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.
