StudentName:SihaoXie
Date:14JANUARY2002
Introduction
DictionaryofBusinessdefinesthecapitalmarketasamarketinwhichlong-termcapitalisraisedbyindustryandcommerce,thegovernment,andlocalauthorities.Themoneycomesfromprivateinvestors,insurancecompanies,pensionfunds,andbanksandisusuallyarrangedbyissuinghousesandmerchantbanks.Stockexchangesarealsopartofthecapitalmarketinthattheyprovideamarketforthesharesandloanstocksthatrepresentthecapitalonceithasbeenraised.Itisthepresenceandsophisticationoftheircapitalmarketsthatdistinguishestheindustrialcountriesfromthedevelopingcountries,inthatthisfacilityforraisingindustrialandcommercialcapitaliseitherabsentorrudimentaryinthelatter.
Theglobalcapitalmarkethasgrownsorapidlyinrecentdecades.SoIwouldliketodiscussaboutitintheessay.
Thisessayisorganizedasfollow,introduction,body,conclusion.Inthebodypart,Section1showswhyhastheglobalcapitalmarketgrownsorapidlyinrecentdecades.Section2talksaboutthecontinuanceofthegrowththroughoutthe2000s.
Body
1.Whyhastheglobalcapitalmarketgrownsorapidlyinrecentdecades
Inrecentdecades,theglobalcapitalmarkethasgrownsorapidlybecauseoftheriseofprivatizationsmainly.Withprivatecapitalflowsrisingfromlessthan5percentofworldGDPin1975toabout20percenttoday,privatizationshavesignificantlyincreasedmarketliquidity.Andalsoprivatizationtakesapotentialroleglobalcapitalmarketdevelopment.
A.TheRiseofCapitalMarket-BasedFinance
Capitalmarket-basedfinancehasinfactbeenincreasinginimportance,bothabsolutelyandrelativetofinancialintermediary-basedfinance,inbothdevelopedanddevelopingcountriesoverthepastdecade.Andalsocapitalmarketsareinfactwinningthepresentandseemlikelytodominatethefutureofcorporatefinanceindevelopedanddevelopingcountriesalike.
a.TheStableRoleofCommercialBankinginModernEconomies
Ordinary"relationshipbanking"appearstobe(atbest)holdingitsownasasourceofcorporatefinancingaroundtheworld,andismorelikelyindecline.Thebitsofbankingthataregrowingrapidlyarethosepartsthatprovidehighvalue-addedproducts(especiallyriskmanagementtools)andprovidelarge-scalesyndicatedcreditstocorporateborrowers.Duringthelate-1980sandearly-1990s,whenJapanandGermanyappearedtobeoutperformingmajorcapitalmarket-orientedcountriessuchasBritainandtheUS,theacademicliteratureoftenfavoredbank-basedsystems.Examplesof thisliteratureincludeProwse(1992),Kester(1992),andPorter(1992),whilethesupportingargumentsaresummarizedinMaherandAndersson(1999)andTsuru(2000).Morerecently,however,theweightofopinionhasswungstronglyinfavoroftheideathatcapitalmarketshavedecisivecomparativeadvantagesoverbanksandotherfinancialintermediariesasoptimalmonitorsandfinanciersofanation'scorporatelife.Thisreassessmenthasbeendriveninpartbytheobservation,discussedatlengthabove,thatcapitalmarketshavebeenprosperingrelativetobanksformany;yearsnow.Therepetitivenature--andmassivecosts--ofbankingcrisesindevelopinganddevelopedcountriesalikehasalsoconvincedmanyobserversthatbanksareinherentlyfragileinstitutions,whoseroleincorporatefinanceshouldbeminimizedasmuchandasquicklyaspossible(Economist(1997,1999)).
b.TheRapidGrowthinStockMarketCapitalizationandTradingVolumeSince1983
From1983to2000,thiswasaperiodofveryrapidgrowthinthecapitalizationofmarketsineverycountryexceptJapan.Totalworldmarketcapitalizationincreasedoverten-fold(to$35.0trillion)between1983and1999,andthetotalcapitalizationoftheUSmarketincreasedalmostnine-fold(from$1.9trillionto$16.6trillion)overthesameperiod.
c.TheDramaticGrowthinSecuritiesIssuanceVolumeSince1990
Anotherwayofmeasuringtheriseofcapitalmarketsistoexaminewhethertheirshareofannualcorporatefinancingactivityhasgrownrelativetothatofothersourcesoffunding.SecurityofferingsbyUSissuersaccountedfortwo-thirdsoftheglobaltotalthroughout1990-1999,thatimpliesthatnon-USsecuritiesissuesincreasedfrom$191billionin1990to$750billionin1998,andthento$1.19trillionin1999.Thesurgeinnon-USissuancevolumein1999waslargelyduetothepopularityofeuro-denominatedbondissues,whichactuallyexceeded dollar-denominatedbondissuesformuchof1999.
d.ThePhenomenalGrowthinVentureCapitalFinancingintheUnitedStates
Onehighlyspecialized,butextremelyimportanttypeoffinancinghasalsogrownveryrapidlyoverthepastdecade,andespeciallysosince1997.ThisisventurecapitalinvestmentbyUSventurecapitalpartnerships.Thefund-raisingpatternsoftheseprivateequityinvestorsarediscussedinGompersandLerner(1998),andthecompetitiveadvantagesofUSventurecapitalistsversusthoseinotherdevelopedcountriesaredescribedinBlackandGilson(1998).
e.TheSurgeinMergersandAcquisitionsWorldwide
Thealmostincredibleincreaseinthetotalvolumeofmergerandacquisitionactivitythathasoccurredsince1990.WhiletakeovershavealwaysplayedanimportantroleintheUnitedStates,theriseinM&A(MergerandAcquisition)activityinEuropeduringthe1990swasevenmoredramatic.Fromlessthan$50billionannuallyinthelate-1980s,thetotalvalueofM&AinvolvingaEuropeantargetreached$592billionin1998,beforemorethandoublingto$1.22trillionin1999--rivalingtheUStotal.TheglobalvalueofM&Aactivityin1999reached $3.4trillion,anastounding10%ofworldGDP.
