEAN countries restrict Development Bank recommends the adoption of foreign exchange risk hedging by investors. Sev- international standards for straight-through pro- enth, some ASEAN countries still levy withhold- cessing for both domestic and cross-border settle- ing tax on securities investment. ments, and the expansion of DVP/PVP settle- Progress toward the expansion of investment, ments. trade and business within the ASEAN region is In a related move, the ASEAN+3 countries are dependent on the liberalization of capital transac- working to create a settlement system to support tions. ASEAN members have completed the task cross-border bond transactions under the Asian of checking and assessing their restrictions on Bond Market Initiative (ABMI). Recent progress capital transactions and are now in the process of includes the completion of a reassessment of busi- developing liberalization roadmaps. The Work- ness feasibility relating to the establishment of a ing Committee on Capital Account Liberalization regional settlement intermediary (RSI) by Task (WC-CAL) has stepped up its monitoring of prog- Force 4. In addition, discussions are continuing ress toward liberalization in ASEAN countries and within the newly established Cross-border Settle- is also discussing policies relating to the risks of ment Infrastructure Forum, which is based on liberalization. voluntary participation by member countries. Inui [2014] describes the current status of a settlement ④ Development of Settlement Systems system covering 10 ASEAN countries and re- Asian Development Bank [2013] contains gions, based on work carried out in the ASEAN+3 recommendations relating to trade settlements, Bond Market Forum (ABMF), which is part of money remittances, retail payments and capital the ABMI. Under this system, bond settlements market settlements. The goals identified are ① the are processed by central securities depositories improvement of settlement infrastructure, ② the (CSDs) operated by central banks or securities ex- standardization of settlement systems (settlement changes in each country. Settlements of funds are technology, market practices, regulations, etc.) processed using real time gross settlement (RTGS) to allow efficient cross-border settlements, and systems provided by central banks, and in many ③ studies concerning the linkage of settlement cases settlements are carried out on a delivery ver- systems within ASEAN. Harmonized settlement sus payment (DVP) basis, which means that bonds systems are likely to play an important role in the and funds are settled at the same time. AEC, and the Working Committee on Payment Cross-border settlements are also processed and Settlement Systems (WC-PSS) is assessing through settlement systems in individual coun- the current situation and making policy recom- tries. However, there are issues in areas other than mendations concerning settlement systems. settlement systems, including restrictions on capi- The level of settlement systems also varies ac- tal transactions, and systems requiring the quali- cording to the level of financial systems devel- fication of foreign investors. Another problem is opment. ASEAN countries first need to improve the fact that many of the elements that make up their domestic settlement systems, and then to settlement systems in individual countries, such as form links with other countries in the region. messages and securities numbers, do not comply Among the medium-term goals recommended with international standards. concerning trade settlements are the facilitation of As previously noted, the priorities now are the overnight (T+1) settlements of cross-border pay- standardization of settlement systems in individual ments, and settlements in local currencies. Rec- countries, and the introduction of STP for cross- ommendations concerning retail payments include border bond transactions and settlements. Prog- the diversification of the products available (e.g., ress in these areas would reduce settlement costs ATM cards, debit cards, credit cards) and the ex- and settlement risks. The key question in this con- pansion of services, such as overseas remittances. text is how cross-border settlements of funds (di-

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 9 rect settlements among the currencies of member region. countries) can be enabled. As listed below, many concrete achievements The Cross-Border Settlement Infrastructure Fo- have resulted from the work of the ACMF. rum, which also works collaboratively with the (a) Expedited Review Framework for Second- ABMF, has issued a report stating that the most ary Listings—A mechanism designed to promising regional settlement infrastructure mod- reduce costs and improve efficiency for el is not the Asian ICSD or CSD linkage model secondary listings by regional corporations (settlements of funds using money from commer- within the securities exchanges of ASEAN cial banks), which the forum had been considering countries by simplifying assessing proce- until now, but rather a CSD-RTGS linkage model dure based on the linkage of CSDs and central bank (b) The ASEAN Corporate Governance Score- fund settlement systems (RTGS) in each country. card—Used to assess the corporate governance of listed companies in the ASEAN ⑤ Development and Integration of Capital region Markets (c) ASEAN and Plus Standards—uniform dis- A key goal in the context of ASEAN’s capi- closure standards developed to improve the tal market liberalization efforts is capital market efficiency of cross-border securities issues integration, which would allow regional issuers (d) Work relating to the ASEAN Exchanges, to implement issues in any ASEAN country, and which enabled trading in 210 representative regional investors to invest in any country in the stocks via an electronic network linking region. Another goal is to allow intermediaries to seven ASEAN exchanges (Indonesia, Ma- offer their services in any country within the re- laysia, the Philippines, Singapore, Thailand, gion, subject to approval by the authorities in their Hanoi, Ho Chi Minh)—The establishment home country. of this structure is being studied by sub- In 2009, the Implementation Plan for ASEAN working groups responsible for the four ar- Capital Markets Integration was adopted. This eas of business planning, regulation, market plan defines specific measures to compensate for management and technology. the inadequate scale of capital markets in indi- (e) Cross-Recognition of Qualifications on Ed- vidual ASEAN countries, including the harmo- ucation and Experience of Market Profes- nization of market infrastructure with the aim of sionals expanding intraregional cross-border transactions (f) ASEAN Framework for Cross-Border Of- in securities exchanges within the ASEAN region. fering of Collective Investment Schemes— The main themes of the plan are the creation of an Known as the “fund passport” system, this enabling environment (① a framework for harmo- concept will be examined in detail later in nization and mutual recognition), the creation of this article. market infrastructure (② an alliance of ASEAN (g) Development of ASEAN stock indices—In securities exchanges and a governance struc- 2005, The FTSE ASEAN 180 Index and the ture, ③ the development of new products, ④ the FTSE ASEAN 40 Index were developed in strengthening of bond markets), and the strength- collaboration with the FTSE Group of the ening of the integration process (⑤ the alignment United Kingdom. of domestic capital market development plans, Progress on all of these items has been led by ⑥ the reinforcement of structures within ASE- the securities authorities of Malaysia, Singapore AN). Progress on this plan is being driven by the and Thailand. When viewed in relation to the Im- ASEAN Capital Markets Forum (ACMF), which plementation Plan for ASEAN Capital Markets In- was established in 2004 as a forum for discus- tegration, these items appear to align with the key sion among securities regulatory authorities about initiatives relating to ① a framework for harmo- capital market development within the ASEAN nization and mutual recognition, or ② an alliance

10 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 of ASEAN securities exchanges and a governance Third, there are initiatives relating to financial framework. Items (a) through (c) relate to issues, inclusion and literacy. Financial literacy initiatives (d) through (e) to transaction infrastructure, and (f) are led by Brunei, which has established a forum and (g) to investment. for information sharing and other activities. ASE- Obviously there are many differences in the AN countries are also cooperating on financial in- capital market regulations and systems and market clusion initiatives. infrastructure of ASEAN countries, and it will not be easy to overcome these differences and achieve mutual recognition. Of particular importance are 2. Financial Systems in ASEAN tasks relating to the facilitation of cross-border Countries securities issues, including the harmonization of disclosure standards, definition of securities and (1) Overview of Financial Systems, rating systems. Strategies for Regional Integration Work carried out by the Working Committee on Capital Market Development (WC-CMD) in- As discussed in the previous section, the ASE- cludes ① the creation of the Bond Market De- AN countries need to move toward regional fi- velopment Scorecard, ② the development of a nancial integration while also reducing the risk of capacity building program to rectify problems financial crises by responding appropriately to ex- identified using the scorecard, and ③ research on panding flows of foreign investment. A key prior- market development issues and policy recommen- ity in this context is the reinforcement of financial dations to ASEAN members in collaboration with and capital markets and financial institutions in the ACMF. individual ASEAN countries. In this section, we In addition, the ACMF, WC-CAL, WC-CMD will examine financial systems in ASEAN coun- and WC-PSS are continuing their efforts to im- tries from this perspective. prove capital market infrastructure. There is considerable variation in the level of development of financial systems in ASEAN ⑥ Other Activities countries. Even where the level of development is Financial integration in ASEAN involves sev- similar, there are differences in other characteris- eral other processes in addition to the four items tics, such as market size and financial infrastruc- outlined above. First, there is the reinforcement of ture and regulations. For this reason, individual regional surveillance. Organizations monitoring countries have different needs in relation to finan- economic and financial conditions in the region cial integration, and while some countries want include the ASEAN+3 Macroeconomic Research regional integration, others regard links outside of Office (AMRO), which was established by the the region as more important. ASEAN+3 countries. The surveillance and capac- This means that regional integration will need ity building programs were further strengthened to be open rather than closed. Moreover, since in- with the creation of the ASEAN Integration Moni- tegration will also cause competition to intensify, toring Office within the ASEAN Secretariat in it will be necessary to strengthen the competitive- May 2010. ness of financial systems in individual countries, Second, ASEAN is working to strengthen infra- and to reduce development gaps between coun- structure finance. The ASEAN Infrastructure Fund tries. ASEAN countries need to debate their ap- (AIF)(1) was established in 2012 with the aim of proach to regional financial integration fully and strengthening physical connectivity within the will need to move forward gradually, while re- region and reducing infrastructure gaps. The first maining focused on the 2015 and 2020 deadlines. project using the AIF was carried out in Indonesia A comparison of financial assets as percentages in 2013, followed by projects in Indonesia, Laos of GDP shows that while Malaysia, Singapore and and Vietnam in 2014. Thailand rank alongside the EU countries, the ra-

