Although Asia has become the biggest economic region in the global economy in recent years, its financial sector is lagging behind. However, increased momentum in hegemonic, technological and economic developments will accelerate Asia’s rise as a financial powerhouse. As a result, Asia will increasingly become a major player in the global financial system trailing its economic rise.
Asia is currently the fastest growing and has become the largest economic region in the global economy in recent decades. However, Asia’s financial development still lags behind its economic rise. First of all, Asia’s internal financial market is one of the least financially integrated markets, as currently more capital flows between Asia and other regions than within Asia. Furthermore, Asia’s long-term savings markets and institutional savings vehicles – like pension, insurance and mutual funds – are underdeveloped, although growing very rapidly in recent years (Asia’s sovereign wealth fund sector is relatively large, as we have written before). Lastly, Asian equity and bond markets are still immature, generally lacking liquidity, depth and trading volume compared to major stock exchanges in developed markets, with strict regulation for offshore funding.There are three axes along which momentum is building for Asia’s financial development. The first is that large investment projects are currently undertaken that deepen regional trade and FDI– like China’s BRI, the Japanese-Indian Asian-African Growth Corridor or India’s maritime investment policy. Financial integration generally follows the tracks of trade and FDI and considering these projects also explicitly promote financial integration - like better access to offshore bond and FX markets - it is expected that intra-Asian financial integration accelerate along with these projects.Second, the digitization in many Asian societies and economies is gaining momentum. The adoption of digital technology, such as smartphones with internet connections, can stimulate financial inclusion, by giving lower- and middle-income households and SMEs better access to traditional finance mechanism from which they were previously excluded (i.e. commercial banks) or new funding sources (i.e. P2P lending or micro-credits). For example, poor Indians now ‘pay’ with their data instead of collateral when taking on loans, and the rise of China’s fintech and e-commerce industry shows how local Chinese companies benefit from global business opportunities in the digital economy. Lastly, Asian powerhouses want to leverage their economic rise into a more dominant position in the global financial system, for example by establishing financial hubs, as we have written before. There are economic reasons, like benefitting from increased household wealth and supply of savings in the world’s fastest growing economic region, but also hegemonic motives, especially as competition and rivalry between regional Asian economies intensify. Japan, for example, as it is ending its decade-long deflation, wants to boost Tokyo as leading financial hub for intra-Asian trade amid political turbulence in London (Brexit), New York (Trump’s presidency and trade wars), Hong Kong (Chinese ‘mainlandization’) and Shanghai (financial regulations in recent years). And Asian economies want to boost their own currency in the global financial system or divert their dependency on the U.S. Dollar. China’s Renminbi, for example, accounted for less than 2% of global transactions last year, while China accounts for 15.5% of global GDP (18.8% in PPP terms). The same goes for the Indian rupee, which accounts for barely 1% of global transactions, while India’s economy accounts for 3.2% of global GDP (7.7% in PPP terms).