McKinsey Global Institute

Asia and the Global Capital Markets
Diana Farrell, Director McKinsey Global Institute
May 6, 2007
The views expressed in this presentation are the views of the speaker and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. Terminology used may not

Which of the following is largest in value?

A B C

Asian central bank foreign reserve assets Total world equity market capitalization Private equity assets under management

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D Global hedge fund assets E Global trade flows
1

Putting world capital markets into perspective

Global GDP ($45 trillion)

1 2 3 4 5 6

Total world equity market capitalization ($43.5 trillion) Total world private debt securities ($35.4 trillion) Global trade flows ($12 trillion) Asian central bank foreign reserve assets ($3.1 trillion) Global hedge fund assets ($1.4 trillion) Global private equity assets under management ($500 billion)

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2

Global financial stock reached $140 trillion, or 316% of GDP
Value of outstanding equities, bonds, and bank deposits $ Trillions
199 55 140 93
3 2 2 5

Equity Private debt Government debt Bank deposits

CAGR 1995-2005 Percent 8.2 10.8 9.0 7.0 6.1

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44 35 23 38 2005* 44.5 316

35 54 55 2010** 63.3 338

12 1980

53 9 10 18 16 1990 21.5 201

65 18 15 13 19 1995 29.4 218

32 22 14 25 2000 31.7 292

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Nominal GDP $ Trillions Depth (FS/GDP) Percent

10.1 109

5.0

* Our 2004 figure dropped from $136 trillion to $133 trillion due to restatement of data by individual countries ** Extrapolation off of 2005 base, with components grown at 2000-05 CAGRs Source: McKinsey Global Institute Global Financial Stock Database

3

Global financial stock by region, 2005
$ Trillions; percent
50
34

Equity securities Private debt securities Public debt securities Bank deposits

8
35

30
22

1
32

20
19 12

5
26 5 6

1
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35 1 21

30 35 22 8 12 34 19 28 20

3 21 35

63 44 35 43

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U.S. Depth, % (FS/GDP) CAGR, % 405 8. 5

U.K. 359 8.5

Euro zone 303 9.1

Eastern Europe 105 20.7

Japan People’s India Rep. of China 427 311 175 4.7 14.2 13.2
4

The Euro area has seen rapid financial market integration and growing depth
Financial depth by region Stock of financial assets/GDP, constant 2005 exchange Change, 1995-2005 CAGR Percent 6.0 4.5 3.0 3.0 5.0

1995 2005

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Euro area Japan U.S. U.K. Other Asia

180 303 269 427 303 405 278 359 136 222

+123 +158 +102 +81 +86

Printed 4/25/2007 12:46:34 PM

Source: McKinsey Global Institute Global Financial Stock Database

5

Financial depth is low across much of Asia
Financial depth by region Stock of financial assets as percent of GDP, 2005

Equity Private debt Government debt Bank deposits

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427 104

405 136

380 178

359 302 139 85 31 104 64 95 58 85 Euro Area 256 91 64 30 71 South Korea 230 35 16 13 166 196 62 25 30 79

45 145 143 47 134 Japan 78 U.S.

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48 40 113

172 70 34 3 66 129 43 13 41 32

119 46 4 26 43

Singa- U.K. pore

People’s Emerg- India ing R. of China Asia*

Latin Eastern America Europe

* Includes Malaysia, Philippines, Indonesia, Thailand Source: McKinsey Global Institute Global Financial Stock Database

6

Cross-border capital flows top $6 trillion in 2005
Total cross-border capital inflows $ Billions (2005 constant foreign exchange rates)
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7,000 6,000 5,000 4,000 3,000 2,000 1,000
876
CAGR 198090 = 4.3%
99 0 1 GR 0.7% CA 5 1 2 00

6,167

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1,337

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2005 2006 Percent 4.6 3.4 3.6 5.5 4.4 5.0 3.7 3.8 6.5 6.0 14.2 7.2 12.1 13.9 of global GDP
Source: McKinsey Global Institute Capital Flows Database 7

New participants control nearly $8.8 trillion of investment assets
International investment assets/assets under management, 2006e $ Trillions Pension funds Mutual funds Insurance assets Petrodollars 2.5 1.5
3.1 1.4 0.5

Mid-East Other petrodollars 21.6 19.3 18.5 4.0* Total = $8.8 trillion

CAGR, 2000-06e Percent
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5 8 11 28** 21 19 7 Average = 21%

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New participants

Asian central banks Hedge funds Private equity (LBO)

* McKinsey Global Institute estimate, including estimate of unreported assets of UAE and Qatar ** Growth rate calculated based on reported assets ($2.5 trillion in 2006e, does not include UAE, Qatar) Source: Hedge Fund Research, Venture Economics, PE Analyst, IFSL estimates based on Watson Wyatt, Bridgewell, Merrill Lynch, ICI, SwissRe, Hennessee Group data, Press, McKinsey analysis, McKinsey Global Institute

8

The U.S., U.K., and Europe account for 80% of capital flows – flows in Asia are small
Average annual cross-border capital flows*, 2001-05 $ Billions
1,576 1,636 721 688 1,022 460 U.K. U.S. Euro Area 106 103 Eastern Europe**
Inflows* Outflows* Intra-Euro Area flows
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82 154

32

152

People’s 23 22 Rep. of China India 192 300 Rest of world

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Japan

48

40

Latin America

* Discrepancy between inflows and outflows equals $148 billion and is due to errors and omissions in the data ** Includes Russia Source: McKinsey Global Institute Capital Flows Database

9

Asian foreign reserves have grown by $2.2 trillion since 2000 – accounting for ~60% of the region’s outflows
Global foreign exchange reserve asset change 2000-06E $ Billions
478 2,248
1,970
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219

115

173

5,203

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2000 Percent of growth

Asia* 70

Eastern Europe 15

Middle East 7

Latin America 3

Rest of world 5

2006

* Source:

MGI Cross-border Holdings Database

10

The global web of capital flows is growing
Map of cross-border financial holdings*, 1999 $ Billions
U.K. 5,459
Euro Area 18,088
Total domestic financial assets Capital flows 300-500 500-1,500 1,500-5,000 5,000+

Other Western Europe 2,805

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Emerging Asia 4,513

U.S. 38,444

Eastern Europe 744

Japan 17,129

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ROW 2,193

Hong Kong, Singapore 1,391 Australia, New Zealand, and Canada 3,126

Latin America 1,846
* Includes cross-border equity, debt, lending and foreign direct investment Source: McKinsey Global Institute Capital Flows Database

11

The global web of capital flows is growing
Map of cross-border financial holdings*, 2004 $ Billions
U.K. 7,526 Euro Area 30,675 Other Western Europe 4,214 Emerging Asia 8,247
Total domestic financial assets Capital flows 300-500 500-1,500 1,500-5,000 5,000+
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U.S. 47,612

Eastern Europe 1,925

Japan 19,627 Hong Kong, Singapore 1,823 Australia, New Zealand, and Canada 5,067

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ROW 4,040

Latin America 2,298
* Includes cross-border equity, debt, lending and foreign direct investment Source: McKinsey Global Institute Capital Flows Database

12

Parting thoughts
• •

Would Asia benefit from a single currency? How else can Asian financial markets integrate further with each other and with other regions? How far can and should central bank reserve accumulation go? How can Asia promote corporate bond market development?

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• •

13

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