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 11 Table 1 Financial and Capital Markets as Percentages of GDP (%) 2000 2012 Banks Bond Stock Banks Bond Stock (domestic market issue market Total (domestic market issue market Total credit) balance capitalization credit) balance capitalization China 112.3 16.9 48.5 177.7 157.1 46.3 44.9 248.4 Hong Kong 133.8 35.2 363.1 532.2 201.3 67.6 1,078.3 1,347.1 Indonesia 52.8 32.0 16.2 101.1 39.4 12.7 48.8 100.9 Japan 227.8 96.2 66.7 390.8 230.5 196.3 58.6 485.4 South 102.5 66.6 27.8 196.9 178.5 130.2 104.4 413.2 Korea Malaysia 138.4 73.2 120.7 332.3 135.3 107.3 153.1 395.7 Philippines 34.9 25.9 31.2 92.0 52.4 39.6 91.7 183.7 Singapore 87.1 47.2 164.5 298.8 99.0 81.2 269.1 449.3 Thailand 110.0 25.3 23.8 159.1 131.5 76.1 106.5 314.1 Source: Asian Bonds Online, IMF, World Economic Outlook Database tios for Vietnam, the Philippines and Indonesia are tered in the past. This is an important issue requir- similar to those for developing countries with sim- ing countermeasures at the regional level. ilar income levels (Table 1). The ratios for Brunei, When diverse financial systems are integrated, Cambodia, Laos and Myanmar are extremely low, there is no way to ensure that all participants will and their stock and bond markets are underdevel- benefit, and inevitably some will be disadvan- oped (Table 2). taged. Considering this point, a number of pri- Financial inclusion varies widely within the orities will need to be tackled as ASEAN moves ASEAN region (Table 3). There is also consid- toward financial integration. First, it will be nec- erable disparity in the insurance sector, and the essary to engage in continual debate about ways urgent need for improvement is apparent from to reconcile differences in the needs of individual the fact that the average number of people served member countries. Second, ASEAN will need to by each life insurance company branch is over work to reduce differences in development levels, 300,000. which are partially responsible for differences in Financial systems in ASEAN countries are the needs of each country. Third, in addition to dominated by banks, although Malaysia and efforts to enhance the competitiveness of finan- Singapore are starting to improve their capital cial and capital markets and financial institutions markets. However, the small size of the ASEAN in member countries, it will also be necessary to economies is reflected in their financial and capi- improve institutional infrastructure, such as finan- tal markets, which are small by world standards, cial regulations. The development of the banking and it will not be easy to improve their interna- sector in the BCLMV countries, which are still tional competitiveness and increase their presence. in the early stages of financial development, will Moreover, even though stock markets are expand- be a particular priority in this context. Fourth, the ing in step with economic development, the low specifics of integration and the ways that integra- level of liquidity means that markets are vulner- tion benefits national interests must be acceptable to fluctuations in the activities of foreign in- able to member countries. Fifth, there should be a vestors. These factors are all incentives for capi- schedule for the achievement of integration. Sixth, tal market integration. Namely, the realization of regional structures should be created to deal with economies of scale is an important reason for in- the risks associated with integration. Seventh, fi- tegration. However, this goal can only be achieved nancial authorities should provide leadership for if each country has robust domestic markets. the steady implementation of integration plans. Moreover, while the achievement of financial The most important priority at present appears integration in some form will bring benefits, it to be the improvement of financial systems in will also create risks different from those encoun- member countries. Efforts to raise the level of

12 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Table 2 Overview of Financial Systems in Cambodia, Laos, Myanmar and Vietnam

Cambodia Laos Myanmar Vietnam ・Banks are very sound, but in ・State-owned banks account for ・There are four state-owned ・There has been a rapid increase recent years there has been 60% of total assets. banks, 22 private banks and 35 in bad loans. The Vietnam Asset a rapid increase in lending, ・Bank interest rates have been foreign banks (representative Management Company was especially to the real estate liberalized and are tending offices). established in July 2013 to buy sector. to remain high. Lending is ・No inter-bank market has been non-performing assets. ・Financial statements still require concentrated into the service established due a lack of trust ・Screening for credit risk is improvement, and bank lending and real estate sectors. There among banks. inadequate. Lending depends is based on collateral. is concern about the worsening ・There is a shortage of bank on collateral (real estate, etc.). A There is no interbank market due quality of loans, resulting in part workers who understand banking Credit Information Center (CIC) Banks ・ to inadequate disclosure. from limited credit screening services. Loans depend on has been established within the ・Banks account for the bulk of capabilities. collateral. There is no detailed State Bank of Vietnam. intermediation, but microfinance ・Despite the rapid expansion of checking of the value of ・Bank supervision is also is expanding, and regulatory bank lending, risk management collateral. inadequate. systems are inadequate. systems remain inadequate. ・The central bank has not Banks are also unable to prepare established a supervisory financial statements. system. ・The inter-bank market remains ・Microfinance is expanding. undeveloped. ・In July 2011, Cambodia ・A stock exchange was ・In 1996 a securities trading ・There are stock exchanges established a stock exchange established in Oct. 2010 with center was established with in Ho Chi Minh and Hanoi. with assistance from S. Korea. assistance from S. Korea. As assistance from the Daiwa Investors are mostly individuals. As of June 30, 2014, there were of June 30, 2014, there were Institute of Research. Only two Institutional investors invest in only two listed companies. Slow only three listed companies. The securities are traded. There government bonds or central progress on the improvement of majority of companies are family- are plans to establish a stock bank bonds. Stock corporate accounting is seen as operated SMEs and not used to exchange in October 2015 with market a major reason for this. procuring funds from investors. Japanese assistance. ・Laos is working to foster ・A securities exchange law investors. All securities was enacted in July 2013. companies are joint ventures Preparations are under way for with foreign companies the establishment of a securities (Thailand, China, Vietnam). exchange committee and securities companies. ・The fiscal deficit (5-8% of ・Laos has a chronic fiscal deficit. ・The fiscal deficit is financed by (Omitted) GDP) is financed by aid from Only short-term government short-term government securities international organizations and securities and central bank underwritten by the central advanced countries. Government bonds are issued. bank. The central bank law was bonds are not issued. ・In 2013, Laos issued baht- amended in July 2013 to limit Bond denominated bonds in Thailand. financing by the central bank. market ・Since 1993, Myanmar has issued 2-, 3- and 5-year government bonds. However, the interest rate is higher than the deposit rate, so banks normally hold the bonds until maturity. Source: Expert Panel on Financial Cooperation with Asian Countries [2014]

Table 3 Financial Inclusion of these systems will enhance the feasibility of ASE- Commercial Banks in ASEAN (2010) AN financial integration. Also, the development of robust financial systems will lead to the creation Deposit Loan accounts Bank branches ATMs per of structures capable of coping with inflows of accounts per per 1,000 per 100,000 100,000 1,000 people people people people capital from outside of the region. Cambodia 108.0 28.9 4.0 5.1 ASEAN is moving toward financial integration Indonesia 504.7 274.8 8.3 13.4 Laos 44.3 4.0 2.6 4.3 not only because of the progress toward integra- Malaysia 1,619.9 284.1 10.5 56.2 tion at the real economic level, but also because of Philippines 487.8 n.a. 7.7 14.9 a loss of confidence in capital from outside of the Singapore 2,134.3 967.7 10.3 58.6 Thailand 1,119.9 237.0 11.2 77.7 region, which has repeatedly flowed into and out Vietnam n.a. n.a. 3.3 17.6 of the region since the Asian financial crisis. After Japan 7,169.0 171.0 34.0 133.0 experiencing the crisis, however, Asian countries Advanced European 2,022.0 701.0 32.0 94.0 have dramatically improved their emergency li- countries U.S. 2,021.9 n.a. 35.7 173.8 quidity support systems, in part by accumulating Source: Asian Development Bank Institute [2014], p.144 foreign currency reserves. As a result, they were

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 13 able to respond appropriately to the sudden de- Fig. 5 Average Sizes of Commercial Banks cline in liquidity resulting from the 2008 Lehman shock. Efforts to improve financial systems are ($billions) 16 15.1 steadily producing benefits, including the recovery 14.4 of financial soundness in the banking sector, and 14 the establishment of a position for Asian bonds as 12 9.7 a target for investment by investors in advanced 10 countries. These achievements can be seen as evi- 8 dence of a measurable strengthening of the capac- 6 ity of ASEAN countries to accommodate capital 4 3.2 1.8 2.2 1.9 inflows from outside of the region. 2 0.2 0.1 0.2 As discussed later in this article, ASEAN coun- 0 tries have a voracious demand for funds, especial- ysia unei Laos Br anmar Mala Thailand Vietnam ly for infrastructure development, and will inevi- Indonesia My Cambodia Philippines Singapore tably continue to rely on funds from outside of the region to some extent. The most important priority Notes: As of the end of 2010 for Brunei and the end of for ASEAN in this context is to combine the pur- 2009 for other countries. For reference, the total assets of the Sumitomo Mitsui Banking Corporation suit of financial integration with continuing efforts amounted to ¥135,966.4 billion (approx. $1,359.7 to strengthen financial systems to ensure that the billion) as of March 31, 2014. Source: Lee and Takagi [2013] region can achieve a form of integration that will allow it to remain open and outward-looking. in ASEAN countries are between one-fiftieth and (2) The Banking Sector one-hundredth the size of Japanese megabanks. Fifth, there is a major gap between ASEAN and ① The State of the Banking Sector advanced countries in terms of financial inclusion, The following analysis examines the financial including the number of bank branches and bank systems of ASEAN countries by looking first deposit accounts per unit of population. Sixth, at the banking sector, and then at stock markets there is considerable variation among ASEAN and bond markets. We can identify a number of countries in terms of levels of banking sector de- characteristics in the banking sectors of ASEAN velopment, bank size, and financial inclusion. This countries(2). First, banking reforms implemented situation will be a major impediment to progress since the Asian financial crisis have dramatically toward regional financial integration(3). improved banks’ financial soundness and earning An analysis of progress toward regional bank- performance, with the result that banks in ASEAN ing integration in this environment shows that now compare favorably with banks in advanced while some banks from Singapore, Malaysia and countries. Second, because banks had maintained Thailand (usually the top 1-3 banks in each coun- sound management policies, they were affected try) have expanded into a number countries in the little by the global financial crisis. In fact, their region, their overseas activities are less extensive financial positions have tended to improve con- than those of major Western Banks, such as Stan- tinuously since the crisis. Third, there has been dard Chartered, Citibank and HSBC (Table 4). no significant change in the relative size and im- Moreover, the majority of ASEAN banks are re- portance of the banking sector within domestic luctant to expand into other countries within the financial systems. ASEAN countries still have fi- region, mainly because of the small scale of their nancial systems centering on banks, which were operations and their lack of international competi- seen as a major cause of the Asian financial crisis. tiveness. Another possible reason is the fact that Fourth, the size of banks is relatively small by in- the domestic financial markets in ASEAN have ternational standards (Fig. 5). For example, banks not yet been fully developed and still offer ample

