ISEAS-NTU Financial Reforms and Liberalization Ranking
Indices For ASEAN 10 + 5 Economies
(i.e. China, Japan, South Korea,
Hong Kong & Chinese Taipei)*
presented by
Dr Tan Khee Giap
Associate Professor of Banking & Finance
Nanyang Business School
Founding Member, Asia Research Center, NTU
Visiting Senior Research Fellow, ISEAS
Dr Chen Kang
Associate Professor of Applied Economics
School of Humanities & Social and Sciences
Founding Member, Asia Research Center, NTU
Visiting Senior Research Fellow, ISEAS
* Prepared for the inaugural launch on 10 March 2006, Seminar Room II, Institute of South East Asian Studies
(ISEAS). This project is funded by Nanyang Technological University (NTU) & ISEAS with support by a team of
able research associates from Nanyang Business School at NTU who include Mr. Chew Wei Lip, Mr. Chin Chea
Theen, Ms. Leow Yiqin, Ms. Ng Ee Teng, Ms. Tan Sun Sun, Ms. Yap Lay Ming, Ms. Shahirah Bte Arshad, Ms. Khoo
Miaosi, Ms. Kwan Poh Teing, Mr. Seah Choon Kiat, Mr. Liaw Siqin and Mr. Chen Zhiy.
Presentation Outlines
• Background and primary concerns.
• Issues at stake & project objectives
• The research framework for Financial Reforms and
Liberalization Ranking Indices (FRLRI)
• The methodological approach, simulation studies & data
sources
• Overall FRLRI for ASEAN 10 + 5 economies
• “What IF” simulated rankings for ASEAN 10 + 5
economies
• Strategies forward & identifying agenda for unfinished
reforms
Background and Primary Concerns
•
•
•
•
•
Lack of coordination and inconsistent policy actions in monetary and
financial reforms in East Asia are well recognized, although there is no lack
of discussions on the broad framework and ground work setting for
integration.
Since the 1997 financial crisis, reform effort made to date in financial and
monetary fronts are far from satisfactory, with many pre-crisis problems
remained and nature of issues unchanged.
The continued lack of fair and true representation, and hence voices
struggling to be heard from emerging economies in international groupings,
forum and international agencies are worrisome and inadequate.
Think-tanks and academics could join effort & should fill the gap by
providing impartial and independent assessment and quantification through
in depth research and market studies.
The ISEAS-NTU study is the first comprehensive attempt to quantify
financial reforms and liberalization of ASEAN 10 + 5 economies reflecting
regional conditions.
Background and Primary Concerns
•
•
•
•
Rapidly growing emerging Asia economies such as China and India since
the new millennium have attracted rapid inflows of foreign direct
investments (FDIs) from developed economies to Asia since the late 1990s,
and more recently portfolio investments (PIs) inflows including
establishments of multi-country cross-border investment funds.
International trade and financial services are twin pillars of globalization.
Notwithstanding the frustration at WTO multilateral negotiations, some
progress made on trade front is evident with flourishing regional and
bilateral free trade agreements (FTAs).
The slow progress in the much talk about post-crisis “international financial
architecture (IFA)” is disappointing, establishing regional financial
architecture (RFA) in East Asia is thus an urgent task but must be
simultaneously undertaken with domestic financial liberalization (DFL).
Asia, being the most rapid growing region in the world, renders effort to
promote harmonious and consistent regional monetary and financial
integration even more critical.
Issues At Stake & Project
Objectives
• In the crisis aftermath, there is greater recognition on appropriate
role of governments and markets in financial reforms and
deregulation, and their respective strength and failure are pivotal to
further regional monetary and financial integration (Stiglitz 2003).
• The post-crisis Peer Review System, introduced by IMF and ADB to
East economies are less than successful because regional
governments still harbor suspicion and reject imposing nature of
international agencies, and there is this general lack of faith and
trust by top leaderships of some crisis-affected economies.
• The Self-Assessment System undertaken by international agencies
including the World Bank resulted in progress findings which are
“too good to be true” as governments tend to be over-generous in
the self assessment exercise.
Issues At Stake & Project
Objectives
• The ISEAS-NTU FRLRI is a Peer Pressure System that is nonconfrontational, non-negotiating, non-obligatory and non-committal.
