Our finance industry had exploded and collapsed within the first 7 years of the 1990s and has since not recovered enough to save the economy.
Traditionally, commercial banks financed business, finance companies financed consumers, merchant banks financed businesses through bond and share issues, and stockbroking companies created a secondary market for bonds and shares.
Now, banks had been collapsed into finance companies and the business of these new banks is consumer lending. Merchant banks had been collapsed into stockbroking firms or stockbroking firms are given corporate finance functions to be called investment banks with the purpose of helping companies issue bonds and shares as well as brokering those bonds and shares to the general public. A new crop of financial institutions enters the game to manage the wealth of the general public.
The competition in the whole finance industry is to see who can repackage the future income streams of corporates in such a way as to get the best value for their clients (companies) and flogging them off to the general public. This provides a major exit point for many small and medium sized companies such that, while we may have the largest number of listed companies, we also have the large proportion of companies that do not have profitability. The local stock market has therefore collapsed as a direct result of the intention of the major shareholders of listed companies to benefit at the expense of the minorities. This, I think, has created a hollowness in our industrial complex such that we have more shells than productive capacity. Assets are acquired at inflated prices.
The collapse of our industrial complex, which previously grew out of the determination of family-operations, means that in the end only monopolies survive. Given their mandate to be profitability, their very corporate turnaround has become a bane on the rest of the economy.
Will the replacement of the 30% rule (on equity) with the 50% rule (on shareholding spread) rekindle the small and medium sized industries? I think not. The SMIs have gone through irrecoverable transformation. Due to lack of opportunities, most would have gone to China where is real market is. At home, the government will pump funds to create new innovative and creative companies. They will hardly need any other funding. If they fail, there is no extra cash to raise. If they succeed, the 50% rule becomes irrelevant (unless of course it is also read as mandatory for the shareholding spread to go to the other parties). The ruling has failed to recognise the structural change in the industrial sector.
Will the relaxation of the equity for stockbroking firms help to revive the local stockbroking industry or the stock market? I think not. If the industrial sector has hollowed out, there is nothing to promote and no decent shares to trade in the secondary market. (There may be attempt to sell junk bonds.)
In my view, the key thing that must be done is to rebuild our industrial structure. Is expanding the services sector the answer? I think partly. I think we have not completed fully IMP1 (building an industrial base), IMP2 (creating value-add industries) and IMP3 (joining the global value chain). I think we need to overhaul and integrate better our primary and secondary industries with a view to growing the services sector. I think the integrating force is corporate efficiency.
The failure of the big banks to come down to the small business people and help them through thick and thin is one of the major factors why new SMIs have not emerged in the post-1998 economy worthy of stockmarket attention. There is no more nurture. The focus of money making is no more in the business but in the stock market. Small business people have become market speculators.
With poor corporate performance, it will be very hard for fund management repackaging stocks in the form of unit trusts to make money unless they tap into the monopolies which have monopoly profits as well as the perennial support from the EPF to increase their share prices. The cry of insufficient float for big investors (presumably foreign) merely means that there is just too much money (read: excess liquidity) chasing too few good stocks (read: monopolies). I am not surprised that the KLCI has been treading sideways and has not surpassed (except momentarily in 2007) the record index achieved in 1993.
The concern over risk management in financial institutions especially banks by accountant-type regulations may be skewing their lending portfolios towards real-estate based funding activities. Further danger will come from believing that value and profits are derived from inflation. My view is that the only safe bet for the financial industry over its long-run profitability and viability is to finance productive business activities. This will involve banks rolling up their sleeves and give their commitment to the financing of the corporate sector - rather than leaving it entirely to the corporate finance people.
But, to be fair, for the banks to get their act together, the government must come out with a credible economic plan to provide the strategic direction for the entire nation. So far, I only see direction for the protected few and the real foreigners. A better plan is needed.