14 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Table 4 Presence of Banks in ASEAN Countries (End of 2011)

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam HSBC ○ ○ ○ ○ ○ ○ ○ Standard Global Rep Rep Rep Chartered ○ ○ ○ ○ ○ ○ ○ Citibank ○ ○ ○ ○ ○ ○ ○ SMBC Rep ○ ○ Rep Rep ○ ○ ○ Mizuho FG Japan ○ ○ ○ ○ ○ ○ ○ Bank of Tokyo- Mitsubishi UFJ ○ ○ ○ ○ ○ ○ Mandiri ○ ○ Indonesia BCA ○ BNI ○ ○ Maybank ○ ○ ○ ○ Rep ○ ○ ○ ○ Malaysia Public Bank ○ ○ ○ Rep ○ CIMB ○ ○ ○ ○ Rep ○ ○ ○ Metrobank ○ Rep Philippines BDO ○ BPI ○ DBS ○ ○ Rep Rep ○ Rep Rep Cambodia UOB ○ ○ ○ Rep ○ ○ ○ ○ OCBC Offshore ○ ○ Rep ○ ○ ○ SCB ○ ○ ○ ○ JV Thailand Bangkok Bank ○ ○ ○ Rep ○ ○ ○ ○ B. Ayudhya ○ ○ Notes: Rep=Representative office Source: Asian Development Bank Institute [2014], pp.148-149 scope for growth. which are ranked second and fourth respectively ASEAN countries also seek to protect their lo- in the Malaysian banking sector, have reached cal banks by restricting participation by foreign basic agreement on a merger including Malaysia banks and discriminating against foreign banks in Building Society Berhad (MBSB), a major non- their domestic markets. Restrictions of these types bank financial institution(4). The aim of this merger were substantially relaxed after the Asian finan- is to gain a competitive advantage in the domes- cial crisis so that foreign capital could be used to tic market, which is not really big enough, and to drive the bank restructuring and rehabilitation pro- achieve the scale needed for overseas expansion. cess that followed the crisis. However, there has The insurance sector is relatively open to for- since been a resurgence of moves to protect and eign participation, but local insurance companies strengthen local banks by limiting participation lack competitiveness, and there have been few by foreign banks. In 2012, for example, Indonesia cases of overseas expansion (Table 5). Most of lowered the ceiling for foreign ownership from the companies that have gained shares of ASEAN 99% to 40%. On the other hand, in July 2014, the markets are insurance companies from advanced Philippines announced that it intended to abolish countries, and there has been little progress to- the 60% ceiling on foreign ownership, and Myan- ward integration within the region. mar has finally started to issue business licenses to foreign banks. These examples show how dif- ② Outlook for Bank Integration, Priorities ferences in the development stages, financial and for the Banking Sector capital market development needs and stances of Most of the foreign banks that have established ASEAN countries are reflected in restrictions on operations in ASEAN countries are from outside participation by foreign banks. of the region. While this situation has started to Banks are also starting to restructure in re- change, the limited scale of local banks means sponse to environmental changes caused by prog- that only a minority of banks are likely to achieve ress toward regional integration. For example, QAB status in the immediate future, and that media reports indicate that the CIMB and RHB, progress toward integration will therefore be grad-

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 15 Table 5 Ownership of Insurance system, would benefit considerably from integra- Companies (2010) tion and is actively promoting the ABIF. Indone-

Number of Insurance Companies sia, however, has a large domestic market, but the Foreign Majority 100% share competitiveness of its financial institutions ap- foreign foreign- Total Domestic (%) ownership owned pears to be relatively weak, and there is ongoing Brunei 12 1 5 18 33.3 debate about the relative merits and costs of inte- Cambodia 3 4 0 7 57.1 Indonesia 88 38 0 126 30.2 gration. Laos 0 10 0 10 100.0 Differences in the size of financial markets and Malaysia 26 0 17 43 39.5 development levels of ASEAN member are also Philippines 123 13 4 140 12.1 Singapore 24 76 50 150 84.0 reflected in significant variation in the level of Thailand 88 0 6 94 6.4 prudential regulations and infrastructure support- Vietnam 20 4 19 43 53.5 ASEAN 384 146 101 631 39.1 ing financial stability. The original ASEAN mem- Source: Asian Development Bank Institute [2014], p.150 bers and the BCLMV countries will need to follow a double-track approach that gives priority to capacity building in the latter group. However, it ual. There is little possibility of comprehensive will not be easy to create a roadmap based on this banking integration as seen in the EU. method that will ultimately lead to the integration However, Asian financial systems center on of the entire region, and there is a strong possibil- banks, and bank integration is likely to play a ity that funds will be concentrated in particular central role in financial integration. The ASEAN countries during the integration process. Senior Level Committee on Financial Integration As is apparent from the preceding analysis, (SLC) was formed as a high-level organization for there are still many issues affecting the bank in- the planning and monitoring of financial integra- tegration process. While it would be possible for tion. banks that are relatively competitive within the The four core components of the ASEAN Bank- region to lead the way in adapting to integration, ing Integration Framework. (ABIF) are ① harmo- it will not be possible to achieve integration on a nization of principles of prudential regulations, level that will bring real benefits without consider- ② the creation of the infrastructure required for ation for those that cannot keep up with competi- financial stability (macroprudential policies, cri- tion. sis management policies, deposit insurance, etc.), The priorities for the banking sector are ③ the provision of capacity building programs summed up in Fig. 6. First, as will be analyzed in for the BCLMV countries, and ④ the adoption of detail later in this article, it will be necessary to standards for QABs. Working groups have been improve banking services in ways that contribute formed with responsibility for each of these areas. to economic development, including the promo- To minimize the risks associated with integration, tion of financial inclusion, and an involvement it will also be necessary to establish regional-level in domestic demand-related business areas. Sec- monitoring and supervisory functions. In addition ond, the competitiveness of banks will need to to the development of closer cooperation among be strengthened. There are many possible strate- authorities within the region, AMRO and the gies to achieve this, including the facilitation of Chiang Mai Initiative Multilateralization (CMIM), mergers, the improvement of operating efficiency, which have been established within the ASEAN+3 human resource development, and the develop- framework, are also expected to play a significant ment of new business areas. However, banks must role in this area. also maintain their present level of soundness by Despite extensive debate by the four work- avoiding excessive expansion of their activities. ing groups, the positions of individual ASEAN Third, to maintain soundness during the integra- members still differ. Malaysia, which has a small tion process, it will be necessary to develop and domestic market but a highly developed financial harmonize banking regulatory and supervisory

16 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Fig. 6 Priorities for the Development of Financial Systems in Asia

(Development of Financial Systems in Asian Countries) −Banks− −Stock/Bond Markets ・Expansion of business that contributes to ・Expansion of issuer base ⇔ economic development ・Diversification of financial products issued

Expansion of investor base Strengthening of banks’ competitiveness ・・ Improvement of secondary market liquidity Expansion through mergers ・ - Improvement of level of intermediaries, Improvement of operating efficiency ⇔ - - human resource development -Human resource development ・Development of market infrastructure

・Development of banking regulatory and ・Development of market regulations and supervisory structures ⇔ systems

・Reduction of gaps among ASEAN countries

(Toward Integration) ・Efforts to regional integration -Liberalization of capital transactions, participation by foreign banks -Harmonization of market infrastructure, regulations and systems -Direct linkage (participation of banks under QAB system, integration of transactions and settlement systems) Source: Compiled by JRI

systems. Fourth, support for BCMLV countries expanded rapidly, the size of domestic issuer and in the area of financial technology will need to investor bases is limited. Institutional investors are be stepped up in order to reduce disparity among still at the developing stage. The underdeveloped ASEAN members. markets of the BCLMV countries make up the fourth group. These markets are at the initial stage (3) Stock Markets of development, and financial infrastructure and regulatory frameworks are still being developed. ① The State of Stock Markets(5) The domestic investor base is small, and apart ASEAN stock markets have achieved rapid from Brunei and Cambodia, all countries in this growth over the past 10 years (Table 6). The mar- group tightly regulate capital transactions. kets can be broadly divided into four groups. The A variety of capital market reforms have been first group consists of one market in a financial implemented by ASEAN countries. The Singa- hub (Singapore). Singapore is a financial hub for pore exchange was established in 1999, while the the whole of Asia, including ASEAN, and in ad- Philippine Stock Exchange became a joint stock dition to its wide range of financial products and corporation in 2001 and was listed in 2003. In market participants, it also has a large offshore Indonesia, the Jakarta and Surabaya Stock Ex- market. Established domestic markets (Malaysia changes merged in 2007. Malaysia has gradually and Thailand) form the second group. These mar- eased restrictions on capital transactions, and in- kets have ample domestic issuer and investor bas- vestment in domestic securities by non-residents es, and Islamic financial products are a feature of has expanded. Thailand announced capital market the Malaysian market. The level of over-the-coun- development plans in 2002 and 2006. ter trading in financial derivatives is still low in Over the past 10 years, the number of listed both of these markets. Investment from overseas companies in all ASEAN countries has increased is affected by certain limitations, including restric- by 30%. In Indonesia and Malaysia in particular, tions on capital transactions. The third group con- the trend toward corporate privatization is help- sists of still developing domestic markets (Indo- ing to drive this growth. In the past stock market nesia, the Philippines). While these markets have intermediaries were mostly global banks from ad-

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 17 Table 6 Stock Market Trends ($billions) Market Capitalization Number of Listed Companies End of End of End of End of End of End of End of End of 2002 2007 2008 2013 2002 2007 2008 2013 China 463 4,479 1,779 3,949 1,223 1,530 1,604 2,489 Hong Kong 463 2,654 1,329 3,101 978(10) 1,241(9) 1,261 1,643(90) India 243 3,479 1,247 2,252 6,566 6,217 6,327 6,973(1) Indonesia 30 212 99 347 331 383 396 483 South Korea 216 1,123 471 1,235 683 1,757(2) 1,793 1,813(15) Malaysia 123 325 189 500 861(3) 986(3) 976 910(10) Philippines 18 103 52 217 234(2) 244(2) 246 257(3) Singapore 101 539 265 744 501(67) 762(290) 767 776(297) Taiwan 261 664 357 823 641(3) 703(5) 722 866(64) Thailand 45 197 103 354 398 523 525 584

