No answer to the future of Asian finance can be complete without some understanding of where global finance is going. Even more important, can we predict the future of Asia's real sector?
These are big questions, and they need to be framed properly.
Mainstream economics, at least the neoclassical version, assumes that there is an ideal or first-best solution to every problem. If you accept the view that life and information are full of uncertainties, then the world is full of second-, third- and even fifth-best outcomes - more commonly known as "muddling through".
First, we need to think about the whole ecosystem of the economy - politics, finance, society, culture, philosophy and history - because each of these parts affects the other. One reason we ran into problems was because the economics profession thought it had the business cycle figured out and central bankers thought their models could handle downturns.
Second, adopting a system-wide framework of analysis means recognising that regulating only parts of the system could leave us with worse outcomes. One must be humble enough to admit that there can be no one-size-fits-all solution for this complex and dynamic world.
To think that there could be a global government, a global central bank, or even one set of standards and rules to solve all problems, is a pipe dream. A centralised system may become such a large uncontrollable bureaucracy that it would add to systemic problems.
The world has become globalised through trade, investments, migration of talent and the internet. But law and regulation are still national in scope and power. The inconvenient truth is that world trade and power will remain divided by national perspectives.
Third, we have learnt that when you over-regulate, business and transactions drift into the shadow or informal area, such as shadow banking. Of course, formal regulators will demand more power to also cover the shadow areas, but, since they did not prevent the past crisis, what makes you think that giving them more power to generate more complex regulations will solve or even prevent the next crisis?
Fourth, the real problem with the current global financial system is that it is "long debt and short equity". In the 30 years since financial liberalisation opened up financial innovation and globalisation, the overall leverage (financial asset size relative to gross domestic product) has risen from 100 per cent in 1980 to 370 per cent last year.
There are two reasons why the current financial system is debt-driven. The first is that the stock market is geared to raise funds for large corporations, rather than small and medium-sized enterprises. Equity funding is more costly to raise than borrowing.
The second is that tax incentives are biased towards debt rather than equity. Interest paid on debt and losses on bank loans are tax-deductible, but capital losses are not and, effectively, dividends are taxed at source.
For example, in China, only 2,500 companies are listed on Chinese stock exchanges in Shenzhen and Shanghai. In contrast, there are 12.65 million companies registered in China.
Last year, IPOs in Shanghai and Shenzhen raised US$16.4 billion, whereas private equity funds invested in 680 projects with a total value of US$19.8 billion. This suggests that informal capital markets are beginning to be more significant than formal markets in injecting long-term funding into projects.
Asia is short of long-term funds and equity capital, because the system relies largely on short-term bank loans.
Asia will be moving from an old industrial structure of manufacturing towards a knowledge-based, service-driven economy, with domestic consumption supplementing the export engine of growth. This requires considerable upgrading of skills and resources, which the financial sector will have to help fund and nurture.
The key drivers of the Asian economy will be SMEs working hand in hand with multinationals within global supply chains. The Asian real sector will be driven by huge investments in green technology, infrastructure linking disparate parts of Asia, such as the inland routes between China and India via Myanmar. Intra-Asian trade is growing in leaps and bounds.
The good news is the region as a whole is not short of savings, and therefore does not rely on external funds. The key question is how to deploy these excess savings within the region to help improve overall resource allocation.
In short, Asian finance will have to focus on the long term, moving from debt to equity, concentrating on social impact investing, better wealth management, and financing SMEs, trade and infrastructure more effectively.
A new report by Oliver Wyman and the Fung Global Institute called "Asian Finance 2020" explores these issues and discusses what can be done to strengthen Asia's financial architecture.
Andrew Sheng is president of the Fung Global Institute