HSBC: ASEAN demands attention

HSBC: ASEAN demands attention

What regulatory and demographic factors are driving Asian capital markets?

Regulatory change and the development of Asian infrastructures are driven, in large part, by what happens in the US and the EU.

In the same way, investors from the US and the EU, who represent about two-thirds of global portfolio flows into Asia, are the principal target of efforts by regulators in the region to improve and extend their capital markets and the regimes that govern them.

The reforms include changes to make markets fairer, more efficient and safer. Progress signals to key index providers, and the investors that watch them, that these markets are capable of transitioning from frontier to emerging markets.

When the designation becomes official – by inclusion in the appropriate MSCI index, for example – the effect is considerable additional inflow into the market in question.

Specific recent examples of improvements to the securities servicing environment in Asia can be found in the growing adoption of T+2 across the region. Australia, New Zealand and Vietnam made the shift in 2016; Singapore should achieve T+2 sometime in 2018.

Why should investors pay special attention to the ASEAN block?

The ASEAN region – Thailand, Malaysia, Singapore, Vietnam, Philippines and Indonesia – has attracted a good deal of excitement over the last couple of years.

The region’s favourable demographic picture is already beginning to have an effect on the economic one; the region has a combined population of 568m.

Between 2007 and 2015, ASEAN recorded an annual growth rate of 5.3%, and its 2015 GDP of $2.4trn makes it the third-largest economy in Asia and the 6th largest globally. 

In 2015, the region also accounted for the fourth largest share of global trade, at $2.3trn1. In the near term, the demographic case for investing in the ASEAN region is compelling.

By 2015, according to the World Bank, ASEAN countries boasted a quarter of the world’s total population. By 2030, the IMF estimates that 55% of these will be in the middle class, a total of about 400m people (by the same date two-thirds of the world’s middle class will be Asian).

If the ASEAN region is treated as a single country it would rank first in the world for the number of cities in the top 100 business process outsourcing (BPO) locations worldwide, second in total foreign direct investment (FDI) flows; second in the number of monthly Facebook users, as well as third in overall population, annual gross national savings and the number of households with an income of $10,000 or more.

What influence will demographic and economic factors have on the development of ASEAN capital markets?

In addition, the region is enjoying a process of rapid urbanisation, a broad shift to representative democracy and a young, tech-savvy population. The factors combine to provide circumstances that could be ideal for the growth of financial services.

In particular, growing affluence and a favourable demographic balance bodes well for the growing penetration of investment and insurance products.

With Chinese GDP growth figures continuing to slow – despite small recent gains, the growth rate remains below its recent historical average – investors and companies are looking increasingly to ASEAN countries as alternative investment destinations.

While increasing labour costs have ramped up the cost of manufacturing in China, for example, those in ASEAN countries continue to be low.

This likely result in the coming years could be a continuing shift of manufacturing to ASEAN countries. I think this will, in turn, continue to favour the development of the region’s local securities markets.

On balance, how do the prospects for ASEAN compare with those for China and India?

At the level of individual countries, none of the ASEAN members may attract as much interest from international investors as say, China or India. Collectively, however, the ASEAN region’s strong demographics should ensure the stories of these countries remain compelling ones over the mid-term.

HSBC has been active in helping shape the regulatory and commercial landscape in each of these countries. Regulators have consulted with us, seeking advice and insight into what neighbouring countries are doing and how far they should adopt the same approach.

We will continue to have a central role and an exclusive perspective on how these markets develop in the coming years. 


The prospects of ASEAN countries


With around 5.8m of ASEAN’s total of 568m people, Singapore is small in population terms. However, the country has developed as a leading regional economy and has established itself in particular as an offshore financial services location.

The country’s regulator is looking to attract further foreign investment by positioning the country as the financial technology hub of Asia. To this end, it has committed itself to developing a “regulatory sandbox” in the coming years: a safe space in which financial technology firms can develop and test products under more flexible regulatory standards.