Annual Turnover/Market Capitalization (%) Value of Shares Issued 2002 2007 2008 2013 2002 2007 2008 2013 China 83.9 228.3 216.4 193.3 8 101 50 70 Hong Kong 39.7 75.5 122.6 46.7 14 70 55 49 India 63.2 45.7 82.4 25.1 6 45 63 14 Indonesia 41.6 54.8 110.8 42.3 1 5 8 5 South Korea 254.4 170.5 304.3 106.1 6 7 4 2 Malaysia 24.9 51.6 49.4 32.9 3 2 2 7 Philippines 13.6 28.6 32.8 27.6 1 2 1 4 Singapore 53.8 67.9 98.1 37.8 1 10 3 7 Taiwan 217.4 142.7 232.7 77.0 2 2 0 4 Thailand 90.4 65.3 112.5 109.4 2 3 3 5 Notes 1: The figures for China and India are totals for two exchanges (Shanghai+Shenzhen, Bombay+National). Notes 2: The figures in ( ) under “Number of Listed Companies” refer to foreign companies. The value of shares issued is the sum of IPOs and supplementary issues. Source: World Federation of Exchanges

vanced countries. More recently, however, bank- the small size of individual countries regarding affiliated securities companies in Malaysia and economies and financial and capital markets. As Singapore have adopted strategies that are clearly the economic growth of China and India began to designed to promote regional market integration, accelerate in the 2000s, the ASEAN countries re- and they are playing an increasingly important alized with alarm that their stock markets would role in the region. In addition, institutional inves- be unable to compete with other markets without tors, such as pension funds and insurance com- further improvements in a number of areas, in- panies, are expanding in ASEAN countries in cluding secondary market liquidity, transaction response to a conspicuous build-up of savings, costs, product line-ups, and financial technology improvements in healthcare and pension systems, innovation. This provided the motive to speed up and other factors. At the same time, there has been regional integration, which had still not reached an easing of restrictions on investment. There has a satisfactory level, leading in 2009 to the an- also been a rapid increase in foreign investment in nouncement of the Implementation Plan for ASE- stocks and government bonds. AN Capital Markets Integration. Regional integration would result in improved ② Outlook for Stock Market Integration, international competitiveness resulting from the Priorities for Stock Markets expansion of the investor base and product line- As we have already seen, the main reason for ups, the reinforcement of domestic markets, and economic and financial integration in ASEAN is the improvement of liquidity. ASEAN would be

18 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 recognized as a single asset class, and the inter- approach that allows countries to participate when est of foreign investors could be expected to rise. they are able. The integration process is unlikely These changes would in turn lead to accelerated to move forward unless each country is confident economic growth and the diversification of chan- that they will be able to benefit from integration. nels for procuring and investing funds. There are several priorities relating to stock Integration would also be expected to bring markets. First, it will be necessary to expand the benefits for market participants. First, the potential investor base. Stock investment is not widespread, benefits for investors include better financial prod- so there are few individual investors. Only 9% ucts and services, lower transaction costs thanks of Singaporeans invest in stocks, compared with to competition among intermediaries, and the di- 35% in Hong Kong and 17% in Australia. Individ- versification of investment targets. Second, lower ual investors account for 60% of transactions on service provision costs, made possible by econo- the South Korean stock exchange, compared with mies of scale and scope, and an expanded investor just 20% in Malaysia. The scale of institutional base are among the likely benefits for intermediar- investors is also small in ASEAN countries other ies. Third, issuers would benefit from lower secu- than Malaysia and Singapore, and their investment rities issuance costs thanks to the harmonization strategies tend to be conservative. of regulations and other systems. Fourth, regula- Second, while ASEAN stock markets have tory authorities would benefit from the develop- achieved a certain level of development, as evi- ment of appropriate regulations for cross-border denced by ratios of market capitalization to GDP transactions as the integration process advanced. and other indicators, most are also affected by Stock market integration is likely to be the problem of low liquidity, which is a source of strengthened through harmonization and mutual market instability. One possible solution for this recognition, and through the role of the ASEAN problem would be the expansion of the individual exchanges, which are expected to support integra- investor base, but more wide-ranging measures tion as market infrastructure. Other key factors should also be considered. will include the development of products that will Third, the level of cross-border investment facilitate cross-border transactions, such as cross- within the ASEAN region remains low (Table 7). border sales frameworks for collective investment High levels of cross-border investment are limited schemes. to transactions between specific countries, such as Progress toward integration can also be expect- Indonesia and Malaysia. ASEAN members will ed to accelerate the development of markets in therefore need to implement a wide range of mea- relatively less developed countries. However, care sures, such as the harmonization of market infra- will be needed to ensure that regional integration structure, to expand cross-border investment. An- does not hinder the market development efforts of other approach that could be effective would be to individual countries. This is another reason why educate individual investors about the potential of policy adjustment efforts and the establishment of regional companies as attractive targets for invest- clearly defined short-, medium- and long-term tar- ment. gets are essential. As outlined earlier in this article, Malaysia, The needs of ASEAN members differ according Singapore and Thailand are leading progress to- to their specific circumstances, and differences in ward stock market integration. The smooth transi- development levels will also be an issue in relation toward integration among these three coun- tion to stock market integration. There is also vari- tries is significant as a successful model for other ation in legal and regulatory systems. For these ASEAN countries to follow. However, there is a reasons, ASEAN should aim for gradual integra- vital need for further home market development tion through the expansion of cross-border trans- to ensure that these other countries can really actions rather than through the creation of a single participate. What is needed specifically is further market. It will also be necessary to take an opt-in improvement, liberalization and harmonization in

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 19 Table 7 Balance of Cross-Border Stock Investment in ASEAN (2010) ($millions) Source Country Total Intraregional Recipient Indonesia Malaysia Philippines Singapore Thailand Total investment investment country balance ratio (%) Indonesia ... 766 ... 2,877 21 3,664 60,971 6.0 Malaysia ...... 8,613 12 8,625 55,467 15.6 Philippines ... 28 ... 974 2 1,004 17,089 5.9 Singapore 22 7,196 5 ... 585 7,808 132,728 5.9 Thailand ... 320 ... 2,978 ... 3,298 55,443 5.9 Vietnam ... 31 ... 395 12 438 2,698 16.2 Total 22 8,341 5 15,837 631 24,836 324,395 7.7 Total investment 948 25,050 19 194,121 5,035 225,173 15,503,684 1.5 balance Intraregional 2.3 33.3 24.6 8.2 12.5 11.0 2.1 investment ratio (%) Notes 1: China and Vietnam are not included among the source countries due to the non-availability of data. Notes 2: Figures shown at the lower right represent total world securities investment balances. Source: IMF, Coordinated Portfolio Investment Survey such areas as capital transaction regulations, tax extremely small size of the market at the starting systems, capital market regulations, product line- point. ups, and corporate governance. Second, as with the banking sector and stock Fourth, human resource development is a vital markets, the level of market development var- priority. There is a shortage of capital market ex- ies widely among countries in the region. This is perts in ASEAN countries, and in addition to the apparent from ratios of outstanding bond issues development of market infrastructure and regula- to GDP. Nor is the average ratio for the region tory frameworks, the recruitment and training of particularly high. Financial systems in ASEAN these specialists will also be extremely important. countries are dominated by banks, and compared with stock markets, which have expanded to some (4) Bond Markets extent, bond markets offer the greatest scope for development. ① The State of Bond Markets Third, while the development of the govern- Excessive reliance on borrowing from domestic ment bond and corporate bond markets is in bal- and foreign banks because of the underdeveloped ance to some extent, the development of the cor- state of bond markets within the region is seen porate bond market involves greater difficulties. as one of the triggers of the 1997 financial cri- The development of the government bond market sis. Recognition of this problem has led to bond is a prerequisite for that of the corporate bond market development efforts by governments in market. The corporate bond issuer base is weight- the region, and to regional financial cooperation ed toward certain types of issuers, such as finan- through the ABMI and other forums. The fol- cial institutions, infrastructure-related companies, lowing is a brief analysis of the characteristics of government-affiliated companies and a few large ASEAN bond markets(6). corporations. Reasons for the lack of growth in First, the Asian market as a whole has expanded corporate bond issues in the past include the stag- significantly since the financial crisis, both in ab- nation of real investment by corporations, and a solute terms and also as a percentage of the world tendency to prefer financing from retained earn- bond market (Table 8). However, the dramatic ings or through share issues. In addition, Cambo- growth of the Chinese market is responsible for a dia, Laos and Myanmar have only just reached the large share of this expansion, and we need to dis- stage at which they will need to start developing count this factor. We also need to be aware of the their bond markets.

20 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Table 8 Increase in Outstanding Issues in Asian Bond Markets ($billions) End of 1997 End of 2013 Expansion (Times) GDP Ratio (%) Govt. Corporate Govt. Corporate Govt. Corporate Govt. Corporate bonds bonds bonds bonds bonds bonds bonds bonds China 45.1 42.7 3,073 1,652 68.1 38.7 32.7 17.6 Hong Kong 13.1 28.0 108 86 8.2 3.1 39.6 31.5 Indonesia 0.9 3.3 90 18 100.0 5.5 12.0 2.4 South Korea 32.5 120.8 626 1,015 19.3 8.4 47.9 77.6 Malaysia 19.4 37.7 182 130 9.4 3.4 60.7 43.1 Philippines 16.6 0.0 87 13 5.2 ― 33.6 5.1 Singapore 13.1 10.6 150 92 11.5 8.7 51.1 31.4 Thailand 1.4 9.0 214 62 152.9 6.9 58.7 16.9 Total 142.1 252.1 4,530 3,068 31.9 12.2 ― ― Total (excl. China) 97.0 209.4 1,457 1,416 15.0 6.8 ― ― Notes: GDP ratios as of the end of 2013 Source: BIS data for figures as of the end of 1997, Asian Bonds Online for figures as of the end of 2013

