Towards the global integration of Asian stock markets

With Asian companies now the world’s largest users of public equity financing, OECD’s Mats Isaksson looks at what this means for the global integration of Asian capital markets and the international corporate governance dialogue.

In 2017, 43% of all equity raised via public equity markets in the world went to Asian companies, according to the 2018 edition of the OECD Equity Market Review of Asia. This means that Asian corporations raised more equity across the stock market than all US and European companies combined.

Needless to say, China is a large part of this story. But not the whole story. Over the past decade, countries like Korea, Viet Nam, Thailand and Indonesia all conducted more initial public offerings (IPOs) than countries such as France, Italy and Germany.

43% of all equity raised via public equity markets in the world went to Asian companies in 2017

The growth of Asian equity markets comes with a number of structural changes in their use and function. So in addition to the analysis of primary and secondary markets, the OECD review also provides extensive data on ownership structures, growth company financing and the development of investment banking activities in the region.

The global integration of Asian capital markets

Looking at all of these different aspects it becomes evident that the rise of Asian public equity markets has both regional and global implications, both for business and policy makers.

At a regional level, capital markets are becoming more complete with stock market financing serving as a complement to more traditional forms of finance, such as bank lending. This means an additional and market-based mechanism that will help to allocate scarce capital effectively among competing ends and continuously scrutinise how well individual firms are actually using the capital that investors provide.

Since equity capital is particularly well suited to forward looking investments such as R&D and innovation, increased access to equity financing will also have a positive impact on Asian business sector dynamics. The OECD review shows that, while smaller growth-oriented companies raising public equity have almost disappeared in the US and Europe, growth company IPOs of less than USD 50M have remained strong in several Asian jurisdictions, including Japan, Korea and Hong Kong, China. Notably, the number of IPOs by Chinese growth firms has increased quite dramatically in the last 5 years, reaching levels last seen in the US market at the end of the 1990s, an era that witnessed the IPOs of some of today’s tech giants, such as Amazon.

At a global level, more developed equity markets will allow Asian companies to seek finance from a worldwide pool of investors. Today, almost half of the world’s listed companies are Asian. Thousands of them are listed or traded abroad. The flip-side of the coin is obviously the investment opportunities that may arise for foreign investors. Today, approximately 80% of institutional ownership in Asia is by foreign institutions. With a number of reform initiatives underway and the recent inclusion of Chinese A-shares in the MSCI emerging markets index, it is reasonable to assume that foreign institutional ownership will increase and that the global integration of Asian equity markets will deepen. This process of integration will also include the market for investment banking activities and other services that come with more developed and sophisticated public equity markets.

The international corporate governance dialogue

By definition, the process of global integration brings increased interdependence between investors and corporations from countries with different legal, regulatory, economic and cultural traditions. One feature that increasingly attracts attention in emerging Asian stock markets is the significant presence of state-owned enterprises. This may indeed give rise to some cross-fertilisation. But it also calls for the development of a common language and shared expectations when it comes to key corporate governance areas, such as company law, securities regulation and enforcement.

The OECD capital market series is an important resource for informing this dialogue, which should use the G20/OECD Principles of Corporate Governance as the natural benchmark. The G20/OECD Principles are endorsed by the countries home to the world’s largest capital markets and they address issues of direct relevance for sound regulatory practices. To host this dialogue, the OECD has established several platforms, including the OECD Corporate Governance Committee and the OECD Asian Roundtable on Corporate Governance.