East Asia’s boom in capital market financing

East Asia's boom in capital market financing

There is much discussion about the rapid expansion of capital market issuances by emerging market firms in international markets. This expansion has been driven by deepening financial globalization, which started in the 1990s, and, more recently, by low interest rates in advanced economies after the 2008–2009 global financial crisis.

In contrast to the importance ascribed to international capital markets, the role of domestic markets has been largely overlooked. In a new paper (Abraham, Cortina, and Schmukler 2019), we examine the case of East Asia and document how the use of domestic capital markets by firms in this region has grown significantly faster than that of international markets since the 1990s. As a result, domestic markets are now the main place where issuance activity takes place (Figure 1).

Figure 1. Share of Domestic and International Issuances, Median East Asian Economy

Figure 1. Share of Domestic and International Issuances, Median East Asian Economy

Source: Abraham, Cortina, and Schmukler (2019).

As domestic markets have developed, more firms have gained access to equity and corporate bond financing. Driven by a higher participation of firms in domestic markets, the average number of issuing firms per year in the median East Asian economy more than tripled between 1990–1998 and 2008–2016. Because domestic markets attract relatively small firms compared to international markets, the size of issuers has declined as the extensive margin has expanded. Despite being smaller, issuing firms are still relatively large corporations.

Domestic capital markets have also helped diversify financing sources for the largest issuers. Whereas relatively small issuers rely almost exclusively on domestic capital markets, the largest firms raise funds in both domestic and international markets. Access to various markets can be beneficial because when the supply of funds from specific markets declines, firms …continue reading