Secondary market liquidity is low. Reasons for Sixth, although there has been gradual progress this include the fact that many institutional inves- toward regional integration, the level of integra- tors in ASEAN are still at the development stage, tion remains low (Table 9). Compared with inves- and the fact that the usual investment style is buy tors in advanced countries, however, Asian inves- and hold. Another factor is the general lack of de- tors generally have a regional bias and invest a velopment of markets for hedging tools, such as high percentage of their assets within the region. derivatives and repos. In addition, there now appears to be a growing Fourth, bond market development has been ap- trend toward investment in Asian bonds among proached as a policy priority. Different countries Japanese investors. This suggests that Asia, in- have implemented different policies, and while cluding Japan, can be expected to move further those policies have resulted in market develop- toward regional integration in the area of bond ment, they have not always led to the achievement transactions in the future(7). of the goals adopted when the ABMI was first cre- Recently there has been an increase in dollar- ated, specifically the reduction of borrowing from denominated bond issues by Asian issuers, result- domestic and foreign banks, and the creation of ing in part from low interest rates in advanced balanced financial systems. countries (Fig. 7). Many of these dollar-denomi- Fifth, there has been qualitative development nated bonds have low ratings, and some observers of bond markets, in the sense that quantitative ex- have warned that repayment risk could increase. pansion has been accompanied by efforts to cre- Another factor contributing to the increase in is- ate robust markets. Some observers have pointed sues is the fact that a variety of issuing structures out that bond markets functioned as a “spare tire” are available in dollar-denominated bond markets. by providing those seeking funds with an alterna- Asian issuers and investors are rapidly becoming tive to international capital markets and domestic more sophisticated, leading to the diversification banking sectors during the Lehman shock. With of bond issues. One example of this pattern is the the additional impetus provided by global mon- growth of covered bond issues in Singapore. etary easing and the rapid growth of Asian economies, the importance of these markets as targets ② Outlook for Bond Market Integration, for investment from advanced countries has risen Priorities for Bond Markets dramatically. However, this has had a negative im- Initiatives toward ASEAN financial integration pact by heightening market instability. currently appear not to include active moves to

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 21 Table 9 Balance of Cross-Border Bond Investment in ASEAN (2010) ($millions) Source Country Total balance Intraregional Recipient Indonesia Malaysia Philippines Singapore Thailand Total of inward investment Country investment ratio (%) Indonesia ... 253 695 8,054 42 9,043 35,735 25.3 Malaysia 12 ... 18 6,468 125 6,624 39,662 16.7 Philippines ... 512 ... 1,687 46 2,245 25,113 8.9 Singapore 622 1,967 96 ... 23 2,707 34,831 7.8 Thailand ... 165 ... 2,280 ... 2,445 10,186 24.0 Vietnam ...... 91 ... 91 2,633 3.4 Total 634 2,897 810 18,580 235 23,155 148,159 15.6 Total investment 4,432 10,770 5,266 126,746 13,311 160,524 21,735,503 0.7 balance Intraregional 14.3 26.9 15.4 14.7 1.8 14.4 0.7 investment ratio (%) Notes 1: China and Vietnam are not included among the source countries due to the non-availability of data. Notes 2: Figures shown at the lower right represent total world securities investment balances. Source: IMF, Coordinated Portfolio Investment Survey

Fig. 7 Dollar-, Euro- and Yen- opment Bank to provide information about Asian Denominated Bond Issues bond markets, and the efforts to standardize bond ($millions) issuing rules and to improve and integrate regional

70,000 settlement systems through the ABMF. The target as far the standardization of bond is- 60,000 suing rules is concerned is the establishment of 50,000 the ASEAN+3 Multi-Currency Bond Issuance 40,000 Framework (AMBIF) as a common regional bond

30,000 issuance program for professional investors. Mu- tual recognition under this framework will allow 20,000 greater integration of bond markets for profession- 10,000 al investors in each member country. When it was 0 first established, the ABMF was expected to take Q Q Q Q Q Q Q Q Q Q Q Q Q Q 1 2 3 4 1 2 3 4 1 2 3 4 1 2 2011 2012 2013 2014 a top-down approach to the creation of offshore (Year/quarter) markets in Asia. However, a bottom-up approach China 8 Asian countries/regions was found to be more practical, and this now ap- Notes: The eight Asian countries/regions are Hong Kong, pears to be the most appropriate strategy. Even so, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam the achievement of mutual recognition will not be Source: Asian Bonds Online easy. The Joint Statement of the ASEAN+3 Fi- nance Ministers and Central Bank Governors in integrate bond markets. However, efforts through May 2014 acknowledges the progress of efforts to the ABMI have been based from the outset on the “clarify commonalities and differences of bond is- view that it would facilitate cross-border trans- suance documentation and procedures,” but so far actions. Current efforts are focusing mainly on this work does not appear to have resulted in any the facilitation of issues, including cross-border actual bond issues. issues, through the establishment of the Credit There are several priorities for bond markets. Guarantee and Investment Facility (CGIF) as a First, it will be necessary to expand the issuer base guarantee institution for corporate bond issues (Table 10). As with investors, one approach to this within the ASEAN region, the maintenance of the task would be to attract overseas issuers. To allow Asian Bonds Online website by the Asian Devel- bond issues by small and medium enterprises, it

22 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Table 10 Overview of Current Conditions and Issues in the Corporate Bond Markets of Five ASEAN Countries

Singapore Malaysia Thailand Philippines Indonesia Market ・The bond market has ・There is limited scope ・There is scope for further ・Approval for issues takes ・The level of market overview, expanded rapidly since for expansion of the expansion of government considerable time. development is similar issuers, 2008. Overseas issuers government bond bond issues. Corporate ・Credit spreads do not to that of Malaysia in the products have also increased their market, but there is room bonds are in short supply. function efficiently and late 1990s. bond issues in Singapore. for expansion of the There have been little are not necessarily ・Issuer diversification is ・Products issued are corporate bond market. issues by government- accurate. needed. becoming more diverse, ・Indonesian and Thailand affiliated companies. ・The number of issuers is ・Indonesia is an Islamic including sukuk and yuan- issuers are issuing bonds ・The relatively high limited, and the size per country, and although the denominated bonds. in Malaysia. number of issues with low issue is small. sukuk market is expected ・Securitization is expected ratings is a feature of the to expand, it is still small to increase. market. at present. ・Issues by foreign issuers are restricted. ・Sukuk issues are expected to increase. Investors ・Investors are mainly ・There is a “rating cliff,” ・The percentage of foreign ・Individual investors are ・There are almost no private sector banks. and investment in bonds investors in government almost non- existent, and individual investors in ・There is little investment with ratings of single A or bonds is relatively high, institutional investors are corporate bonds. in foreign bonds by below is minimal. but there is little foreign not well developed. domestic investors. ・Few individuals or investment in corporate overseas investors bonds. participate in the corporate bond market. Liquidity ・Because of the saving ・Bonds with low ratings ・Market liquidity is low ・Transactions are small, ・Bond market liquidity is surplus, bonds are have low liquidity. because of the imposition and liquidity is low. low, and risk premiums basically held until of capital gains taxes on are large. maturity (“buy and hold”) individual investors, who account for the majority of investment in the corporate bond market. ・There are no functioning market makers. Source: Compiled using articles from Asiamoney

Table 11 Investor Mix in Government Bond Markets (%) China South Korea Malaysia Thailand Philippines Indonesia Banks 77.0 18.0 31.9 13.0 31.6 33.7 Pension funds ― 32.2 27.0 24.4 4.0 27.0 Insurance companies 5.4 5.8 23.0 ― 13.0 Investment trusts, etc. 4.8 21.0 ― ― ― 4.3 Foreign investors ― 10.0 28.2 17.0 ― 32.5 Others 12.8 24.0 1.9 20.0 44.0 12.5 Notes 1: Figures as of December 2013 for China, the Philippines and Indonesia, and as of September 2013 for other countries Notes 2: Some figures are estimates because of differences in the categories used in each country. Source: Asian Development Bank, Asia Bond Monitor, March 2014 would also be necessary to create bond markets tors would lead to market instability. However, for companies with low credit ratings. with their advanced investment technology and Second, the investor base will need to be ex- diverse investment styles, there would also be sig- panded. There has been some diversification of nificant benefits. Foreign investment in corporate the investor base, but more needs to be done to bonds could also be expected to increase. improve secondary market liquidity (Table 11). Markets would also benefit from diversification Expectations toward investors should focus on of the investment styles of domestic investors. foreign as well as domestic investors. There is a Pension systems should be improved, in part as a risk that increased participation by foreign inves- way of expanding the institutional investor base.

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 23 There is also the view that what bond markets 3. The Desirable Ways of Finan- need is not more investors but more issuers, but cial System Development the diversification of investor demand is likely to result in increased issues. Another way to increase (1) Contribution to Economic Develop- investment in corporate bonds would be to ease ment restrictions on investment by pension funds and insurance companies and the government bond ① Providing Diversified Financial Services holding requirements for banks. Reinforcement of domestic financial systems is Third, there should be efforts to improve mar- a prerequisite for progress toward regional finan- ket infrastructure and institutions that encompass cial integration. Another important consideration harmonization and standardization. As noted ear- is the mutually facilitating relationship between lier in this article, the development of settlement the reinforcement of domestic financial systems systems for securities and funds is especially im- and domestic economic growth. portant, and some form of standardization of the One source of insights into the role that finan- rating methods used in ASEAN countries would cial systems are expected to play in ASEAN coun- also be useful. Other essential steps include the tries is Malaysia’s Financial Sector Blueprint, development of derivatives markets, and the aboli- which was released in December 2011. This docu- tion of withholding tax. ment identifies future priorities for the financial Fourth, efforts toward market integration are sector, especially banking. The targets for the pe- needed. Like the banking sector and stock mar- riod to 2020 cover four areas: ① a financial sector kets, however, bond markets are extremely di- that best serves the Malaysian economy, ② en- verse, and there is continuing debate about mean- hancing regional and international financial link- ingful approaches to integration. ages, ③ safeguarding the stability of the financial system, and ④ other key enablers for the development of the financial system (Table 12). Recommendations relating to regional financial integration, which falls into the second of these categories, include the reinforcement of regional and international linkages through the gradual opening up of domestic markets to foreign banks,

Table 12 Financial Sector Blueprint

The financial sector that best serves the Malaysian economy 1. Effective intermediation for a high value-added and high-income economy 2. Developing deep and dynamic financial markets 3. Financial inclusion for greater shared prosperity

Enhancing regional and international financial linkages 1. Strengthening regional and international financial integration 2. Internationalization of Islamic finance

Safeguarding the stability of the financial system 1. The regulatory and supervisory regime 2. Raising the standards of governance and risk management 3. Regulation and greater regional and international integration

