Running from cyberwars to a radically different session on the Asian economies in the plenary room.
The session had the grand title: How seismic is this shift? A discussion about the implications of emerging growth markets, and was chaired by Dominic Hobson (or Doominic as he’s now named) of Global Custodian magazine with three key guys:
- Nobuyuki Hirano, President, Bank of Tokyo Mitsubishi UFJ
- KV Kamath, Chairman, ICICI Bank Ltd
- Simon Tay, Chairman , Singapore Institute of Intern. Affairs
Again, here are the highlights for me, and not quotes but summation.
KV Kamath: Asia will represent half of global GDP in the next few years and this will see emerging countries become supporters for other yet-to-emerge countries. As growth sustains, markets will become linked with demand for money and products strongest in Asia for the next 20 to 30 years. Thereafter you will see the same transformation across Africa. It will be an exciting time for the next 20 to 30 years.
Simon Tay: it’s not so much a shift of trade to Asia, but a shift of expectation. There are challenges, but if you look at Asia as an economy, there a lot of assets and attention coming to our region because of that expectation. Now, most of the time, we talk about Giant China and Giant India, and we will see the Rupee become a major currency soon, alongside the Renminbi, and the financial ties between China and the rest of Asia will also grow. But Asia is more than this. Asia has ten countries that are not as strong as one big country, but they are important too. There is Singapore, Viet Nam, Indonesia, Myanmar, Malaysia and more. These are markets with many millions of people and they have resources, demands and assets that will also be bankable. By collaborating through the ASEAN Economic Community http://www.aseansec.org/index.html , the South and South East Asia will become one of the pillars, along with China and India.
Dominic: Hirano-san, what can the ASEAN community learn from Japan’s experiences.
Nobuyuki Hirano: we feel some pain and regret in responding to this question, but the big lesson is that we have an aging population challenge. Over 40% of our people will be over 65 soon and rapid aging will damage Japan’s social system, as well as our productivity and growth. Increasing public spending and social security expenses are a big challenge and, historically, we have been fiscally incontinent. Government spending in Japan is the highest of any Asian economy, and this has resulted in major issues for our economy and economic system. Now this is being addressed with a meaningful step of increasing. This is not just a lesson we can share with ASEAN countries, as aging populations and fiscal reform are global issues, not just Japan’s issues. Some emerging economies are already seeing aging populations, even before their income achieves the levels of developed economies like Japan’s. So the lesson is around how to manage and organise the social systems, and reforms should be made before the problem emerges, not when it is in full flow. Another lesson we are learning is that, in the past, many Japanese companies have had international capabilities backed by Japanese innovation and technology, but some have lost their positions today. This is also not unique to Japan, as it has been seen in other global economies. But Japan still maintains a massive advantage in human resources, infrastructure, logistics and products. The key now is to create and invest in the next generation growth industries to replace our legacy industries, and encouraging the flow into investment by offering near to zero interest rates on savings. If Japan achieves this change it will be a valuable lesson for all.
Dominic: KV, where do you see the next generation of growth in this region?
KV Kamath: the opportunity is around expansion in the ASEAN region below the Singapore level, which will see huge growth as there is a massive demand for infrastructure. The aspirational growth driven by the needs of this region will be an opportunity. The next generation of consumers and today’s youth will have needs, and serving those needs will require infrastructure and capital. Just in India for example, there are around 600 million people who are unbanked in 600,000 villages. That is an opportunity. It’s a huge challenge to serve those people, but also a huge opportunity to bank the unbanked. The same will be true across ASEAN and China markets. Lending against infrastructure developments and servicing the new consumer demands will be the big drivers of change and opportunity in this region for the future.
Simon Tay: I agree, and the people best suited to take this opportunity are the Japanese and Chinese banks, as they can take a long-term view with low interest rates. The Western banks can try to get into these markets, but do they have the long-term view? Western banks might focus more on the aspirational consumer, as professionals and new consumers in this region respect the brand names from the West and look to those brands to serve their needs. That may change, but Singaporeans want a Singapore Bank or a Western Bank. This is where the Western banks maybe have the biggest opportunity. The banks that can get the reach and cost lower, and then facilitate payments, will be those that get rewards.
Dominic: Can the political systems keep up with economic growth, for example can China’s government keep up?
Simon Tay: keeping up the growth is a problem, as are social iniquities. This is much more on the table now than ever before, not just in China but India and elsewhere. The disparities are too clear. And the bigger issue of dealing with growth is dealing with a crash. Japan and Britain have done a great job of dealing with this, and Asian countries are not ready for this but they should be. They are riding a wave and the concern for the political system will be when the wave crashes. This is why Japanese banks have a great opportunity as they are very trusted. Japanese banks have been in this region for a long time, and there is an assurance about how they approach things therefore. As Japanese companies go out and seek projects across Asia, it makes sense for Japanese banks to follow them. This opportunity should not be underestimated.
Nobuyuki Hirano: there is a challenge with this, as there are multiple supply chains that are like a spider’s web from regional to domestic supply chains. Within these it’s not just Japanese multinational firms that are in this chain but SMEs too, and understanding these links between countries and companies are where the banks can seek leverage. As Simon says, we have a good relationships because of our long history in the region and we cannot just work with Japanese firms, but all Asian firms and countries.
Dominic: how do you see growth in India KV?
KV Kamath: the big growth opportunity in India for the past few years has been the consumer. This has been led by credit card and loan financing, which is a recent phenomenon. The next big domestic opportunity is banking the unbanked, as I said before. This is the centrepiece of our going forward strategy – inclusive growth. We need to touch the whole population, not just the wealthy, and that is where we see the big opportunity for the next decade. The challenge of inclusive growth is reach and cost. The ability to reach and bank 600 million unbanked people means that we are looking at a new banking correspondent model. The idea is to have agents in the 600,000 villages. You then have technology to support them, using mobile devices for example. The cost of this is a quarter of what it was just two years ago and, last year, the growth of the people connected to the internet using a mobile increased 850% in India. That represented a 50% increase in overall internet usage in India. So you can now take technology down to the masses at a fraction of the cost you used to, and this will be key for all markets, not just India. Just five years ago, you could not have done this but today, you can. Technology is driving emerging Asia and the emerging world to new frontiers and new banking.
Dominic: What are the regulatory implications of these markets and growth opportunities?
Nobuyuki Hirano: Japanese banks are well capitalised and structured, which is why we have no concerns about the implementation of Basel III, but that should not give the impression that Asian banks are robust from a crash due to the current sluggish environment, along with issues that exist as risks from demographic change and fiscal incompetence as discussed before. But the real issue is the risk of a one size fits all regulation. Unintentionally this may destabilise the financial system. Regulators must strive to create principles-based frameworks that allow implementation to match each country’s situation. There are rules in the UK and USA for example, that may constrain financial firms from providing the money to the real economy that is required globally or locally. We will be monitoring their consequences very closely from now on which why we have created a regional grouping of financial firms to have one voice to the global regulators.
Simon Tay: the regulatory question is a critical one as we are struggling to find the right framework for an Asian regulatory system. Maybe there is not one, but the danger is that we end up importing the wrong one as the medicine being applied to the Western banks might make us choke. The real question is whether the economic system integrated globally or whether it is decoupled, and that should determine where we need the financial system to have global regulations versus local.