Transforming Asia's financial system

The liberalisation of China's financial system will unleash a flood of capital into global bond and equity markets and Asia's financial system will be larger than the US and Europe combined by 2030, ANZ has predicted.

In a report titled Caged Tiger: The Transformation of the Asian Financial System, which will be released on Monday, ANZ says the 10 largest economies in Asia - China, India, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam - which it dubs the ''A10'', will account for half of global gross domestic product (GDP) by 2050 and almost half of the global middle-class population.

''This is a tectonic shift in the global economic landscape,'' ANZ says in the report, prepared by chief economist Warren Hogan.

ANZ is seeking to earn up to 30 per cent of group profits outside Australia by 2017, so would benefit from a larger Asian financial system along with other financial institutions in the region.

As Chinese e-commerce company Alibaba plans a blockbuster initial public offering this year, ANZ says many Asian governments are also seeking to transfer assets into private hands.

''A succession of the world's largest IPOs in Asia can be expected in coming years,'' the report says.

''IPOs are likely in financial services, energy, telecommunications and infrastructure, sectors currently dominated by large, state-owned enterprises.''

Asia ex-Japan equity market capitalisation is set to explode, the report says, rising from $US9 trillion ($10.6t) to almost $US55t by 2030.

In US dollar terms, Asian equity markets will exceed the US, European Union and Britain combined by 2030.

With China moving forward with reforms to its capital market structures - which bankers believe will ultimately lead to the liberalising of the yuan, deregulation of interest rates and open access to global financial institutions - ANZ estimates Chinese private portfolio flows into global bond and equity markets will grow by $US1.3t a year for the first five years after liberalisation.

By 2030, China's financial system could be more than twice as big as the US, it says.

The report also says that Asia ex-Japan bond markets will grow to be six times their current size over the next 15 years, matching the size of US debt markets.

China's debt markets are forecast to grow from about $US4t last year to about $US27t in 2030, ANZ's modelling suggests.

ANZ also sees the yuan becoming the regional funding currency and predicts the Chinese banking system will overtake the size of the US system by 2020.

ANZ said earlier this year its Asian growth target could be achieved through organic growth of its existing Asian assets but the bank is also looking to make more acquisitions in the region.

ANZ has an estimated A$3 billion ($3.2b) of capital invested in Asian banks.

The report recognises the risks inherent in Asian financial market liberalisation, including potential losses for banks.

''The international experience with financial system deregulation and capital account liberalisation is replete with examples of capital flow surges creating wide current account deficits, asset price bubbles and large banking system losses,'' the report says.

In order to mitigate such risks, Asian governments will need to create independent central banks, liberalise their capital accounts, improve prudential oversight and implement wide-ranging institutional reform of domestic capital markets, corporate governance and legal structures.

''An Asian century now requires a profound transformation of the Asian financial system,'' ANZ says in the report.

Sydney Morning Herald