Key enablers for the development of the financial system 1. Electronic payments for greater economic efficiency 2. Empowering consumers 3. Talent development to support a more dynamic financial sector

Source: Bank Negara Malaysia, Financial Sector Blueprint 2011-2020

24 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 Table 13 Balances of Islamic Financial Assets by Region (June 30, 2013) ($billions) Islamic Fund Takaful Insurance Bank Assets Sukuk Balance Assets Premiums Asia 192.3 166.0 24.2 3.5 GCC 490.3 74.9 30.6 7.6 Middle East/N. Africa (excl. GCC) 518.3 1.2 0.4 7.1 Sub-Saharan Africa 20.6 2.2 1.6 0.2 Others 62.2 1.0 12.1 0.01 Total 1,283.7 245.3 68.9 18.3 Source: Islamic Financial Services Board, Islamic Financial Services Industry Stability Report 2014 international cooperation among financial authori- cerned, since bond issues are limited almost ex- ties, the development of financial infrastructure clusively to large corporations with high credit to encourage increased cross-border transactions, ratings, there are many areas, such as lending to and an expanded role for the Labuan International SMEs and consumers, in which the banking sec- Business and Financial Center (IBFC). The Blue- tor must provide appropriate services. Priorities print also calls for efforts to internationalize Is- in these areas include the development of credit lamic finance, including the expansion of market risk information data bases to facilitate lending, participants, the standardization of documenta- and the enhancement of credit guarantee systems. tion, and the enhancement of consideration about In the area of consumer services, improved con- regulations and tax systems (Table 13). sumer protection and appropriate regulation are The first section of the Blueprint calls for the needed, in part because of the possibility of exces- creation of the financial sector that will best serve sive lending. the Malaysian economy. The main goal relating to A diverse range of financial services will be “effective intermediation for a high value-added needed as economic structures change. Examples and high-income economy” is the development include pension-related financial products, ser- of new financial tools— such as infrastructure vices for high-net-worth people, credit for newly finance and finance for newly established com- established companies, finance for infrastructure panies—that will contribute to economic growth. projects, microfinance and Islamic finance. The In addition, the Blueprint states that as economic types of services needed will vary according to the structures change, pension services and business way of economic development. The promotion of with affluent customers will become increasingly financial inclusion is also a common priority for important and banks will need to become more ASEAN countries. competitive. In the section calling for the development of ② Real Economic Trends and Financial Sys- deep and dynamic financial markets, the Blueprint tems emphasizes the importance of improvements to Walsh [2014] analyses the priorities for Asian the bond and foreign exchange markets and settle- financial systems from the perspective of eco- ment systems, and the development of a balanced nomic growth and development in the region’s financial system. The Blueprint also calls for fi- countries in the following terms. First, financial nancial inclusion for greater shared prosperity and systems must support continuing rapid growth. identifies financial inclusion as an important step Asia is expected to achieve growth in excess of toward the acceleration of Malaysia’s economic the world average in the foreseeable future, and fi- growth and the reduction of income disparity. nancial systems will be required to play an impor- While this example relates to Malaysia, the tant role in that context. Second, financial systems contribution of the financial sector to economic must meet the region’s huge demand for funds growth is a key factor common to all countries for infrastructure development. The level of infra- in the region. As far as the banking sector is con- structure development in ASEAN countries is in-

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 25 Table 14 Infrastructure Indices of to seek profit opportunities overseas. ASEAN Countries In this way, economic development leads to in-

Rank Score creases in the scale and complexity of the financial Singapore 2 6.41 system, and to deepening international integration. Malaysia 29 5.19 This article has emphasized that regional financial Thailand 47 4.53 integration will not be easy in the existing envi- Brunei 58 4.29 ronment. However, sustained economic develop- Indonesia 61 4.17 Vietnam 82 3.69 ment can be expected to increase the likelihood Laos 84 3.66 that integration will deepen. This is because the Philippines 96 3.40 mutually facilitating development of economy and Cambodia 101 3.26 the financial system also helps to drive regional fi- Myanmar 141 2.01 nancial integration. This process will heighten the Notes: Based on Global Competitiveness Report (2013- need to liberalize systems that hinder integration, 2014), sample: 148 countries, score: 1-7 (the higher the better) such as restrictions on capital transactions, and Source: Asian Development Bank Institute [2014], p.167 build structures, such as financial regulations, to limit risks. adequate at present (Table 14). Factors that are ex- ③ Issues Relating to Infrastructure Finance pected to drive a rapid increase in the demand for and Financial Systems a diverse range of infrastructure include urbaniza- Infrastructure development is regarded as an tion, the growth of intraregional trade, and grow- important concern for the establishment of the ing demand for telecommunications and travel. ASEAN Economic Community. Better infra- It will not be easy to meet the demand for infrastructure enhances a country’s ability to provide structure development funds in this environment. public services, reduces the costs involved in the Third, financial systems must be able to keep pace transportation of people and goods, and strength- with shifts in the demand for investment and pro- ens domestic and regional connectivity. This is curement of funds resulting from demographic extremely significant for the formation of produc- change. Long-term investment tools will need to tion networks and the achievement of economic be improved, in part because of an anticipated fall growth. Goals under the Master Plan on ASEAN in savings rates in countries affected by rapid de- Connectivity, which was adopted in 2010, include mographic aging, such as Japan, China and South not only the improvement of physical infrastruc- Korea. Countries with expanding working popula- ture, but also the removal of institutional barriers tions, such as India and Indonesia, will meanwhile to distribution and the promotion of human inter- need to find sources of finance, not only for infra- action at the social and cultural levels. structure development, but also to meet demand Infrastructure development cannot be funded from both companies and individuals in areas solely from fiscal resources, and the mobilization ranging from new businesses to housing. Only by of private sector funds under public-private part- strengthening cross-border financial intermedia- nership (PPP) frameworks is an important prior- tion systems will it be possible to meet demand in ity. However, infrastructure projects involve high both types of countries. initial costs, especially for construction, while the Basically, if an economy grows, the funds nec- recovery of costs through usage charges and other essary for financing will also expand, leading in- means takes many years. For this reason, infra- evitably to the expansion of the financial system. structure development requires not only access to As an economy matures, simple profit opportuni- long-term finance, but also accurate assessments ties will decrease, causing financial institutions to of the risks involved in complex projects. Many become involved in more complex business areas risk factors can affect infrastructure projects, in- and provide more sophisticated services, and also cluding governance and political risks. A key is-

26 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 sue with the PPP approach is the level of capacity would be the provision of government subsidies on the government side. Asia has abundant sav- or credit enhancements. ings, but the important question is how those sav- Another way to encourage investment is by im- ings can be applied to infrastructure development. proving transparency through the accumulation Traditionally banks were the main providers of of data on project costs and returns. Investment finance for infrastructure projects. However, long- in unprecedented areas is not easy, and the accu- term funds provided by banks are sourced mainly mulation of data—at least concerning future proj- from deposits, especially short-term deposits, and ects—is vital. the capacity of banks to expand long-term financ- The fact that infrastructure investment frequent- ing is limited, in part because the level of capital ly involves multiple countries is another reason required for long-term financing will increase why progress toward regional financial integration under Basel III. That is why there is a need for in- is essential. This type of infrastructure develop- vestment by institutional investors with access to ment has the potential not only to enhance ASE- long-term funds. AN’s international competitiveness, but also to Institutional investors use several methods to reduce regional disparity. invest in infrastructure projects. First, there is in- Other priorities from a financing perspective vestment in unlisted infrastructure funds. A re- include support from Japan, China and South Ko- cent estimate places the balance of these funds at rea for the aforementioned ASEAN Infrastructure around $22 billion. Second, there is investment in Fund, and capacity building to improve govern- bonds rather than equity. Examples include proj- ment capabilities in relation to PPP projects. ect bond investment funds and project securitization. Bond issues are generally suitable for long- (2) Policies to Facilitate Regional Fi- term, large-scale financing. Further expansion of nancial Integration the supply of funds through bond markets will require an increased focus on the improvement Facilitation of regional financial integration of bond markets and the development of institu- will require not only the strengthening of markets tional investors. Another hurdle that will need to in individual countries, but also the implementa- be overcome is the creation of acceptable combi- tion of measures to promote integration, such as nations of risk and yields. Institutional investors further development of cross-border investment will be reluctant to invest in anything other than products, modification or harmonization of regu- investment-grade bonds providing yields that are lations and systems, and the liberalization of capi- commensurate with risk. One effective approach tal transactions (Table 15).

Table 15 Essential Steps for Facilitating Cross-Border Transactions

1. Progress on dialog concerning approaches to economic and financial integration within and beyond the region (debate over the costs and benefits of financial integration), reconciliation of differences in national positions and views 2. Reduction of differences in bond market development stages through market development in member countries (development of bigger issuers, improvement of credit ratings, improvement of secondary market liquidity, development of risk hedging mechanisms and settlement systems, etc.) 3. Expansion of issuer base: The use of securitization and credit guarantees to complement issuer creditworthiness 4. Expansion of investor base: Development of regional institutional investors, information distribution and public relations activities for investors 5. Product development: Development of cross-border products (securitization products, Asian corporate bond funds, mutual funds, etc.) as catalysts 6. Modification and harmonization of systems and market infrastructure (including capital transaction regulations, tax systems, market-related laws and regulations, rating systems and other credit risk data, accounting and auditing standards, and settlement systems) 7. Solution of currency-related problems (liberalization of capital account transactions, internationalization of regional currencies)