The modus operandi works through influences, soft persuasion,
constructive consultations,& most important of all, to exert annual
peer pressure through publicity and power of international media
and press.
• The prime objective is to construct a prototype analytical framework
to annually quantify progress made in financial reforms and
liberalization for ASEAN 10+ 5 economies.
• In terms of financial reforms and liberalization, the ISEAS-NTU study
is intended not as much to single out top economies, but more so to
encourage weaker economies to identify areas in need of reforms
through our “What If” simulation exercises.
FRLRI FRAMEWORK
Financial Sector Reforms and Liberalization Ranking Indices for ASEAN 10+5 Economies
1. Financial
Institutions' Stability
and Soundness
1.1
Banking
Institutions
2. Financial Markets’
Development and
Liberalization
3. Policies and
Management Efficiency
of Regulatory Authorities
4. Corporate Governance
and Compliances
2.1
Money Market
3.1
Exchange Rate
Regime
4.1
Shareholders' Right
2.2
Stock Market
3.2
Transparency and
Regulations
4.2
Disclosure and
Transparency
2.3
Bond Market
3.3
International
Financial
Development and
Openness
4.3
Board
Responsibilities
2.4
Futures
Market
3.4
Efficiency of
Management
(Corruption and
Nepotism)
4.4
Equitable Treatment
of Shareholders
1. Financial Institutions' Stability and Soundness
1.1 Banking Institutions
1.1.01
Ratio of regulatory capital to riskweighted assets
1.1.08
Ratio of liquid assets to liability base
1.1.02
Ratio of bank capital to assets
1.1.09
Ratio of foreign assets to total assets
1.1.03*
Ratio of nonperforming loans to total
gross loans
1.1.10
Ratio of foreign assets to foreign
liabilities
1.1.04
Ratio of provisions to nonperforming
loans
1.1.11*
Ratio of foreign liabilities to total
liabilities
1.1.05
Degree of sectoral distribution of loans
to total loans
1.1.12
Ratio of banking sector assets to GDP
1.1.06*
Ratio of property related loans to total
loans
1.1.13
Moody's weighted average bank
financial strength index
1.1.07
Return on equity
* Indicator in reverse order (i.e. the lower the value, the better is the indicator)
2. Financial Markets' Development and Liberalization
2.1 Money Market
2.2 Stock Market
2.3 Bond Market
2.4 Futures Market
2.1.01*
Short-term
money market
rate (overnight)
2.2.01
Stock market
efficiency
2.3.01
Ratio of bond market
capitalization to GDP
2.4.01
Ratio of
notional value
of futures
market to
GDP
2.1.02
Ratio of volume
traded for money
market to GDP
2.2.02
Ratio of stock market
capitalization to GDP
2.3.02
Ratio of annual bond
turnover
2.4.02
Ratio of
volume
traded of
futures
market to
GDP
2.2.03
Ratio of stock value
traded to GDP
2.3.03
Ratio of volume
traded for bond
market to GDP
2.4.03
Ratio of open
interest of
futures
market to
GDP
2.2.04
Number of listed
domestic companies
2.3.04*
Ratio of foreign
currency bonds to
total bonds
outstanding
2.2.05
Growth on stock
market index
2.3.05*
Aggregate effective
currency mismatch
index)
2.2.06
Stock traded-turnover
ratio
2.3.06
Annual rate of
growth of bond
market
2.2.07*
Long-term interest
rate (1 year deposit)
* Indicator in reverse order (i.e. the lower the value, the better is the indicator)
3. Policies and Management Efficiency of Regulatory Authorities
3.1 Exchange Rate Regime
3.3 International Financial
Development and Openness
3.4 Efficiency of Management
(Corruption and Nepotism)
3.1.01
Foreign reserves in
months of imports
3.3.01
Foreign equity limits in
existing local banks
3.4.01*
Risk of political instability
3.1.02
Exchange rate stability
3.3.02
Current account
liberalization
3.4.02
Central bank policy
3.1.03
Exchange rate policy
3.3.03
Capital account
liberalization
3.3.04
Interest rate liberalization
3.2 Transparency and Regulations
3.2.01
Transparency
3.2.02
Adoption of international
best practices in
regulation
* Indicator in reverse order (i.e. the lower the value, the better is the indicator)
4. Corporate Governance, Rules & Regulations
4.1 Shareholders' Rights
4.2 Disclosure and Transparency
4.1.01
Time of notice to shareholders before meeting
