Asian Financial Connectivity: Room for more

Asian portfolio assets make up less than 20% of Asia’s total cross-border holdings. While financial integration within Asia has increased over the years, it is limited by the diverse levels of financial sector development across the region. As Asia pursues greater financial connectivity and the benefits it potentially brings, policy co-ordination and surveillance frameworks will need to be strengthened.

04 Oct 2019 | 4 min read

Financial integration, according to research, is a function of trade and distance1. Cross-border movement of capital and financial services should increase as countries trade more with each other and are located close to each other. Yet, this has not fully materialised in Asia.

Thanks for subscribing!

Follow us :

Weak links

Financial integration in Asia is much less advanced than the level of trade integration. While more than 50% of trade flows in Asia are within the region2, intraregional investments only account for 20% of portfolio investments between 2003 and 2016, and 32% of syndicated loans3. On the other hand, Foreign Direct Investments (FDI) have fared better, with investments in the region accounting for around 50% of Asia’s FDI within this period.

Financial integration has remained low in the region despite the number of initiatives which has been set up over the years to promote greater financial connectivity. The Asean Comprehensive Investment Agreement (ACIA), for example, aims to establish a free, open, transparent and integrated investment regime for domestic and international investors throughout the ASEAN member states. Other initiatives include the ASEAN Trading Link, the ASEAN Capital Markets Forum (ACMF), the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund Initiative.

Asia’s cross-border asset holdings grew to USD17.0 trillion in 2017, with higher intraregional share of bond investments, bank deposits and FDI compared to 2012. See Fig. 1.

Fig. 1: Cross-border Assets - Asia4


While the intraregional share of Asian assets has increased on average, assets held outside the region still account for majority of total cross-border assets. Intraregional share only accounted for 18% of inward equity investments and 16% of inward bond investments in 2017. Most of the intraregional investments come from Hong Kong, Singapore and Japan - accounting for around 80% of intraregional portfolio equity and bond investments. These investments go mostly to China, Japan and Australia, although other notable destinations for intraregional bond investments have included Singapore and South Korea in 2017.

Why aren’t more Asians investing in Asia?

Asia’s relatively larger holdings outside the region arises from its large account surpluses over the years and hence, accumulation of US assets5. Asia’s more muted appetite for intraregional portfolio investments is also partly linked to the relative underdevelopment of some of the financial markets within Asia. At the same time, Japan and China are currently the two largest equity markets in Asia and the latter has been less accessible, opening up its capital markets gradually only in the recent years. Even then, the relatively lower levels of corporate transparency and limited availability of hedging instruments have deterred some Asians from investing significantly in China to date.

While diversity in economic development and growth helped create a complementary trade eco-system and supply chain network (link to trade article), the same cannot be said for financial integration. Although capital markets in various economies in the region have expanded significantly, some are still small and characterised by low liquidity, high transaction costs and narrow investor bases. For example, equity market capitalisation of listed domestic companies was 1052% of Hong Kong’s GDP in 2018, but only 54% in Vietnam.

The share of domestic credit to the private sector, another leading indicator of financial development, was 39% of GDP for Indonesia in 2018 versus the global average of 129%. Meanwhile, Asia’s financial sector is also highly concentrated in the banking sector. Nonbank financial institutions’ assets, for example, make up only 49% of GDP in Thailand versus 154% in the US 6.

Given the less developed financial sectors in some economies within the region, the range of financial instruments, sophistication and financial market depth needed to help regional savers diversify and hedge their risks may not be available. Notably, the relative underdevelopment of some of the financial sectors in Asia appears to play a less important role in attracting intraregional FDI.

Moving forward

Financial integration helps financial sector development, which can in turn improve efficiencies and lower costs. It is also expected to encourage greater trade and investments in the region, by facilitating the development of financial instruments that can help different parties hedge their risks. Deep, liquid and efficient capital markets can also enable the region to channel its huge savings into productive investments and diversify the sources of funding for economic development.

Greater financial integration will come about as Asia presses on with its various initiatives and financial markets evolve with economic growth. For example, Ngo The Trieu, CEO and CIO of Eastspring Vietnam believes that the adoption of global corporate governance standards and further progress on Vietnam’s State-Owned Enterprise (SOE) reforms will make the Vietnam equity market more attractive to regional and international investors.

As Asia pursues greater financial connectivity, it will need to balance the benefits against the risks of financial instability and financial contagion. Business cycles within Asia may be more closely correlated with shocks potentially transmitted quickly from one country to its neighbour. As such, Asia will require closer co-ordination of regulations, surveillance and crisis management frameworks going forward.

This article is part of our Asian Connections series, written especially to celebrate Eastspring’s 25th anniversary.

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)

Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).

Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).

Thailand by Eastspring Asset Management (Thailand) Co., Ltd.

United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.

European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.

United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.

Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.

The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.

The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.

Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.

Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.

Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).