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
necessarily be consistent with ADB official terms.
Which of the following is
largest in value?

A Asian central bank foreign

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reserve assets

B Total world equity market

capitalization

C Private equity assets under

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management

D Global hedge fund assets

E Global trade flows
1
Putting world capital markets into perspective

1 Total world equity market

capitalization ($43.5 trillion)

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Total world private debt securities
($35.4 trillion)

Global GDP 3 Global trade flows

($12 trillion)

4
($45 trillion) Asian central bank foreign reserve

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assets ($3.1 trillion)

5 Global hedge fund assets

($1.4 trillion)

6 Global private equity assets under

management ($500 billion)

2
 Global financial stock reached Equity
Private debt
$140 trillion, or 316% of GDP Government debt
Value of outstanding equities, bonds, Bank deposits

and bank deposits CAGR 1995-2005

$ Trillions Percent

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199 8.2

55 10.8
140
35 9.0
44
93
3 65 32 35 54 7.0
53

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2 9 18 22 23
2 10 15 14
12 18 13 55 6.1
5 25 38
16 19
1980 1990 1995 2000 2005* 2010**
Nominal GDP 10.1 21.5 29.4 31.7 44.5 63.3
$ Trillions 5.0
Depth (FS/GDP) 109 201 218 292 316 338
Percent
* 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, Equity securities
Private debt securities
2005 Public debt securities
Bank deposits
$ Trillions; percent
50 8 30 1 20 5 1

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22 19
26
34 35 32 35
12
5
3 6 1
30
22 21 35 21
35
8 20
63

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12 44 43
34 35
28
19

U.S. U.K. Euro Eastern Japan People’s India

zone Europe Rep. of
China
Depth, % 405 359 303 105 427 311 175
(FS/GDP)
CAGR, % 8. 5 8.5 9.1 20.7 4.7 14.2 13.2
4
 The Euro area has seen rapid financial 1995
2005
market integration and growing depth
Financial depth by region
Stock of financial assets/GDP, constant 2005 exchange

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Change, CAGR
1995-2005 Percent
180 +123 6.0
Euro area 303
269
Japan +158 4.5

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427
303
U.S. +102 3.0
405
278
U.K. +81 3.0
359
Other 136 +86 5.0
Asia 222
Source: McKinsey Global Institute Global Financial Stock Database 5
 Financial depth is low across Equity
Private debt
much of Asia Government debt
Financial depth by region Bank deposits

Stock of financial assets as percent of GDP, 2005

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427
405
380
104 359
136 302
45 178 139 256

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64 230
145 91 35 196
143 95 172
48 85 16 13 62
70 129 119
40 31 64 25
47 58 43
134
30 166 30 34 3 13 46 4
78 113 104 85 79 41 26
71 66 43
32
Japan U.S. Singa- U.K. Euro South People’s Emerg- India Latin Eastern
pore Area Korea R. of ing America Europe
China Asia*
* 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
6,167
6,000
9 9 0-
5,000
G R 1 .7 %
C A 5 10
4,000 2 00
3,000 CAGR 1980-

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1,337
2,000 90 = 4.3%
876
1,000
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 Mid-East
CAGR, 2000-06e
under management, 2006e Other petrodollars Percent
$ Trillions
Pension funds 21.6

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5

Mutual funds 19.3 8

Insurance
18.5 11
assets

Petrodollars 2.5 1.5 4.0* 28**

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participants

Asian central 21
3.1 Total =
banks Average
$8.8
= 21%
Hedge funds 1.4 trillion 19
New

Private equity 7
0.5
(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 Inflows*
$ Billions Outflows*
1,576 1,636 Intra-Euro Area flows

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721 688
106 103
1,022
Eastern
460 Europe**
U.K. 82 154 152
32
People’s

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U.S. Euro Area Japan
23 22 Rep. of
China
India

48 40 192 300
Latin
America Rest of
world
* 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

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$ Billions
5,203
115 173
219
478

2,248
1,970

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2000 Asia* Eastern Middle Latin Rest of 2006
Europe East America world
Percent 70 15 7 3 5
of growth

* Source: MGI Cross-border Holdings Database 10

 The global web of capital flows is growing
Map of cross-border financial holdings*, 1999 Total domestic
financial assets
$ Billions
Capital flows
300-500
U.K. Other Western 500-1,500

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Europe 2,805 Emerging 1,500-5,000
5,459
Asia 5,000+
4,513
Euro
U.S. Area Eastern
38,444 18,088 Europe Japan
744 17,129

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Hong Kong,
Singapore
ROW 1,391
2,193
Australia,
New Zealand,
Latin America and Canada
1,846 3,126

* 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 Total domestic
financial assets
$ Billions
Capital flows
300-500
U.K. Other Western 500-1,500
Emerging

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Europe 4,214 1,500-5,000
7,526 Asia
5,000+
8,247

U.S. Euro Eastern

47,612 Area Europe
30,675 Japan
1,925 19,627

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Hong Kong,
Singapore
ROW 1,823
4,040
Australia,
New Zealand,
Latin America and Canada
2,298 5,067

* 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?

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• How else can Asian financial markets
integrate further with each other and with
other regions?

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• How far can and should central bank
reserve accumulation go?

• How can Asia promote corporate bond

market development?

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