4.2.01
Legally required consolidated financial reporting
4.1.02
Thresholds for shareholders to convene
extraordinary shareholder meetings
4.2.02
Frequency of periodic information
4.1.03
Types of channels for shareholders to vote
4.2.03
Disclosure of non-financial information
4.1.04
Shareholders' right to vote on appointment of
directors
4.2.04
External auditing of financial statements
4.1.05
Shareholders' right to vote on removal of directors
4.2.05
Rotation of audit firms and auditors
4.1.06
Shareholders' right to vote on remuneration of
board members
4.2.06
Conformity of auditing and accounting norms to
international standards
4.1.07
Shareholders' approval of related-party
transactions
4.2.07
Reporting of internal auditors to the audit
committee
4.1.08
Shareholders' ability to place items on meeting
agenda
4.2.08
Penalties attached to irregular information
disclosure
4.1.09
Types of redress if shareholders' rights are violated
4.2.09
Information contained in the company's annual
report
4.1.10
Penalties attached to insider trading
4.2.10
4.1.11
Shareholder’s right to vote on Major corporate
transactions (acquisitions, disposals, mergers,
takeovers)
4.2.11
Requirement to disclose director shareholding
4.1.12
Shareholders' rights to nominate a candidate for
director
4.2.12
Requirement for directors to report their
transactions of the company stocks
Requirement to disclose Top 10 shareholders
CONT’ : 4. Corporate Governance, Rules & Regulations
4.4 Equitable treatment of
shareholders
4.3 Board Responsibilities
4.3.01
Limit to number of boards
an individual may serve
4.3.07
Establishment of
nomination committee
4.4.01
Requirement of oneshare-one-vote
4.3.02
Minimum number of board
meetings per year
4.3.08
Requirements for directors
to have professional
experience18
4.4.02
Requirement for insiders
to disclose their trading of
company's stock?
4.3.03
Disclosure of attendance
records of board meetings
4.3.09
Requirements for directors
to have minimum
education and training
4.4.03
Legal and regulatory
framework requirement
for disclosure of relatedparty transaction
4.3.04
Election of independent
directors to the board
4.3.10
"Fit and Proper" test
4.4.04
Requirement for related
persons to abstain from
voting on the transactions
4.3.05
Establishment of audit
committee
4.3.11
Disclosure of self-dealing
transactions to Securities
Commission or Stock
Exchange21
4.3.06
Establishment of
remuneration committee
4.3.12
Approval of self-dealing
transactions by securities
commission or stock
exchange
Methodological Approach
•
The basis for the ranking is the standardized value (STD). We first compute the 15-economy
average for each indicator following which the standard deviation (S) is calculated using the
formula:
S 
•
(X
 X )2 / N
Following which STD is computed, by subtracting the 15-economy average from a economy’s
original value and then dividing the result by the standard deviation as follow:
STDvalue  ( X  X ) / S
•
Note that sub-factor rankings are the average of the STD values of all the ranked indicators which
make up each sub-factor. This average is found by dividing the sum of the STD values by the
number of indicators in each sub-sector. This enables us to “lock” the weight of sub sectors
independently of the number of indicators they contain.
•
Category rankings are determined by dividing the sum of the sub categories” STD values by the
number of sub categories in each category. The computation of the overall ranking for the ASEAN
10 + 5 economies is found by computing the weighted average of the 4 categories’ STD values.
•
Given that implementation and enforceability is still a major issue for corporate governance
(OECD 2003), we therefore allocated weight of 100 for category 1, 2 & 3 but 50 for category 4.
Simulation Studies & Data Sources
•
•
•
•
Avoiding being obsessed with ranking per se, and to be constructive we
conduct simulation exercises by identifying 20% weakest indicators as
measured amongst the lowest STD values across all 86 indicators, then
“improve” them to the 15-economy’s average.
