The Future of Asian Finance

• Author: James P. Walsh
• Position: a Deputy Division Chief in the IMF’s Monetary and Capital Markets Department.

In spring 1988, a bank in the Shenzhen Special Economic Zone, established eight years earlier in southern China near the border with Hong Kong SAR, began to buy and sell shares in local companies to investors. A few other financial institutions quickly noticed a lucrative business and became involved. Two years later, the Shenzhen Stock Exchange was founded.

Today, Shenzhen is among the world’s 20 largest stock exchanges, and the companies listed there have a total market capitalization of about $1.1 trillion, comparable to the stock markets in Switzerland and Madrid. Across Asia, the rapid growth of financial sectors is an important part of the growth miracle that has made Asia the world’s most dynamic region. Analysts look closely at the financial risks that Asia faces today, but sometimes it’s interesting to look farther forward. So with this dynamism expected to continue, what will Asian financial sectors look like in the future?

As countries get richer, their consumers demand more financial services, from mortgages to credit cards, and the financial needs of their businesses, from buying property for new stores to financing equipment for new factories, grow as well. Asia’s growth has thus facilitated an equally dizzying expansion of the region’s financial sectors.

Between 2000 and 2012, the total value of companies listed on India’s stock markets rose from one-third to two-thirds of GDP, and those in Indonesia from one-sixth to almost one-half. The total volume of loans provided by banks rose from 75 percent of Korean GDP in 2000 to 169 percent in 2012, while in Vietnam, it rose from 33 percent to 105 percent. The financial markets in these countries, combined with the global financial hubs of Hong Kong SAR and Singapore and the large and developed markets in Japan, Korea, and Australia, make for an extensive financial sector in Asia as a whole.

Different from others

Asian countries tend to have larger financial sectors than countries in other regions at similar levels of income. But Asia is a diverse place, and while financial sectors in its dynamic emerging markets are large, they are not yet as large or as sophisticated as those of Asia’s advanced economies. For example, while bank lending among Asia’s emerging markets—105 percent of GDP at the end of 2012—tends to be a larger share of GDP than in emerging markets in other regions, the share among Asia’s advanced economies is 194 percent.

Asian financial sectors differ in other ways from those in the rest of the world, too. Banks dominate the financial sector in most Asian advanced and emerging markets, as they do in Europe, but unlike in the United States, where equity and bond markets have a larger role.

Asian banks also tend to be more focused on the traditional bank businesses of deposit taking and consumer lending to households and companies, and rely less on lending to other banks and on selling products such as swaps and other derivatives. This was an advantage during the global financial crisis, when dependence on borrowing from other banks created problems across the United States and Europe as markets seized up.

This reliance on traditional banking is why shadow banking—whereby nonbank financial institutions engage in services traditionally provided by banks—is a relatively new phenomenon in most Asian economies, even though such activities are widespread in many markets in Europe and North America. And while shadow banking and other nontraditional financial services are grabbing headlines and growing quickly in places like China and the Philippines, the base from which they have grown so rapidly was small 10 years ago.

Another area in which Asia’s financial sector differs from the rest of the world is its capital markets. Stock markets in Asia tend to be highly volatile compared with those in other regions, though they often enjoy higher returns. Although Asia’s advanced economies have relatively sophisticated and deep...