Compliance
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The Globe Has No Corners: As regulations converge, Asia opens up to foreign capital
September 1, 2005
South and North Korea are two extremes when it comes to Asian investments. In the south, foreigners are allowed to own 100 percent of a company's shares, and there are few limitations on foreign brokerages setting up shop or moving capital in or out of the country--an attractive proposition to global brokerages.
North Korea? Well, how much can be said about one of the most closed markets in the world?
Most of the rest of Asia falls somewhere in between. The good news for securities firms is that almost all Asian countries, with the glaring exception of North Korea, are moving toward greater openness and integration into global markets.
Last year, the Philippines and India joined the California Public Employees' Retirement System's (Calpers) Permissible Emerging Equity Market List, which already included Malaysia, South Korea and Taiwan. This spring, Thailand also made the cut, a sign that these countries are making progress. (Japan is considered a developed country, not an emerging one.) "We are witnessing a greater level of transparency and an increased effort by countries to reform their markets to support institutional investment," says Rob Feckner, president of the Calpers board of administration.
"We see a point of convergence for the regulations in the respective countries," says Ghanshyam Dass, managing director for Asia-Pacific at the Nasdaq Stock Market. "The globe has no corners."
One sign is that countries' accounting standards are becoming more and more aligned with international standards and U.S. generally accepted accounting principles (GAAP). "They're becoming almost the same," says Dass.
For example, at the South Asian Federation of Exchanges, which includes 13 exchanges in seven countries, members are busy standardizing listing regulations, says secretary general Wali-ul Maroof Matin, who is also the CEO of the Chittagong Stock Exchange in Bangladesh. "We just completed pinpointing the differences and similarities of the member exchanges," he says.
Integration Stages
The transition to full integration in the global economy seems to start with goods, such as textiles and computer parts. In China, foreigners are allowed to own factories and can easily move products in and out of the country.
The next stage is currency liberalization. China took a small step this summer with a revaluation, and more liberalization is expected soon under pressure from the U.S. and other trading partners.
Finally, a country opens up its capital markets. China is taking steps here as well, allowing foreign securities firms to set up joint ventures and apply for qualified foreign institutional investor (QFII) status.
When it comes to capital markets, China still has a long way to go. "The service sectors in general, and financial services in particular, haven't opened up as significantly as other sectors in China," says Hubert Lem, executive director in the legal division of Morgan Stanley's Hong Kong office. In compliance with China's World Trade Organization commitments, the China Securities Regulatory Commission (CSRC) allows foreign brokerages in by setting up joint-venture brokerage or comprehensive securities companies, or by acquiring a domestic company. Setting up an actual branch is still forbidden. By comparison, the latter is now quite common in other East Asian countries, such as Thailand, South Korea and Singapore.
Merrill Lynch and Morgan Stanley have branches in Korea, Singapore and India but only representative offices in China. By the end of 2004, only 4 out of 130 securities companies in China were joint ventures. Lem notes that new joint ventures continue to be funded, and he expects to see even greater liberalization, up to full foreign ownership of local firms.
