On 16 June 2015, the Australian Centre for Financial Studies (ACFS) launched its report ‘Financial Integration in the Asia-Pacific: Fact and Fiction’ at a breakfast event hosted by PwC in Sydney.
Speaking at the event, ACFS Chairman Jeremy Duffield noted that the report marks the first stage of ACFS’ fifth major project in recent years, after the success of Funding Australia’s Future, the Melbourne Mercer Global Pension Index, the CSIRO-Monash Superannuation Research Cluster and the Australian Equities Database. Mr Duffield explained that the report aims to separate fact from fiction, canvassing existing data and research to establish what we do and do not know about financial integration.
Mr Duffield introduced the keynote speaker, Dr Guy Debelle, Assistant Governor (Financial Markets) at the Reserve Bank of Australia. In his address, Dr Debelle noted that financial integration has not been a monotonic process, and that “it is not always onwards and upwards.” Comparing the structures of financial systems around the world, Dr Debelle argued that the regulatory reform program after the crisis has tended to increase the cost of bank-intermediated finance. “As a result, market intermediation is increasing, which will have implications for the future of financial integration in Asia,” he said.
Turning to China, Dr Debelle noted that a major influence on the future path of financial integration in the Asia-Pacific region will be developments in Chinese financial markets. China is on a path of financial deregulation and capital account liberalisation. However, according to Dr Debelle, “almost no other country has managed this process without encountering significant problems.”
The full text of Dr Debelle’s speech can be found on the RBA’s website at ‘Remarks on Financial Integration in the Asia Pacific.’ An audio recording is available here.
In introducing the panel discussion, Andrew Parker, the leader of PwC Australia’s Asia Practice, spoke briefly about PwC’s research on opportunities in Asia for Australian businesses. A recent PwC report, ‘Passing Us By’, suggests that Australia’s level of investment in Asia is “woeful” and that Australian businesses are largely ignoring the world’s fastest growing region. The ANZ PwC Asialink Business Services Report ‘Australia’s Jobs Future’ demonstrates that by 2030, services can become Australia’s number one export to Asia, with financial services being an area of real competitive advantage for Australia.
Amy Auster, Deputy Director of ACFS, opened the panel discussion with an overview of ‘Financial Integration in the Asia-Pacific: Fact and Fiction’. According to Ms Auster, Asia is quickly becoming the world’s economic centre of gravity. The region features large and growing domestic financial sectors, with countries like Vietnam, China, the Philippines and Hong Kong SAR experiencing significant financial sector growth (relative to GDP) since 2005. China, in particular, has grown its regional share of outstanding credit, and now accounts for over 40 per cent of all outstanding credit in the Asia-Pacific region.
However, most of Asia still lags behind Australia on a simple measure of financial integration: the sum of foreign assets and liabilities as a proportion of GDP. A critical barrier to further integration is the high barriers to services trade in commercial banking and insurance in nations like China, Indonesia and India, especially compared against the OECD average. These barriers may partially explain why Australia remains heavily oriented toward the United States, United Kingdom and New Zealand in its financial relationships. Ms Auster concluded by highlighting the existence of critical gaps in primary data, modelling and research on financial integration in the Asia-Pacific region.
The panel, comprising Ms Auster, Dr Debelle, and Hugh Harley (Financial Services Leader for Australia, PwC), took questions from Mr Parker and from the floor.
In responding to audience questions, Ms Auster noted the importance of recognising that Asia consists of numerous markets with diverse sets of rules and regulations, and suggested that regulators in Australia may need to do further work on capital requirements associated with foreign joint ventures. Ms Auster also posited that Australia, as a medium-sized, open economy, could serve as a useful case study for Asian countries in the process of liberalisation.
Asked about the recent launch of an official renminbi clearing bank in Australia, Dr Debelle suggested that the clearing bank (along with a new bilateral local currency swap agreement between the Reserve Bank of Australia and the People’s Bank of China) was symbolically important and “a demonstration that the Chinese are interested in our [Australia’s] engagement into China as against other countries.”
On the topic of the Asia Region Funds Passport, Mr Harley noted that taxation appears to be the sticking point in negotiations, but that “bit by bit, we seem to be moving in the right direction.” Mr Harley also suggested that Australia has to “run its own race”, with Australian businesses needing to differentiate themselves by taking advantage of the fact that Australia is viewed more favourably in Asia than the United States or Europe are. In the absence of any real prospect for multilateral trade agreements, Mr Harley saw the recent conclusion of three free trade agreements (with China, Japan and South Korea) as being a positive development.
‘Financial Integration in the Asia-Pacific: Fact and Fiction’ was co-written by Amy Auster and Martin Foo of the Australian Centre for Financial Studies. The report was sponsored by Finsia, the leading professional membership association representing the entire spectrum of the Australasian financial services industry. The Australian Centre for Financial Studies acknowledges Finsia for their financial support and PwC for hosting the event.