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A New Financial Market Structure for East Asia

A New Financial Market Structure for East Asia

Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang

This book contends that the East Asian financial constitution lacks an appropriate infrastructure, resulting in inefficient allocation of high savings and an over-inflated short-term debt market. It goes on to point out that despite high savings, East Asia’s dependency on financial centers outside the region is also relatively high, and that there is no strong region-wide network to connect various financial centers in East Asia.

Chapter 11: Financial Centers in East Asia: The Malaysian Perspective

Mahani Zainal Abidin and Chung Tin Fah

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


11. Financial centres in East Asia: The Malaysian perspective Mahani Zainal Abidin and Chung Tin Fah 1. INTRODUCTION Malaysia’s growth, particularly in the 1990s, was very much predicated on a high-investment strategy. As a result, the high national savings rate was unable to provide all of the investment requirements. For example, in 1996 the savings-investment gap was 5 per cent. This gap was partly funded by inflow of both short and long-term foreign capital. The domestic sources of funding were mainly the banking sector and the equity market. The pattern of financing in Malaysia was not unlike that in other countries in East Asia, in that it was heavily reliant on the banking sector because businesses were mainly based on networks and relationships (Yoshitomi and Shirai 2000).1 This form of financing proved to be unsustainable as shown during the Asian crisis in 1997–98. Loss of market confidence and the prospect of deep economic downturn in the region triggered a large capital outflow from the Asian region. This in turn caused a severe shortage of capital to support on-going projects. Adding to the woes was the raising of interest rates; a tool used to overcome the crisis. The resulting shortage of liquidity and higher cost of funds caused the Malaysian economy to contract by 7.4 per cent in 1998 and the non-performing loans to increase from 4.1 per cent in December 1997 to 7.8 per cent in April 1998. Some analysts (Wing et al. (2000), Arthukorala...

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