Asia Summit 2014 - Strengthening Asian Markets: Allocating Capital, Refining Policy

Market State and Structural Gaps

• Capital Shortfall: Piyush Gupta estimates a banking system capital shortfall of approximately $500 billion over the next decade to finance Asia's growth, noting that state-owned banks require deep capitalization to fill the gap.
• Market Size Disparity: Asia's total bond market (excluding Japan) is roughly $5 trillion, compared to the U.S. private sector bond market alone which is $25 trillion.
• Savings vs. Intermediation: While Asia holds massive savings surpluses (e.g., China's $4 trillion in reserves), the primary constraint is not a lack of savings but an "intermediation gap," with most capital currently flowing West only to return as investment.
• Public Market Depth: Equity markets in Asia are described as fragmented and small; consumer stock exposure in the MSCI Emerging Markets index is only about 8%, limiting direct investment in key growth trends.
• GIC Portfolio Composition: GIC's portfolio remains 75% invested in developed markets, citing insufficient liquidity and capacity in Asian emerging markets as the primary deterrent for domestic allocation.

Investor Requirements and Constraints

• Risk-Adjusted Returns: Private equity firms like Providence Equity and TPG prioritize specific corporate opportunities and returns on equity over broad GDP growth, as no five-year correlation exists between GDP and ROE.
• Currency Volatility: Foreign exchange risk is a major barrier for dollar-denominated funds; investors require stable exchange rates and free currency transferability, noting that hedging costs in high-growth Asian currencies are often prohibitive.
• Legal Framework: Investors cite the lack of creditor rights, predictability in bankruptcy law, and transparent corporate governance as key factors that stifle investment, particularly in debt and restructuring scenarios.
• Investment Allocation: Both TPG and Providence currently allocate approximately 25% of their global portfolios to Asia, significantly higher than the 3-6% allocation typically seen in public market indices like the MSCI.
• Government Policy Risk: Retroactive tax changes and regulatory unpredictability (e.g., corruption in mobile license allocations in India) are identified as primary "killers" for long-term capital commitment.

Future Market Development and Models

• Securitization Necessity: The panel agrees that asset-backed financing (e.g., infrastructure bonds, mortgages) is critical for Asia, contrasting with the U.S. post-GFC aversion to securitization.
• Currency Diversification: Mike Milken and others suggest developing deep swap markets and offering investment indices indexed to the Renminbi (RMB), Euro, Dollar, and Gold to attract capital.
• RMB Bond Market Growth: The offshore RMB (CNH) bond market is growing rapidly, with Chinese issuances in Hong Kong, Taiwan, and Singapore providing a potential catalyst for regional market depth.
• Singapore as a Hub: A Singapore corporate bond market denominated in RMB with Singaporean legal frameworks is proposed as an immediate, viable alternative for Chinese companies seeking financing.
• Leapfrogging Potential: Panelists anticipate Asian financial services may "leapfrog" Western models via digital distribution and mobile banking, potentially bypassing inefficient legacy infrastructure.
• Crowdfunding Impact: Technology-driven crowdfunding is expected to gain pace in Asia, allowing smaller capital raising that skirts traditional regulatory boundaries.

Regulatory Landscape and Infrastructure

• State-Owned Enterprise Dominance: Unlike the U.S., Asian capital markets are heavily influenced by state-owned enterprises (SOEs) and family-controlled businesses, complicating the transition to private enterprise financing.
• Infrastructure Funding: A massive global infrastructure deficit exists, but low yields and long durations deter private capital; the panel notes that Chinese firms often fund African infrastructure based on policy rather than return.
• Regulatory Friction: Basel regimes and liquidity rules are viewed as punitive for long-term infrastructure financing by insurance companies and banks.
• Regulator Sophistication: Regulators in Asian markets are described as generally sophisticated and rational, though their mandates often diverge from pure economic efficiency, sometimes prioritizing national interests over market openness.
• Harmonization Lag: The ASEAN Capital Markets Forum has struggled to achieve harmonization of rules or standardization of prospectuses (e.g., English language) over a seven-year period, indicating a glacial pace toward regional integration.

Forward-Looking Projections

• Market Size Potential: The consensus is that Asian capital markets could eventually equal or exceed the size of U.S. markets, driven by Asia's population being ten times larger than the U.S. and its GDP parity.
• Self-Financing Goal: The panel projects that Asia will move from financing the U.S. to financing itself, and eventually financing other regions like Africa, within a 5-to-15-year horizon.
• Talent Dependency: Future market success is contingent on the development of local human capital and the recruitment of global financial expertise to manage complex markets.
• Private Equity Trajectory: Private capital is expected to lead the transition to deeper markets faster than public markets, as private vehicles are better equipped to handle infrastructure and opacity.
• Long-Term Horizon: Full market maturity, where financial sector size correlates directly with GDP, is projected to take longer than the panelists' current careers, requiring sustained political will and structural reform.