1-1.Class policy etc BY Three Lectures

Tabata ⇒ Suzuki ⇒ Kawaguchi ⇒ Tabata ⇒ … We discuss the financial institution and Asian economy from three views 1. Macro-economic view 2. Business view 3. Financial theoretical view

1-2.Various background of three lectures

• • • • • • • • • Tabata Economist for international finance and banking in private institutions Professor at Nishogakusha Suzuki Skilled business man in Foreign countries as investment bankers Consultant in DIR ; specialist in Asian financing and strategy Kawaguchi Top frontier on real estate study in Japan Professor in Waseda for real estate and economics

1-3.Homework and Testing

• Homework; You should hand in using Waseda net • You should hand in your homework in English as long as you can. However, we accept Japanese one Final EXAM; English only; no-open book or lecture note. However, please contact if you have some request.

We also evaluate your attendance and effort Enjoy class.

2-1. Introduction

From 1990s, Asian countries enjoy high economic growth. Especially Chain become the second largest economic country in the world . Some people believe the era witch Western countries dominated the world economy and politics was over. Niall Ferguson says ,in recent published book “CIVILIZATION”, Western civilization has faced to risk to collapse the dominancy and moved into the Asian countries. He also points out the risk to reduce the sudden stop of growth in this Area.

2-2 Risk to stop the growth in Asian countries

• • • • Japanification ; aging, fixed system, financial depress Inner struggle with upper class and middle or lower class People loose hungry spirit.

Struggles with Asian countries

2-3 How to deal with these Asian emerging

• Jacques Attari “History of 21 Century” also point out that Asia become the largest economic countries. He also predict that the conflict among this area will be serious before going super democracy. • Japan should seek for establishing voluntary economic zone in East Asian Countries and pacific Area.

Philippine- Indonesia- Taiwan - Vietnam -Malaysia We meet serious situation to discuss and decide how the Japanese banking and financial industries seek for the future business corresponding with Asian economic growth.

• • • •

3-1. Financial Designs in Asian Countries

Non-EU style ------ non-policy power Asian countries adopt non-EU style economic zone in which economy or business should be priority to the policy issuing. We take care for market oriented or market progressive. Japan Leadership NO China Leadership NO Majority Voting No ⇒ Unanimous all nations agreement • • • ASEAN + three countries( China, Korea , Japan) Two engine After 1997 Asian financial crisis, Asian countries recognizes the weakness of their own countries banking system. They add the new policy to add the strengthen the bond financing Asian bond market initiative (ABMI)

Vietnam Cambodia Philippine Basic Idea of ABMI Indonesia JP Korea China Thailand Singapore Philippine Indonesia JP Vietnam Cambodia Korea China Thailand Singapore Malaysia Myanmar Malaysia Myanmar

Result ;Bank credit and Securities almost equal

Thailand Outstanding THB mn

Credit Stock Bond 12 000 000 10 000 000 8 000 000 6 000 000 4 000 000 2 000 000 0

Result 2 ; Debt financing

3-2 Basic question

• • • 1.

2.

3.

ASEAN + three countries Three countries try to coordinate the Asian financial market by developing bond market.

Simple question How should banking industry deal with financing?

If coordination circumstances will meet to collapse, ABMI should stop or not.

How should the US- European financial industry play in this area?

Present financial situation in Asian and world We meet the serious puzzle in Asian Financial situation.

• 4-1 Present Asian circumstances (Direct investment) Japan has invited in Asian countries by means of direct investment. Korea has invested into China and Vietnam etc. Chain has invested into Thailand and other countries through HK. Firms across Asian countries are linked through Direct investment. Japanese firms have been main investor in Asia. Direct Investment Vietnam Cambodia no data Philippine Korea Thailand JP Indonesia China Singapore Malaysia Myanmar

4-2 Japanese financial institution strategy

• To develop the domestic financial business by Japanese banks. Japanese banking industry earns about 20% of total profit in foreign business. Japanese bank industry should accept more risk to expand Asian business. Still low.

• ---- Why Japanese industry is less incentive to expand ?

To facilitate using public financial institution (JBIC etc) I believe that Japanese financial institutions have not worked as financial institutional players. One reason is less credit demand from Asian residence.

4-3 Present circumstances in bond and equity investment among Asian countries (Bond and equity) Japanese financial portfolio investment into Asian countries is quietly weak .

Portfolio Investment Philippine Indonesia JP Vietnam Cambodia Korea China Malaysia Myanmar Thailand Singapore

5-1 Asian Financial Circumstances ( low investment)

• Low investment and quality improvement in Asian countries • Puzzle; low incentive to invest across the Asian countries.

5-2 improving credit quality

• loan decreasing • ⇒ Selection of credit quality • ⇒ Default ratio improvement • ⇒ Evaluation of Low credit risk

5-3 risk and interest rate

• • Interest rate Theoretical Interest rate = risk free rate +

default risk

By Rating Companies Default risk down due to the credit quality improvement In Asia, rating credit risk is not real risk , but order or ranking among Asian countries. Market Interest rate ≠ theoretical interest rate

Background

This source from NRI (Nomura Institute of Research ) Study

International borrowers get the credit, enjoying more discounted cost through Asian countries

5-3 Low investment and Asian financial attitude for new business

• Asian banks don’t have pressures to establish sophisticated management. It brought the Asian banks less incentive to introduce new financial service. Derivative, Securitization ⇒ Mr. Suziki review It is one of circumstances why Asian governments do not make effort to seek the further credit demand.

6-0 International capital flow and international financial system

• Current account surplus • ⇒ out-flow to the world + accumulation of foreign reserve Current account deficit ⇒ in-flow from the world + reducing foreign reserve

6-1 Philippine flow of funds 1 • Summary ; Flow of Fund Analysis Monetary Asset Cash Authority Liability Foreign Res Bank Asset Cash Loan Bond Liability Deposit Remittances Foreign countries Asset Liability Foreign Res Remittances Direct Inv Foreign Bond Government Asset GOV InV Liability Tbond

6-2 Flow of fuind analysis (2)

Credit supplier Financial Institutions Household Non-financial sector Financial Institution 2004-7 loan Securities 15.1

2008-2010 24.3

Deposit 17.4

44.1

others supply Credit absorber World Government 2004-7 -18.5

2008-2010 -29.2

-10.8

3.4

-35.7

4.0

World Loan Shares etc absorb 2004-7 -- 12.3

-20.3

2008-2010 3.9

-33.4

Foreign Reserve etc.

2004-7 Securities loan (or Others) -14.3

-9.0

-6.8

2008-2010 0.5

-30.0

-7.3

Remittances Domestic Liquidity Overseas financial protforio

6-3 Why low investment?

• • • • • • Low productivity ; industrial changing speed is still low Trade deficit; high investment has tendency to bring serious trade of deficit. Government always take care for trade deficit.

Firm structure; Family firms dislike to compete with other families.

Direct investment; Direct investment from foreign countries discourage to make efforts to develop own business by themselves.

Non-arbitrage between investment and other assets ⇒ Prof. Kawaguchi

7 Basic knowledge for this class

• • • Trade surplus = international portfolio position (negative) International exchange rate system and capital flow credit and quality

Next lecture

• • Asian banking behavior China problem