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Asia faces major hurdles in capital market integration
Asia is facing numerous obstacles to its efforts to eliminate barriers to capital flows and create an integrated financial market, even as governments in the region acknowledge a need to deepen financial links.
The Asset 26 Nov 2014

 Asia is facing numerous obstacles to its efforts to eliminate barriers to capital flows and create an integrated financial market, even as governments in the region acknowledge a need to deepen financial links.

 

“Financial market integration is a very ambitious and challenging task,” said Noritaka Akamatsu, deputy head of the office of regional economic integration, Asian Development Bank (ADB), in an opening address at The Asset’s 9th Asian Bond Market Summit in Singapore today.

 

The challenges are technical, as well as, diplomatic, he said. Akamatsu cited as an example the frontier economies in Asia where governments rely heavily on concessional loans and whose domestic debt markets remain underdeveloped.

 

Political and diplomatic reality often trumps practical and economic advantages, he noted. Although the benefits of a central hub for bond trading and settlement are apparent, governments reaching an agreement on where to locate it may be a difficult diplomatic task, he said.

 

The recent turmoil in the Eurozone underscores the complexity of unifying capital markets and could make nations in Asia more cautious about proceeding fast with the integration.

 

Moreover, certain regulatory initiatives, like Basel III, can interfere with efforts toward a unified market. The widely-adopted Basel III banking rules impose tougher leverage ratio requirements on banks. That means banks will prefer to invest in the highest quality corporate bonds in the region, over those of lower, but still investment-grade quality bonds, Akamatsu said.

 

He urged regulatory authorities to create the framework for cross-border capital flows, but warned them against confusing control with creating impediments to capital flow. Restrictions on cross-border capital flows may be convenient, but they are a poor, temporary substitute for actual effective control, Akamatsu said. He said that the goal should be to enhance control, while eliminating impediments.

 

While governments may drag their feet on the tough initiative, the private sector can help enhance regional links.

 

“The role of the private sector is absolutely critical, but government authorities and market participants must work together,” he said.

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