Source: Compiled by JRI

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 27 We will look next at recent developments con- As mentioned earlier in this article, Singapore, cerning the Asia Fund Passport concept(8). In terms Malaysia and Thailand agreed in October 2013 to of the framework shown in Table 15, this concept establish a similar program as part of their efforts involves the modification and harmonization of toward ASEAN financial integration. The main regulations and systems, together with the devel- driving force for this program was an initiative opment of cross-border investment products. by Singapore. In the future it may be necessary The Asia Fund Passport concept was initially to reconcile multiple programs. China and Hong proposed to Singapore and Hong Kong by Austra- Kong are also considering a reciprocal approval lia, which has an active mutual fund industry, in system for funds. 2009. Since then it has been the focus of debate The UCITS scheme is also expanding beyond primarily through APEC. Under this system, col- Europe, especially into Asia, and in particular into lective investment schemes (CIS), such as mutual Singapore and Hong Kong. Asian countries are funds that have been approved in one Asian coun- unable to exert any influence over UCITS, which try, could be approved and sold in other Asian is a European system. The development of Asian countries without the need for registration or other standards would be useful from the perspective complex formalities. To gain this status, a CIS of promoting regional financial integration. How- would need to meet specific criteria, which can ever, the Fund Passport scheme would require the be interpreted as CIS safety standards. A similar harmonization and mutual recognition of systems scheme, the Undertakings for Collective Invest- in member countries, and the aims of individual ment in Transferable Securities (UCITS), is al- countries would be reflected in the evolution of ready in wide use in Europe. the system. We need to be aware that the recon- Sellers of mutual funds would be able to avoid ciliation of national interests and support for less the problem of different approval procedures in developed countries as part of the integration pro- different countries, while achieving economies of cess would also be necessary under this system. scale by selling their funds to investors in multiple countries. Potential benefits from the investors’ perspective include lower mutual fund fees and 4. Key Factors Affecting Prog- the diversification of products available for pur- ress toward Regional Financial chasing. Provided that sellers of mutual funds are Integration based in Asia, this structure has the potential to facilitate the overall circulation of funds in the re- (1) Europe’s Experience of Financial gion. Integration A pilot program was initiated following the signing of a Statement of Intent by Australia, ① The Evolution of European Financial In- South Korea, New Zealand and Singapore in Sep- tegration tember 2013. It was decided that this program In this section we will examine the European would cover collective investment schemes that experience of financial integration and consider allow sales to individual investors. In April 2014, the implications for financial integration in ASE- a public consultation paper was released, and AN. The EC market integration plan implemented Thailand and the Philippines joined the program. between 1985 and 1992 called for free movement Because the program will require law changes in of goods, services, capital and labor within the participating countries, actual implementation will European region. Financial integration initiatives not begin until 2016. Information released so far were implemented as part of the process of real- indicates that funds will be required to meet very izing this plan. Financial integration measures stringent criteria designed both to strengthen com- included ① the full liberalization of capital trans- petitiveness in the Asian asset management indus- actions, ② the introduction of a single licensing try, and also to protect investors. scheme (mutual recognition of licenses) for finan-

28 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 cial institutions and free access to regional stock advanced prudential regulations and supervision, exchanges for securities companies with stock ex- and action on other issues, such as taxation sys- change seats, and ③ a minimal level of harmoni- tems. zation among the financial regulations of member There were also developments relating solely countries. to securities markets. In 2001 the Final Report Efforts to liberalize capital transactions bogged of the Committee of Wise Men on the Regulation down in the early 1960s, but 1986 saw the begin- of European Securities Markets (the Lamfalussy ning of a gradual liberalization process based on Report) was completed. This report highlighted EC directives. It was decided that full liberaliza- problems caused by the complexity of the existing tion would be achieved by July 1990 (1992 for securities-related legislative process in order to certain countries, such as Spain). Capital flowed promote financial integration, and recommended into peripheral countries, such as the United King- improvements. These recommendations resulted dom and Spain, because of the expectation that in the establishment of two regulatory and su- monetary union would cause interest rates to fall. pervisory organizations: the European Securities However, the emergence of doubts about mone- Committee (ESC) and the Committee of Euro- tary union triggered an outflow of capital, leading pean Securities Regulators (CESR). Known as in 1992 to the outbreak of the European currency the Lamfalussy process, this new regulatory and crisis. The currency fluctuation band was widened supervisory structure was extended to the banking to 15% in attempt to resolve the situation, but this and insurance sectors in 2002. showed that the free movement of capital would However, progress toward the harmonization of inevitably be accompanied by currency fluctua- regulation and supervision under this system has tions as long as countries retained autonomy over not been entirely satisfactory. Harmonization has monetary policy. proved to be extremely difficult in the absence of Another important issue is the harmonization of a consensus about the appropriate regulatory and regulations. Recognizing that the harmonization of supervisory model. Another problem was the fact laws among member countries would not be easy, that differences in the regulations applied in fi- the European Commission developed a strategy nancial centers, such as the United Kingdom and combining minimal harmonization with mutual Luxembourg were a source of competitiveness. recognition, which it presented in its 1985 white Efforts to facilitate financial integration on a paper, Completing the Internal Market. However, practical level, such as market infrastructure, in- even mutual recognition proved to be far from cluded programs to ① extend the effectiveness simple, and there was little growth in cross-border of monetary policy, ② strengthen and integrate transactions. Progress toward the integration of stock and bond markets, and ③ integrate financial national markets was also impeded by the fact that services for companies and individuals. Specific Europe already had an efficient offshore market in measures included the introduction of the Trans- which Eurobonds could be issued cheaply. European Automated Real-time Gross Settlement With the achievement of monetary union in Express Transfer (TARGET) system, the acceler- 1999, Europe began to implement a common ated integration of short-term financial markets monetary policy within the region. This height- and short-term securities markets, the unification ened the importance of efforts to integrate short- of securities settlements, and the unification of term financial markets and government bond bank account settlements. markets. In May 1999, the European Commission These efforts have resulted in steady progress announced the Financial Services Action Plan. toward financial and capital market integration, The strategic goals identified in this plan were the including the reduction of yield gaps among mar- completion of a single wholesale market, the de- kets, increased correlation between rates of return velopment of open and secure markets for retail in each sector, and the expansion of cross-border financial services, the implementation of the most transactions. The gradual harmonization of laws

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 29 and regulations has also contributed to growth of progress toward regional financial integration. cross-border transactions, but the most important factor appears to be the elimination of exchange (2) Conclusions rate risk as a result of monetary union. However, there are areas in which integration has been rela- ① Need for Reconciliation of National In- tively slow, such as banking services for individu- terests and Support for Less Developed als. Countries Europe’s experience shows that the harmoniza- In this final section, we will summarize the key tion of financial regulation and supervision is not points for regional financial integration. Regional a simple task. However, there are also areas in financial integration would lead to an increase in which progress toward integration will be relative- cross-border financial and capital market transac- ly easy, such as settlement systems and other mar- tions and would also facilitate the reciprocal use ket infrastructure. The overall integration process of markets in ASEAN countries. Prerequisites for is likely to benefit significantly from increased ef- this include the liberalization of capital transac- forts in these areas. tions, and the harmonization and mutual recognition of regulations, systems, market infrastructure ② The European Crisis(9) and other elements. Currency union caused capital to flow into pe- ASEAN financial integration would bring a va- ripheral countries in the region. Consequences riety of benefits, including economies of scale, for the countries concerned included asset price improvements in the quantity and quality of ser- bubbles, and a loss of international competitive- vices on offer thanks to the increased competive- ness due to rising currency values. The subse- ness of the region’s financial systems, support for quent global financial crisis caused the financial member countries’ economic development and in- positions of European banks to deteriorate, and tegration at the real economic level, the reduction government fiscal positions were also adversely of disparities in the economies and financial sys- affected, in part by the cost of rescue measures. tems of ASEAN countries, and increased circula- Because there had already been a certain amount tion of funds in the region, leading to a reduced of progress toward regional financial integration, reliance on outside funds. Even the relatively less banks in each country held government bonds is- developed ASEAN countries would enjoy signifi- sued by various countries in the region. The result cant benefits from integration. was a vicious circle of deteriorating bank finances However, ASEAN is characterized by the gener- and worsening fiscal positions. ally small size of member countries’ financial sys- Lax financial regulation and supervision has tems, and by wide disparities between countries in been highlighted as one of the causes of the Euro- the region. Integration would be driven mainly by pean crisis. While there had been some progress private sector economic entities and would lead toward the harmonization of financial regulations, to escalating competition, and not everyone could bank supervision was still under the control of be a winner. As far as the integration of labor and individual governments. This meant that mecha- goods is concerned, it would be possible to dis- nisms established to cope with crises, such as cover factors that would give relatively less devel- prudential regulations, deposit insurance systems, oped countries an advantage, such as lower wages bank liquidation systems, and liquidity support and abundant natural resources. However, there structures, were inadequate in the environment would be few such factors in relation to financial created by the expansion of cross-border transac- integration. This characteristic of financial trans- tions. actions is responsible for the difficulty of moving Based on this experience, Volz [2013] empha- forward with regional financial integration. From sizes the need to create regional financial moni- this perspective, it becomes clear that the recon- toring and supervision organizations in step with ciliation of national interests and the reduction of

30 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 disparities between ASEAN countries will be im- ③ The Need to Address Risks portant priorities. The reduction of disparities will Because regional financial integration opens require the reinforcement of financial technology markets up to foreign participation, it also results assistance systems for the less developed coun- in increased risk. The prerequisites for the lib- tries, but this process is likely to take considerable eralization of capital transactions include sound time. macro policy management and the improvement Decisions about whether competition should be of domestic financial systems. The lower the level encouraged or curbed will need to be made on a of economic and financial development, the lower case-by-case basis, taking a range of factors into will be the extent to which these prerequisites can account. A balanced approach is needed. be fully met. Integration can bring major benefits for the relatively less developed countries in the ② Contribution to Economic Development region, but these countries also face the greatest as a Criterion for Moves toward Integra- risks. The full benefits of integration cannot be tion realized unless the prerequisites for liberalization Contribution to economic development is the are met. This means that the obvious choice is an fundamental purpose of a financial system and approach whereby countries participate in inte- should remain a focus during the integration pro- gration when they are ready. Full liberalization cess. Volz [2013] states that the aim of regional of capital transactions is not an easy goal for any banking integration should contribute to regional country. economic development by giving priority to trade The creation of crisis preparedness systems finance and infrastructure finance, and that the also plays a vital role in reducing risks. Related emergence of Asian banks as leading international measures include capital flow monitoring, the re- banks is not an essential goal. ASEAN countries inforcement of emergency liquidity support sys- also need to be aware that there is a mutually fa- tems, the strengthening of financial regulations cilitating relationship between regional economic and the improvement of financial supervision. development and financial integration. The most These preparations need to be made on a regional important priority is to discourage the excessive basis, which will require the harmonization of pursuit of profit in ways that do not contribute to regulatory and supervisory systems. ASEAN has the support of real economic activity, and instead no central agency responsible for promoting re- to aim for the creation of sound, robust financial gional integration, and the integration process is systems. instead based on respect for each country’s auton- Specifically, the key issues for banks are the omy. Given this situation, the resolution of issues types of companies and individuals that should be such as the harmonization of financial regulations given loans, and the areas of business on which to and the establishment of regional financial super- focus. The important questions in the case of eq- visory organizations will be long-term challenges. uity and bond markets are the types of issuers to ASEAN will need to maintain a balance between attract and the types of products to issue. progress toward integration and risk management The overall priority is to allocate funds toward within these limitations. productive purposes. Infrastructure finance is es- Asian financial systems have not become the pecially important in the current situation. An- source of a major financial crisis since the 1997 other key issue is the ability of financial systems financial crisis. As they move toward regional fi- to cope with demographic aging, the expansion of nancial integration, the ASEAN countries will the middle class, environmental degradation, the need to maintain the soundness of their financial increased frequency of disasters, and other chang- systems. es.

