Asia’s biggest emerging markets are flinging open their doors to court overseas investors, but there is a catch — and it is a big one.
China, India and Malaysia have pledged to open up channels for foreign money to flow through their markets, with policymakers and heads of state publicly proclaiming their wish to be full-fledged members of the global financial system, but the reality often falls short of the rhetoric as national governments insist on maintaining regulatory systems designed to keep capital flows and trading rules under tight control.
Asia’s Tiger economies still remember how unfettered capital flows and free-market capitalism sunk their economies about 20 years ago.
During the 1997 to 1998 Asian Financial Crisis, booming regional economies attracted “hot money” from overseas and borrowed heavily in US dollars. When currencies and stock markets cratered foreign investors headed for the exits, triggering a painful economic slump and banking crisis.
That is why Asian leaders, while welcoming foreign investors, are wary of adopting the Western-style liberalization template.
Singapore-based Pictet Wealth Management chief investment officer of Asia David Gaud said: “1998 is still on everyone’s minds.”
“The Asia model will be a mix of Western rules and state strategy of opening up to help national development and not for total liberalization,” he said.
The reluctance to cede control is creating tension with international investors and their governments, who are keen to profit from some of the world’s fastest-growing economies.
“China and India are hard places to invest in,” London-based Aberdeen Standard Investments global head of equities Devan Kaloo said. “They want to have control over domestic capital leaving.”
However, because the two nations are among the world’s largest and most attractive investment themes, money managers take the trouble to access their markets, said Kaloo, who manages US$820 billion in assets.
The nascent opening comes during a testing period as a US dollar rally and rising US Treasury yields suck capital from emerging markets.
Asia has not been immune, with a foreign exodus from Indonesian stocks seeing about US$651 million leave the market in the past two weeks.
Other nations, including India, are also vulnerable to outflows.
In emerging Asia, overall investor flows, including into stocks and bonds, are at the slowest pace since 2014, Bank of America Merrill Lynch said.
Full access to Chinese financial markets is one of the simmering trade disputes between Washington and Beijing, while India, whose Prime Minister Narendra Modi spoke at Davos in January of “removing the red tape and laying out the red carpet” for business, has drawn criticism from index compiler MSCI Inc for actions that have curtailed offshore trading.
Days after Modi’s speech in Davos, exchanges in his nation alarmed investors by taking the unprecedented step of axing overseas licensing deals on market data and derivatives products, and while India last month boosted the cap on foreign investment in its domestic bonds, its appetite for such inflows contrasts with China, which has steadily expanded access.
Yet even in China, policymakers are only making it easier for overseas funds within strictly controlled systems.
Greater access to the world’s second-largest economy usually happens on closed loops such as the stock-trading links with Hong Kong or restricted qualified foreign investor programs that require regulatory approval.
Malaysia bans the dealing of its currency outside the nation and last year its central bank warned that trading futures contracts based on the ringgit on exchanges in Singapore goes against its policy.
“Asia’s markets are maturing and are simply not willing to follow someone else’s version of international standards,” said Joe Andrew, chairman of Washington-based law firm Dentons. “There’s a natural pride, or some may say arrogance, in managing the rules of opening up and this has led to contradicting forces battling each other.”
While some see it as pride, for Asia’s emerging nations there is a strong political calculus.
Modi and Chinese President Xi Jinping (習近平) are both attempting deep-seated reforms of their economies and societies — placing their currency in the hands of unfettered free-market forces risks jeopardizing their efforts.
That is one reason why China is reluctant to free up the yuan: Its move in 2015 to allow a modest devaluation sent shock waves through global investors, who feared a steep devaluation.
It is a similar picture in Kuala Lumpur. While Malaysia promises to let the markets decide the direction of the currency in onshore trading, officials are not letting up on a clampdown against speculators and international trading of the ringgit that began in the wake of the late-1990s crisis.
In 1997, the currency plunged 35 percent, reserves dwindled and the stock market lost half its value.
Malaysia rejected a bailout from the IMF and implemented capital controls.
The move was initially met with vehement opposition, but the IMF and World Bank have since warmed to it.
The Malaysian central bank has repeatedly reminded investors that its currency or related derivatives are not allowed to be traded offshore.
“A currency is a reflection of a country’s sovereignty,” said Gaud, echoing the common theme among the nations.
China continues to enforce strict rules on moving money in and out of the nation, restricting households and companies to transferring cash for reasons approved by the government.
India also enforces its rules and has a lengthy registration process to be a qualified foreign investor.
It routinely intervenes to manage its currency, which is prone to volatility.
It could be that Asian nations have come up with a way to take part in global finance on their terms: Gateway hubs that offer a semblance of offshore independence, while maintaining capital controls.
China’s stock-trading link with Hong Kong, which began in 2014, blazed a trail.
The system lets investors in Hong Kong buy and sell mainland-listed shares without having an impact on the onshore yuan.
The program was a key factor in MSCI upgrading China to emerging-market status — all the Chinese companies to be added to its benchmarks are available through the link, meaning that foreigners will not have to navigate capital controls or investment quotas, though the link has daily limits on net buying.
Directly or not, the link might have inspired other nations.
India is promoting a tax-free financial hub in Modi’s home state as the nation’s answer to international trading centers Singapore and Dubai, United Arab Emirates.
The Gujarat International Finance Tech City is to be open to offshore investors with none of the usual hurdles.
Meanwhile, Malaysia and Singapore are working on their own stock-trading link, which would allow investors in the city-state to trade without worrying about ringgit controls.
“It’s difficult to develop the market when regulators are reluctant to take on funding from foreigners,” National University of Singapore Center for Asset Management Research and Investments research director Johan Sulaeman said. “Perhaps the trading links are somewhat of a compromise.”
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