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‘Asian century’ will dominate global financial markets

07/04/2014|Paul J Davies  financial times
 Imagine you are a currencies or commodities trader in London in the year 2050. What do you think would be happening at around 10am?

There is a very real chance you would be winding down towards the quiet time in your market, even finishing your shift. In roughly three-and-a-half hours’ time, things would start to crank up again when New York came on line for what would be the beginning of the next global trading day.

This picture tells you a lot about what the “Asian century” will look like, according to Warren Hogan, chief economist at Australian bank ANZ.

In the 21st century, the contribution of Asian industry to global gross domestic product has already leapt from just over 20 per cent to more than 30 per cent, driven mostly by China since its accession to the World Trade Organisation.

However, this industrialisation has happened without financialisation – growth has been funded by domestic bank loans or lending and investment from outside Asia.

Mr Hogan reckons that an Asian century will only truly arrive with huge growth in Asian financial markets to the extent that they will come to dominate global finance. That will mean the most important price action and discovery will be anchored around Pacific time zones rather than Atlantic ones, Mr Hogan reckons – hence your need to swap lunchtime for nap time in 2050.

“No more sleepless nights for Asia’s FX traders in the future,” he says. “It will be traders in London having to get up at all hours to respond to unexpected economic data and policy events.”

He has some startling predictions about how the Asian financial century will look. By 2050, China will account for one-third of global GDP, with the rest of Asia taking the region’s total contribution to more than one half, he reckons. The US and Europe together, meanwhile, will make up less than 15 per cent.

A financial revolution will be needed to drive this growth, which will mean that China’s bond markets, for example, will become ten times bigger by 2030 – from just over $3tn today to $32tn. The entire Asian financial system – banks, bond markets and equities – should grow to be more than double the size of the US and Europe combined in 16 years’ time at about $210tn for Asia versus $91tn for the US and $82tn for Europe. By 2050, Asia’s financial system could be more than four times the size of its western neighbours, Mr Hogan reckons.
This kind of financial depth is essential if emerging Asia and especially China are to be able to fund their own companies, infrastructure and consumer spending – and so be sure of making the leap from low and middle to high income countries. The real question is how to achieve such an extremely complex and potentially fragile evolution at incredible speed. And the counterpoint to such bullish projections for Asian markets’ growth is to consider just how shallow they currently are.

Banks still dominate Asian finance – again particularly in China – and institutional investors, which funnel private savings to capital markets, are lacking.

China’s entire life insurance industry, for example, has total assets of less than its largest bank, ICBC. Its mutual fund industry is also still tiny, with total assets under management equivalent to less than 20 per cent of GDP at the end of 2012, according to Citigroup’s fund services arm, versus almost 70 per cent in Japan and more than 150 per cent in the US.
Fitch Ratings estimates that bank lending makes up 62.5 per cent of all credit in China, with bonds and shadow financing accounting for the rest. However, that is before adjusting for the fact that banks are the biggest single owners of bonds and may well be liable for most for the shadow sector, too.

The rest of Asia may not look quite so extreme as China in this sense, but it is not much further forward and China is the market where development is most important.

Most discussion about whether Asia can escape the middle-income trap revolves around how to move up the manufacturing value chain, or develop more service industries. But developing financial techniques and technology are probably even more important.

Regulators are aware of this. Ashley Alder, head of the Hong Kong regulator who also leads Asian peers in discussions on how to improve regional markets, told the FT recently that they also know co-operation is all important.

“The question for Asia, with volatile foreign capital and currency dependence, is how do you create sustainable Asian markets, which require a degree of co-operation to basically mobilise savings to achieve that,” he says.

As ANZ’s numbers show, the direction of travel is clear, yet the challenges along the road are immense. The message for London traders is: don’t adjust your sleeping patterns just yet.


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