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A digital future for Asia’s capital markets

New research shows progress in building market depth, and how digital technologies can accelerate growth.

Nitin is a senior expert and serves clients across Asia-Pacific on Corporate and Investment banking (CIB) business

Fumiaki helps lead the Financial Services Practice in Japan and Asia Pacific. His clients include both domestic and multinational institutions in the banking, securities and insurance sectors. His focus is on corporate investment banking

Joydeep Sengupta

Leads the Asia–Pacific Banking Practice and works side by side with banking and insurance clients to transform their businesses

Prachi is a manager leading global Corporate and Investment banking (CIB) knowledge team and also serves clients in CIB

In 2017, we published a white paper that introduced the McKinsey Asian Capital Markets Development Index, a comprehensive assessment of the performance of capital markets (both demand and supply) in the region and in each of 14 major economies as of 2015. Our new research updates the Index to 2017. Between 2015 and 2017, Asia’s capital markets grew faster than the world average. Issuances rose from $2.5 trillion in 2015 to $2.7 trillion in 2017. Growth was propelled by more issuances in private markets, lower financing costs, and increased retail participation.

Despite these gains, Asia’s Index score (3.8) remains lower than the world average (4.13) (Exhibit 1). Capital supply as measured by annual issuances represents only 10 percent of GDP (the world average is 15 percent). Systemic challenges such as liquidity and underdeveloped market infrastructure have yet to be solved.

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Today, we estimate that if Asia were to match the average rate of issuances around the world, it would add $1.2 trillion in annual capital supply. That would raise the annual total to $3.9 trillion, and enable access to capital for more than 4,000 new issuers. At that point, more than 13,000 companies would be tapping Asia’s capital markets, providing crucial accelerant for growth, especially in Asia’s developing countries. Note that these are best-case projections; actual growth is likely to be slower, considerably so if a potential debt crisis in Asia materializes.

Other highlights of our new research include:

  • Deeper capital markets: More issuers are accessing Asian capital markets—from 2015 to 2017, the numbers rose from 2,300 to 2,728 in the equity capital market (ECM) and from 2,835 to 3,510 in the debt capital market (DCM).
  • Growth in SME participation. More small and medium size enterprises (SMEs) are accessing capital market financing —the count grew from 1,842 to 2,066 in ECM and from 299 to 576 in DCM. The growing engagement of SMEs in capital markets creates prosperity that percolates down to the grassroots of an economy.
  • The rise of Mainland China. The market represents 46 percent of issuances and 35 percent of the outstanding stock of capital in Asia. From 2015 to 2017, its index score improved by 43 basis points. Emerging technology ecosystems (such as those of Alibaba and Tencent) and regulatory changes (such as the Stock Connect and Bond Connect trading links for foreign portfolio investment flows) have prompted greater issuer and investor participation.
  • Lower cost of financing: In a welcome shift, savings due to the reduced real costs of capital-market financing from 2015 to 2017 totaled $413 billion per year.
  • Greater retail participation. Emerging Asia saw the opening of 52 million first-time retail investor accounts. This unlocked income streams for middle-class investors, improved financial literacy, and generated about $13 billion of additional wealth.
  • Enhanced spirit of risk-taking and innovation with the entrance of startups and green bonds. More start-ups are accessing capital markets. China alone saw over 4,500 venture-capital deals between 2015 and 2017, according to AVCJ. The issuance of green or climate bonds (for direct environment-friendly projects) also rose, to $43.4 billion in 2017, or 36 percent of global volume.[1] According to KfW, these issuances could reduce greenhouse gas emissions by 48 million tons per year.[2]

How digitization can deepen capital markets

Technology has long been a fundamental building block for growth in capital markets. Today, digitization and advanced analytics offer tremendous new potential. We identified and prioritized 11 such technologies (Exhibit 2); here, we examine two of the most promising.

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Digital investment ecosystems

Capital markets would be greatly aided by a comprehensive digital ecosystem for SMEs—a single platform where small companies can raise capital through crowdfunding, obtain banking services (such as foreign exchange and invoice financing), and get help with other business needs (such as deal advisory, bookkeeping, regulatory reporting, auditing, and analytics).

Globally, crowdfunding platforms had raised about $110 billion by 2017. The US alone has more than 375 such platforms which have helped more than 600,000 SMEs raise $17 billion in 2017. About 170 platforms operate in Asia, such as Crowdera and AngelCrunch, and raised about $10 billion (primarily in Mainland China) in 2017.

Investors (especially millennials) are shifting towards alternative investing channels such as crowdfunding. Millennial investors today hold around 52 percent of their wealth in cash. By 2023, we estimate they might move about $55 billion of their estimated $300 billion of cash holdings into such platforms. That could provide funding to over 1.5 million SMEs.

SME passport

A lack of reliable information deters investment in a company, especially SMEs, which do not regularly publish financial reports. Digital technologies such as natural language processing and machine learning can help create an SME data repository that records a unique identifier for every SME in a country, as well as its industry classification, financial performance highlights, risk score, and a credit score based on traditional data (such as financial reports, where available) and alternative data (such as social media, creditor reports, supplier payment history, and so on). It could also capture additional details such as company filings, news reports, and details of buyers and suppliers.

In developed markets, private agencies such as Dun & Bradstreet long ago established SME identification numbers and credit reports, on which suppliers, lenders, and contractors have come to rely. In Asia, such systems are scarce. But some Asian countries already have essential building blocks in place, such as unique identifiers for SMEs; India’s Goods and Services Tax Identification Number is an example. SME tracking and credit systems can be built from these foundations, using the new technologies and data sources, and integrated with global legal-entity-identifier regulations.

Creating such a repository could encourage investments in SMEs. In our estimate, about 7 million micro-enterprises and SMEs might gain access to about $650 billion by 2023 in emerging economies. Easier access through an SME passport might lower the cost of financing by up to 100 bps, saving $45 billion annually. 

Every market has its distinct challenges and opportunities, which regulators account for while developing and implementing policies. Digital and analytics represent one set of enablers that, while undeniably important, need to be positively reinforced by all the classic elements discussed in our 2017 paper for holistic capital markets development — foundational policies, and market architecture and design; and a nationwide change management approach for effective implementation of policy decisions.

The authors would like to thank Yash Todi and Sugandha Vir Anand for their contributions to this article.


[1]The green bond market in Asia-Pacific, Jonathan Drew, 2018, International Capital Market Association.

[2] This is equivalent to the carbon sequestration capacity of 2.3 bn trees. Calculation based on KfW assertion that EUR 1 million in green bonds reduced greenhouse gases by 1,270 tons.