In exchange for appropriate safeguards in their testing models, companies can be confident that their experimental innovations will not be curbed by a sudden regulatory crackdown.

In 2014, Prime Minister Lee Hsien Loong announced plans to make the city-state into the world’s first smart nation by 2030. The government has pledged to use technology throughout the economy – and in all areas of society - to improve citizens’ standard of living.

At the heart of the new vision are efforts to promote collaboration between the sectors of technology, financial services, the research industries and institutions of higher learning as well as other innovation professions and government agencies.

In financial services efforts are focussed on developing Application Programming Interfaces (APIs) to open up the banking system (APIs refer to the system or programming innovations that allow existing applications to interact – combining mobile retail banking interfaces with back office settlement systems, for example).

All this is helping to build a vibrant ecosystem for innovation, which should attract the best in international talent, specialising in the cutting edge research necessary to achieve ground-breaking discoveries that propel industry and society forward.

A recent report by Ernst & Young for the UK Treasury put Singapore fourth in the world for the quality of its innovation, ahead of Germany and Hong Kong and behind only the east and west coasts of the US and the UK.

Singapore may not be about to win the population race – or even the competition for the world’s fastest growing economy – but it may yet become one of the world’s leading centres for innovation in general and financial technology in particular.


A recent $32bn bilateral agreement was signed between Malaysia and China, as part of China’s Belt and Road initiative. Malaysia is also pursuing a national transformation plan, the goals of which include increasing the population from its current 31m to 50m by 2050.

In March, the Alibaba Group and the Malaysia Digital Economy Corporation (MDEC) launched Malaysia’s Digital Free Trade Zone. It is the world’s first special trade zone and targets the growth of e-commerce by providing a supportive environment in which small and mid-sized companies can transact products and services.

The project is aiming to account for $65bn in trade for Malaysia by 2025. Jack Ma, Alibaba’s founder, launched the project and it will be the firm’s first e-hub outside its home market of China.


The world’s fourth most populous country holds considerable potential when it comes to the development of its capital markets. Demographically, it boasts a young and increasingly affluent population; 100m monthly Facebook users and a capital city, Jakarta, where residents are the world’s most active Twitter users.

Its proximity to China and key role in the ASEAN network means it is well placed for future development, which is set to include considerable infrastructure investment. Financial markets, and the involvement of international investors, will be the key to the financing of this.


The Philippines also benefits from the favourable macro-economic trends that are helping many of its ASEAN neighbours develop their capital markets. With big commitments to infrastructure spending, a young population and high domestic consumption the fund industry is set to grow, led by the insurance and trust sectors.

The labour force is well educated, has strong language skills and a reputation for working hard. The regulator is working to develop an investor-friendly environment as well, approving new products, including dollar-denominated listings for public-private partnerships.

The central bank has relaxed FX regulations, including the purchase limit for domestic residents, which allows residents to trade more. Reforms have also speeded up the cheque clearance system, which is now achieved in one day.


In 2015, the Thai government announced a 20-year national strategy including a five-year economic plan. The latter includes changes in tax regulations, improvements to government transparency, reform of state enterprises and moves to improve governance standards.

A recent memorandum of understanding has been signed with China to create a $5bn high-speed rail link – once again, part of China’s Belt and Road initiative. Further government initiatives have targeted innovation, technology, aviation and the creation of a medical and biotech hub, with another for robotics.

Capital markets are benefitting from plans to introduce T+2 as well as a national e-payment initiative. Progress on the former includes the establishment of a pre-settlement matching system, which should see T+2 go live in September.


Vietnam enjoys low labour and input costs and a young workforce, both of which are helping to attract a high level of foreign development capital to the country.

The government has embarked on a programme of selling stakes in many of the country’s state-owned enterprises, helping to raise government revenue, reduce the costs of subsidies and increase dollar investment in the country.       

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