Note that amongst 82 indicators used, we identified 14 weakest indicators
from category 1, 2 & 3, while 3 weakest indicators were identified from
category 4 reflecting the 0.5 weight previously assigned.
Given that implementing reforms involved time lag and their improvement in
terms of ranking may not be readily reflected, and in order to enable
economies to keep tract and maintain their good performances, we did
however identify 20% strongest indicators amongst all indicators which
would not be reported here.
Indicators used based largely on 2004 data were sourced from International
Financial Statistics, International Monetary Fund. ASEAN Secretariat, Bank
for International Settlements, Political & Economic Risk Consultancy,
Governance Metrics International & World Development Indicators.
Overall FRLRI Ranking of the ASEAN 10 + 5 Economies
Economies
STD Value
Rank
Singapore
0.6264
1
Hong Kong, China
0.5129
2
Japan
0.4665
3
South Korea
0.4416
4
Thailand
0.3416
5
Chinese Taipei
0.3082
6
Malaysia
0.2654
7
Indonesia
0.2128
8
China
0.0580
9
Philippines
0.0576
10
Vietnam
-0.4313
11
Cambodia
-0.5681
12
Myanmar
-0.6738
13
Laos
-0.7335
14
Brunei
-0.8843
15
1. Financial Institutions' Stability and Soundness
Economies
STD Value
Rank
Hong Kong, China
0.6053
1
Indonesia
0.5189
2
Singapore
0.4590
3
South Korea
0.3300
4
Thailand
0.2477
5
Philippines
0.1975
6
Chinese Taipei
0.1950
7
Japan
0.1842
8
China
0.1814
9
Malaysia
0.1013
10
Cambodia
-0.1109
11
Vietnam
-0.4223
12
Laos
-0.5724
13
Myanmar
-0.6710
14
Brunei
-1.2434
15
2. Financial Markets' Development and Liberalization
Economies
STD Value
Rank
Singapore
0.7996
1
Japan
0.7269
2
Hong Kong, China
0.6408
3
South Korea
0.5710
4
Chinese Taipei
0.5241
5
Thailand
0.4352
6
Malaysia
0.3670
7
China
-0.1074
8
Indonesia
-0.2040
9
Philippines
-0.4254
10
Vietnam
-0.4517
11
Brunei
-0.7190
12
Cambodia
-0.7190
12
Laos
-0.7190
12
Myanmar
-0.7190
12
3. Policies and Management Efficiency of Regulatory Auhtorities
Economies
STD Value
Rank
Singapore
0.8745
1
Japan
0.8485
2
South Korea
0.5620
3
Hong Kong, China
0.5234
4
Thailand
0.4863
5
Chinese Taipei
0.2891
6
Indonesia
0.2605
7
Malaysia
0.2187
8
Philippines
0.0980
9
China
-0.1675
10
Vietnam
-0.2558
11
Myanmar
-0.7485
12
Cambodia
-0.8857
13
Brunei
-1.0177
14
Laos
-1.0857
15
4. Corporate Governance, Rules & Regulations
Economies
STD Value
Rank
Malaysia
0.7477
1
Singapore
0.7410
2
Philippines
0.7159
3
China
0.6418
4
South Korea
0.6062
5
Hong Kong, China
0.5617
6
Indonesia
0.5544
7
Chinese Taipei
0.4444
8
Thailand
0.3944
9
Japan
0.2061
10
Brunei
-1.1227
11
Cambodia
-1.1227
11
Laos
-1.1227
11
Myanmar
-1.1227
11
Vietnam
-1.1227
11
Empirical Rankings &
Interpretations
•
•
•
•
•
The results of the overall financial reforms and liberalization ranking is by and large
within expectations, with emerging economies ranking lower and developed
economies in top positions.
On financial institutions’ stability and soundness, Indonesia ranked rather high at
second position reflecting substantial restructuring, “clearing up” and recapitalization
after spending RP650 trillion.
On development and liberalization of financial markets, Singapore leads the league
reflecting Monetary Authority of Singapore’s liberalization measures introduced since
1999.
On central banking policies and management efficiency, again the findings are not
surprising with top ranking coming from developed and newly industrialized
economies.
