yuba raj khatiwada : development of regional capital markets in asia – issues and challenges speech by dr yuba raj khatiwada, governor of the central bank of nepal and chairman of the seacen board of governors, at the 50th seacen governors ’ conference, port moresby, papua new guinea, 20 november 2014. * * * 1. asia is the fastest growing economic region of the world and the engine of global economic growth. but its growth is still dependent on ( i ) external demand from advanced economies and ( ii ) external capital and direct investment. the region has the highest saving rate and keeps on funding the fiscal deficits of many economies of the advanced world. at the same time, the region lacks sufficient long term fund for promoting investment for high economic growth. sustaining high economic growth in the asian region requires huge investment in both public and private sectors. big infrastructure projects are likely to demand high amount of capital even above the capacity of domestic market ; and resorting to international market for the same is not always practical. this is where the development of regional capital markets in asia is called for. 2. a regional capital market implies that there are no barriers to the movement of capital and the provision of investment services within a geographic region. this implies that domestic savers find suitable instruments for saving in the region and investors / issuers can invest or raise capital in other countries along with domestic markets, all knowing that they will encounter broadly similar regulations, information, trading systems, settlement systems, accounting standards and governance standards throughout the region. while development of regional capital market is necessary to promote investment and economic growth in asia, it is also instrumental to strengthen domestic capital markets and provide liquidity, scale, and capacity and ultimately put asia in the position to integrate with global market. however, the development of capital markets in asia has not kept pace to that of economic growth in the region relative to other regions of the world. this has led to the asian investors ’ continued dependence on the markets of advanced economies for mobilizing long term capital. 3. developing a regional capital market leads to the convergence of risk adjusted returns on financial assets of similar maturity across the region. further, it helps the deepening of domestic capital markets, increases competition, and widens the range of instruments available for savings and investments. these changes, in turn, lead to more efficiency and innovation in the provision of services to savers, investors, and issuers. more innovation in such financial

along with the risk taking capacities of the banks. policy makers thinking about developing a stronger asian regional capital market will have to assess this situation in depth. 10. various potential barriers, which may be related to regulations, taxation, or monopoly, pose serious challenges towards the capital market integration. regulatory barriers like exchange controls and restriction on foreign listings restrict the movement of capital towards its efficient use. taxation barriers alter the economic comparison between different activities or participants leading to narrower markets and higher costs. monopolistic structures like limitations on the total number of stock exchange members prevent access to particular parts of the market, reduce competition, and increase costs for all users. 11. also important are fairness barriers and information barriers. fairness barrier such as explicit discrimination against foreigners or a perception that such discrimination exists deter them from entering the market. likewise information barriers could exist when there are significant differences in accounting standards or disclosure requirements, and lack of transparency of trading, which prevent nonlocals from seeing the state of the market. a multidimensional approach with strong regional cooperation is required to overcome such potential barriers and move towards the regional integration. efforts should be directed towards harmonizing rules and practices by addressing major differences in laws, regulations, and tax treatments that prevent investors from building regional portfolios. emphasis should be given to convergence with globally accepted standards and best practices, which will also facilitate easier global integration later. 12. a major challenge faced by asian nations towards developing a regional capital market is the building of necessary market infrastructures. establishing links between national clearing and payment systems, creation of regional credit rating agencies and benchmarks should be emphasized to enhance the depth and liquidity of capital markets. 13. one more challenge to the asian capital market is the limitation of bond market. currently, more than 80 per cent of the asian bond market is contributed by government bonds. corporate bonds issues are still limited and companies are often inclined to bank loan financing than resorting to the issuance of bonds. in future course of time, government bond market is expected to saturate for the reason that ( i ) public debts are on the rise and such debt levels do not allow governments to incur high deficits and issue bonds to finance the deficit, and ( ii ) the past fiscal profligacy and subsequent macroeconomic imbalances of some of the asian countries have taught strong lessons on not incurring high fiscal deficits. therefore, if the development of the asian capital market in terms of bonds is concerned, there is