Financial for Development: Capital markets as a source of finance for development after the Asian cu

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Financial for DevelopmentCapital markets as a
source of finance for development after the Asian
currency crisis

• Prof. Stephen Y. L. Cheung
• Department of Economics Finance
• City University of Hong Kong

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Domestic stock markets in the country, experience
and future prospect

• Impressive GDP growth
• Stock indexes and turnovers have rebound back to
  the pre-crisis level

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Real GDP Growth Rate
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Stock Indexes
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Share Turnover
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Market Capitalisation
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Problems

• Hang Seng Index rose by 52
• All Ordinaries Index rose by 22
• Hutchison Whampoa and China Telecom (China
  Mobile) have gone up 200 and 550 respectively.
• Only a couple of stocks with good names or
  Hi-Tech background

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Infrastructure (1)

• Improvement in clearing settlement systems
• Increase system efficiency
• Lower costs
• Enhance systemic risk management

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Infrastructure (2)

• Continuous net settlement
• Reduce risk exposure
• Enhance derivative markets development

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Case study

• Merger of three clearing houses in HK
• Increase efficiency
• T 2 ? T 0 ?
• Goal
• Dematerialized shares
• Straight through processing
• Delivery vs. Payment ( D v P )

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Domestic corporate rating (1)

• Only major corporates have channel to the
  international debt markets
• International demand
• Participation of international credit rating
  agencies

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Domestic Corporate Rating (2)

• Problems
• Family controlled
• Minimal information disclosure
• Bank loan financing

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Domestic corporate rating (3)

• Promote local-based credit rating agency with
  creditability
• Promote the concept of cheaper financing through
  bond market

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Convertible bonds and equity dilution (1)

• Investor preference
• Lack of credit rating
• Right issues are popular

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Convertible bonds and equity dilution (2)

• Right issues are negative signal
• Proper monitoring system
• Improvement in corporate governance practices

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Encouragement of stock holdings (1)

• Improve regulatory framework
• Transparency
• Level playing field
• Accountability of regulators

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Encouragement of stock holdings (2)

• Improve corporate governance
• Information disclosure
• Reduce connected transaction
• Accountability of directors

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Encouragement of stock holdings (3)

• Financial products
• Retirement funds, MPF
• Tracker fund
• Derivative products

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Encouragement of stock holdings (4)

• Growth Enterprise Market
• KOSDAQ in Korea
• On-line trading, mostly retail investor
• Cheaper transaction cost, 0.5 ? 0.1

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KOSDAQ (1)

• On-line trading 45
• Retail investors 95
• Trading volume grew 252 times from January 1998
  to November 1999

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KOSDAQ (2)

• Established in July 1996
• 480 listed companies
• Market capitalisation is over 100Trillion KRW
• Index rose by 300 from October 1998
• Average daily trading value increased to 5
  trillion KRW from 5,500m KRW at the end of 1998

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Overview of bond market (1)

• Potentials
• High saving rate 30 in Asia
• Invest in fixed income securities of developed
  markets
• Retirement funds
• Benchmark yield curve reduces credit risk

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Great development potential for bond market (
of GDP 1998 )
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Bond Turnover
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Overview of bond market (2)

• Problems
• Liquidity
• Active in the OTC
• Widen the investor base, 80 held by financial
  institutions
• Derivative instruments
• Infrastructure enhancement

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Overview of bond market (3)

• Solutions
• Listed on the exchange
• infrastructure enhancement
• US clearing system
• Promotion of local credit rating agencies
• Retirement funds
• Education
• Retail investors
• Intermediaries

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Alliances with developed markets

• Complementary - time zone and technology
• Developed derivative market
• Lower IT development cost
• Cross-listing

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Examples

• Shares of 7 Nasdaq companies began trading in HK
  on 31 May 2000
• Welcome Euro shares to be traded in HK
• HSBC already traded in NY, HK and London
• SIMEX - CME - MATIF

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Exchange Alliance - Nasdaq 7 (1)

• Shares of 7 companies listed on the Nasdaq will
  be traded in SEHK in Q1 of 2000
• If 5 of the turnover is carried out in Hong
  Kong, turnover of SEHK would have increased by
  about 30

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Exchange Alliance - Nasdaq 7 (2)
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Alliances with regional exchange

• Weak linkage
• Different regulatory framework
• Different cultural background
• Dispute between SIMEX and HKFE
• Futures contracts on HK index

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Potentials (1)

• Development of Asian index
• Mutually owned by regional exchange
• Same trading rule
• Same regulatory framework
• Provide benchmark for fund managers

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Potential Asian Alliance

• Market cap of Asia 65 is more than 3 times that
  of the SEHK at end-1999

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Potentials (2)

• Diversification opportunity for regional
  investors
• Cross listing of stock across region
• Country funds, listed on other regional markets

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Potential (3)

• Lower IT development cost
• Enhance the depth and breath of regional exchange

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Asian online broking
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Challenges

• Intermediaries need to re-evaluate their own
  roles in a CYBER world
• Global investors in a hi-tech world view
  different financial markets as one single market
• Provision of an one-stop high value added
  financial supermarket ( I.e. the linking up of
  different financial markets )

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Challenges

• Provision of an efficient and low risk settlement
  platform ( I.e. the linking up of trading and
  settlement systems )
• Provision of a 24-hour trading environment ( I.e.
  the linking up of different financial centres )

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• End of Presentation