On corporate governance, rules and regulations, interestingly Malaysia, Singapore,
Philippines & China are ranked amongst top positions, and we do want to reiterate
that these top positions are not equivalent to effective implementation and
enforceability. Surprisingly Hong Kong ranked rather low at 6th position in this
category. Hong Kong’s low level in this category is confirmed by a recent survey done
by Pacific Economic Cooperation Council on Macro Corporate Governance
Scorecard (see Cheung & Jang 2005) where it was ranked lowest amongst the East
Asian economies. However, in terms of perception by investors, fund mangers and
analysts, the survey results revealed that Singapore & Hong Kong persistently ranked
1st and 2nd.
“What IF” Simulations &
Limitations
• Ranking can be a meaningless exercise and obsessed with ranking
is both dangerous and wrong.
• “What If” simulation is constructive as it highlights strength &
identifies weaknesses for further reform effort
• The major limitation being that “What If’ simulation is a static
evaluation where improvements are made and assessed on one
economy while holding other 14 economies unchanged or ceteris
paribus.
• Corporate governance indicators are based on rules and regulations
put up by an economy, but do not necessarily reflect their
implementation or enforceability, thus we assigned only 50% of
category weight. We are however of the view that having a
comprehensive corporate governance codes reflects a good starting
position.
Overall FRLRI Ranking Upon Simulation
Economies
Ranking
Before
Simulation
STD Value
Before
Simulation
Ranking
After
Simulation
STD Value
After
Simulation
Singapore
1
0.6264
1
0.6959
Hong Kong,
China
2
0.5129
1
0.6784
Japan
3
0.4665
2
0.5545
South Korea
4
0.4416
2
0.5184
Thailand
5
0.3416
5
0.4339
Chinese
Taipei
6
0.3082
4
0.4532
Malaysia
7
0.2654
5
0.4030
Indonesia
8
0.2128
5
0.3516
China
9
0.0580
6
0.3137
Philippines
10
0.0576
7
0.2569
Vietnam
11
-0.4313
11
-0.1348
Cambodia
12
-0.5681
11
-0.2133
Myanmar
13
-0.6738
11
-0.3346
Laos
14
-0.7335
11
-0.3744
Brunei
15
-0.8843
12
-0.4671
Empirical Simulated Rankings &
Interpretations
•
•
•
•
•
The simulated results revealed that Chinese Taipei (6th to 4th), Malaysia (7th to 5th) &
Indonesia (8th to 5th) could move up within top 5 positions if they “improved” upon 20% of
their weakest indicators to the 15 economy-wide average which we identified, ceteris
paribus.
For Chinese Taipei, amongst 20% weakest indicators include ratio of foreign assets to total
assets, ratio of foreign currency bond to total bond outstanding, aggregate effective
currency mismatch, ratio of bank capital to assets, degree of distribution of loans by sector
to total loans etc.
For Malaysia, amongst 20% weakest indicators include exchange rate policy, ratio of
foreign assets to total assets, foreign equity limit in existing local banks, stock market
efficiency etc.
For Indonesia, amongst 20% weakest indicators include exchange rate stability, ratio of
banking assets to GDP, ratio of foreign assets to total assets, ratio of bond market
capitalization to GDP, long term interest rate etc
From the 2nd position, Hong Kong could overtake Singapore’s 1st position in the overall
ranking if it “improved” the 20% weakest indicators to the 15 economy-wide average which
we identified to include ratio of liquid asset to liability base, ratio of foreign assets to total
liability, ratio of property related loans to total loans, exchange rate policy etc.
Strategies Forward and Identifying
Unfinished Reform Agenda
• After the inaugural launch of the ISEAS-NTU FRLRI, we would
improve our studies by setting up an independent and objective
advisory panel consist of experts from 15 economies to gather
financial sector-specific feedbacks .
• The ISEAS-NTU study can later, when resources permit, be
extended to the entire Asia by including Australia, New Zealand,
India & Pakistan.
• We hope the ISEAS-NTU study will further stimulate discussions
and dialogue amongst market practitioners, government officials and
academics through annual release of ISEAS-NTU study.
• We noted specifically the effectiveness of international press &
media is helping us to deliver the peer pressure effect. We therefore
are prepared to subject our research rigor to scrutiny and be
absolutely transparent to share our findings publicly, thank you all.