Free flow of capital in Asia ‘critical to investment in infrastructure’

IMF deputy managing director Min Zhu said in an article for the organisation that Asia is set to be the “powerhouse for growth in the next decade, just as it was in the last one”. However, he said the region must continue to invest in transport, power and telecommunications infrastructure, sectors in which Asia “lags behind other regions such as Latin America”.

Zhu said: “Asia has a large pool of savings but, despite potential high returns in the region, most of these currently leave the region. And so a critical challenge is to ensure that there are no impediments to the healthy flow of capital across the region so that savers can find the best returns for their investment and infrastructure financing needs can be met. Securing small and medium sized enterprises access to finance would also support investment.”

Zhu called on the region to foster a long term investor base to “help build up a stable source of finance for infrastructure projects (for example through unlisted funds), which would require the development of an appropriate back office support infrastructure”. However, Zhu said “with institutional investors relatively small in most countries, and barriers to investment across borders still high, this will be a long-term process”.

As financial systems become more integrated and complex, Zhu said “a regional perspective” will be increasingly important to addressing regulatory and supervisory challenges. He said options for addressing this issue could include the “formation and strengthening of supervisory colleges”.

Zhu said “careful planning and policy implementation” is also needed to prepare for potential risks that come with greater global financial integration. He said: “As Asia’s financial systems become bigger they are also likely to become more complex and interconnected than they are today.”

According to Zhu, market development “including shadow banking and increased complexity can also raise risks, with a potential for problems to spread across borders with an impact beyond Asia”. He said: “At the same time, big changes are being made to the global regulatory environment that are likely to create a number of challenges for markets and regulators alike, affecting financial flows and the size of banks and shadow banks, as well as prudential ratios and resolution frameworks.”

To ensure economic and structural transformation, Zhu said Asia needs a more diversified financial system “with deeper and more liquid markets, which will require a broader and more diverse investor base (and) greater involvement of long-term investors”.

Zhu said supporting social stability and meeting the financial services needs of a growing middle class in the region, such as in retirement and property purchase planning, also requires “longer-dated assets and an asset management industry with a longer horizon”.

According to a recent report from professional services firm PwC (24-page / 5.68 MB PDF), the Asia-Pacific market will represent nearly 60% of all global infrastructure spending within the next 11 years. PwC said growing urbanisation in emerging markets such as China “should boost spending for such vital infrastructure sectors as water, power, and transportation”.