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 31 ④ Reinforcement of Financial Systems the Most Important Priority Reinforcement of each country’s financial system will be a prerequisite for progress toward regional integration. This will involve a range of specific priorities. The priorities for banks include the improvement of operating efficiency, the development of new business areas, human resource development, and the facilitation of inter-bank mergers. Among the priorities for stock and bond markets are the expansion of issuer and investor bases, human resource development, the development of financial products, the improvement and harmonization of market infrastructure, systems and regulations, and the improvement of secondary market liquidity. The expansion of the domestic investor base is also important from the view- point of coping with capital flows. Growth in the number of cross-border transactions by issuers and investors can be expected to result in accelerated market expansion and development. The reinforcement of financial systems in ASEAN countries in step with progress toward ASEAN financial integration would contribute to economic development while also helping to reduce risk. Another benefit would be the creation of structures to accommodate funds from outside of the region. This leads to the conclusion that the development of robust financial systems capable of supporting open integration is the most important goal from a long-term perspective.

32 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 7. According to an article about the rapid expansion of in- End Notes vestment in Asian bonds in the Nippon Keizai Shinbun of July 27, 2014, Japanese investors were net buyers of medium- and long-term bonds issued in Asian countries (especially Singapore and Malaysia) by ¥411.5 billion in 1. The AIF was established in Malaysia with contribu- the first five months of 2014. This is 70% higher than the tions of $335 million from ASEAN members and $150 total for the same period in 2013. In an article in its Au- million from the ADB. Each year it provides loans up gust 12, 2014 edition about the shift from government to a ceiling of $75 million each for around six projects. bonds to foreign bonds and infrastructure regarding the Loans are available for projects that contribute to pov- asset management of life insurance companies under low erty reduction, trade expansion and the promotion of in- interest rate environment, the Nippon Keizai Shinbun ob- vestment. The ADB manages the AIF and provides com- served that major life insurance companies had started to mitments for additional project co-financing. expand their investment in bonds and other products issued in emerging countries, including those in Asia, and that some companies had established specialist depart- ments for this purpose.

2. For a detailed examination of the banking sectors of Ma- laysia, Thailand, Indonesia and Vietnam, see Japan Re- search Institute Limited [2012]. 8. The main sources for these comments are Date [2011] and Okada [2014a] and [2014b].

3. In relation to this issue, a senior official of the Philippine central bank commented in February 2014 that the small size of Philippine banks meant that the Philippines was 9. The author referred to Volz[2013] unlikely to benefit from integration in the present environment, and that banks needed to prepare for integration by strengthening their positions in their home markets and improving their risk management systems.

4. Nippon Keizai Shinbun, October 10, 2014

5. See Oliver Wyman and CIMB ASEAN Research Insti- tute [2013] and Korea Institute of Finance [2014] for analyses of stock markets.

6. References with detailed discussions of Asian bond markets include Shimizu [2014].

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 33 7. Kamio, A. [2012], ASEAN Shihon Shijo Togo no Tori- References kumi (Asian Capital Market Integration Initiatives in ASEAN) Daiwa Institute of Research, August.

1. Expert Panel on Financial Cooperation with Asian Coun- tries [2014], [Report] (Subcouncil on Foreign Exchange and Other Transactions, Council on Customs, Tariff, 8. Kamio, A. [2013], Asean Ginko Sekuta no Jiyuka Togo Foreign Exchange and Other Transactions, Ministry of no Torikumi (Banking Sector Liberalization and Integra- Finance, June 24). tion Initiatives in ASEAN), Daiwa Institute of Research, August.

2. Akabane, H. [2013], Asean Keizai Kyodotai ni okeru Kinyu Sabisu/Shihon Shijo no Renkei Togo (Coordination 9. Kamio, A. [2014], Ajia Shinkokoku no Teikakuzuke Sai- and Integration of Financial Service and Capital Markets ken-to ni Ryunyu suru Mane (Money Flowing into Low- in the ASEAN Economic Community), in Flash 163, In- Rated Bonds, etc., in Asian Emerging Countries), Daiwa stitute for International Trade and Investment). Institute of Research, July.

3. Inui, T. [2014], Ajia ni okeru Kurosuboda Kessai Infura 10. Date, N. [2011], Ajia Fando Pasupoto Koso e no Kitai no Seibi to Kongo no Tenbo (The Development of and (Expectations toward the Asia Fund Passport Concept), Future Outlook for Cross-Border Settlement Infrastruc- in Institute for International Monetary Affairs, Kokusai ture in Asia), Hitachi Research Institute, March. Kinyu Topikkusu (International Monetary Topics), No. 193, April 25.

4. Okada, K. [2014a], Shinten Suru Ajia Chiiki Fando Pa- supoto Koso (Progress on the Asia Fund Passport Con- 11. Toyomaki, Y. [2014], Fando Pasupoto no Shinten (The cept), in Nomura Institute of Capital Markets Research, Evolution of the Fund Passport), in Mitsubishi UFJ Trust Nomura Capital Market Quarterly, Winter. and Banking Corporation, Mitsubishi UFJ Shintaku Shisan Unyo Joho (Mitsubishi UFJ Trust Asset Manage- ment Information), August.

5. Okada, K. [2014b], Ajia de Fukusu no Seido Seibi ga Shinten Suru Fando Pasupoto Koso (Progress on the Improvement of Multiple Systems under Fund Passport 12. Hayashi, H. [2014], Asean ni okeru Ginko e no Gaishi Concept), in Nomura Institute of Capital Markets re- Shusshi Kisei to Saikin no Ugoki (Recent Trends in Re- search, Nomura Capital Market Quarterly, Summer. strictions on Foreign Investment in Banks in ASEAN), in Nomura Capital Market Quarterly, Spring.

6. Kaga, R. [2013], Jissen Ajia no Infura Bijinesu (Practical Aspects of the Infrastructure Business in Asia), Nippon Hyoron Sha.

34 RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 13. Yamanaka, T. [2013], Asean no Ginko Sekuta Togo ni 22. Ding, Ding, W. Raphael Lam and Shanaka J. Peiris tsuite (Banking Sector Integration in ASEAN), in Insti- [2014], Future of Asia’s Finance: How Can It Meet tute for International Monetary Affairs, Newsletter, De- Challenges of Demographic Change and Infrastructure cember. Needs?, IMF Working Paper No. 126, July.

14. ASEAN [2008], ASEAN Economic Community Blue- 23. IMF [2013], Global Financial Stability Report, October. print.

24. IMF [2014], Global Financial Stability Report, April. 15. ASEAN Finance Ministers’ Meeting [2014], Joint Min- isterial Statement of the 18th AFMM, April 5.

25. Japan Research Institute Limited [2012], The Roles and Functions of the Banking Sector in the Financial System 16. Asian Development Bank, Asia Bond Monitor, various of the ASEAN+3 Region, ASEAN+3 Research Group Fi- issues. nal Report, March.

17. Asian Development Bank [2013], The Road to ASEAN 26. Korea Institute of Finance [2014], SWOT Analysis on the Financial Integration. Capital Market Infrastructures in the ASEAN+3 Mem- ber Countries and Its Implications, ASEAN+3 Research Group Final Report, February.

18. Asian Development Bank [2014], Asian Development Outlook, April. 27. Lee, Choong Lyol and Shinji Takagi [2013], Deepening Association of Southeast Asian Nation’s Financial Mar- kets, ADBI Working Paper Series No. 414, March

19. Asian Development Bank Institute [2014], ASEAN 2030 : Toward a Borderless Economic Community.

28. Oliver Wyman and CIMB ASEAN Research Institute [2013], Lifting-the-Barriers Roundtable: Capital Mar- kets, Network ASEAN Forum. 20. BIS [2014], Annual Report, 2013/2014, June.

29. Penelitian dan Pelatihan Ekonomika dan Bisnis [2014], 21. DAI-Nathan Group [2013], Impact of ASEAN Capital SWOT Analysis on the Capital Market Infrastructures in Market Integration on Indonesia’s Capital Market and the ASEAN+3 Member Countries and Its Implications, Economy, January. ASEAN+3 Research Group Final Report, February.

RIM Pacific Business and Industries Vol. XIV, 2014 No. 54 35 30. Shimizu, Satoshi [2014], Asian Bond Markets Initiative: The way forward, in Kinkyo, Takuji, Yoichi Matsub- ayashi and Shigeyuki Hamori ed., Financial Globaliza- tion and Regionalism in East Asia, Routledge.

31. Simmons, Catherine, Nick Wright and Hon Cheung [2011], The Prospects and Challenges of Southeast Asian Financial Integration, VISION FOCUS, State Street, October.

32. Singh, Datuk Rangit Ajit [2009], ASEAN Capital Mar- ket Integration Issues and Challenges,” in ASEAN: Per- spectives on Economic Integration, SR002, LSE IDEAS, June.

33. Thomas, Matthew [2014], How to Cultivate Asia’s Flag- ging Bond Growth, Asiamoney, May.

34. Volz, Ulrich [2013], ASEAN Financial Integration in the Light of Recent European Experiences, Paper prepared for a special issue of the Journal of Southeast Asian Economies, May.

35. Walsh, James P. [2014], The Future of Asian Finance, Finance & Development, June.

36. Wihardja, Maria Monica [2013], Financial Integration Challenges in ASEAN beyond 2015, ERIA Discussion Paper Series, November.

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