NextIwilldocumentthatshareissueprivatizationshavetrulytransformedshareownershippatternsofinvestorsinmanydifferentcountries.
B.Privatization'sImpactonStockandBondMarketDevelopment
Weshouldbecarefulininferringcausationregardingprivatization'simpactonmarketgrowth,sinceashiftinideologyorsomeotherexogenouspoliticaloreconomicchangemighthavecausedboththeprivatizationandtheoverallboom.
a.TotalProceedsRaisedbyPrivatizationPrograms
Itisclearthatnationalgovernmentshavebeenamongthebiggestwinnersfromprivatizationprograms,sincethesehavedramaticallyincreasedgovernmentrevenues,whichisclearlyonereasonthepolicyhasspreadsorapidly.Asmentionedabove,PrivatisationInternational[Gibbon(1998,2000)]reportsthatthecumulativevalueofproceedsraisedbyprivatizinggovernmentsexceeded$1trillionsometimeduringthesecondhalfof1999.Asanaddedbenefit,thisrevenuehascometogovernmentswithouthavingtoraisetaxesorcutotherpublicservices.
b.Privatization'sImpactonInternationalInvestmentBanking
Allinternationalinvestmentbankscompetefiercelyforshareissueprivatizationmandates,fortwoprincipalreasons.First,becausetheofferingsaresolargeandsovisible--andarealmostalwaysdesignedtohelppromotethemarket'scapacitytoabsorbsubsequentstockofferingsbyprivatecompanies--theseareveryprestigiousmandates.Todate,thelargeUSandBritishbrokeragehouseshavehadthemostsuccessinwinningadvisoryandunderwritingmandates,thoughallcountriesthatlaunchlarge-scaleSIPprogramstendtofavorlocalinvestmentbanksas"nationalchampions"to handlethedomesticsharetranche.ThesecondreasonbankscompetesofiercelyforSIPmandatesisbecausetheycanbeextremelyprofitable.Inspiteofthefact--documentedbyJones,etal(1999)andLjungqvist,etal(2000)--thatSIPshavesignificantlylowerunderwritingspreadsthanprivatesectorofferings,theirsheersizeandlackofdownsidepriceriskmakethemverylucrativeforunderwriters.
2.Willthisgrowthcontinuethroughoutthe2000s?
Asweindicatedabove,theglobalcapitalmarkethasgrownsorapidlyinrecentdecadescauseoftheprivatizationsrise.Privatizationsincreasedthemarketliquidity.Nowwehavealreadysteppedintothe21stcentury.Ibelievethatthegrowthwillcontinueforthefollowingreasons.First,mostofthesouth-eastAsiacountrieshaverecoveredfromthe1997financialcrisis.Forthesecountries,theynowhavethecapitaltodobusinesses.Andtheygetbackonthefastgrowingtrack.Second,bytheendof2001,world'sbiggestdevelopingcountry,China,has;enteredtheWTO(WorldTradeOrganization).Thisisrealgreatnews.Asweallknow,today'sChinatakesaseriouspositioninworld'seconomy.ItsinnovationandopeningpolicymakechinakeepachievinghighGDPgrowthrate.Thisdrivestheglobalcapitalmarketkeepgrowing.
SummaryandConclusions
Thisessayexaminestheimpactofshareissueprivatizations(SIPs)onthegrowthofworldcapitalmarkets(especiallystockmarkets).Ibeginbydocumentingtheincreasingimportanceofcapitalmarkets,andthedecliningroleofcommercialbanks,incorporatefinancialsystemsaroundtheworld.Ithenshowthatprivatizationprograms--particularlythoseinvolvingpublicshareofferings--havehadadramaticimpactbothonthedevelopmentofnon-USstockmarketsandontheparticipationofindividualandinstitutionalinvestorsinthosestockmarkets.
Thishastoldthereasonofthefastgrowthofglobalcapitalmarket.AndthenIsuccinctlyindicatedthecontinuanceoftherapidgrowth,thegreatfuture.
Thelastbutnottheleastistherecommendation.Icanconfidentlyassertthat,ifexecutedproperly,aseriesofshareissueprivatizationscanindeedpromotethegrowthofglobalcapitalmarket,whichwillyieldeconomicandpoliticaldividendsformanyyearstocome.ThatmeansthereisaneedtoencouragethedevelopmentofSIPsinordertogaingrowthofglobalcapitalmarket.
References
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TheEconomist(April17,1999),"OnAWingandAPrayer:ASurveyofInternationalBanking."
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Tsuru,K.,2000,"FinanceandGrowth,SomeTheoreticalConsiderationsandAReviewoftheEmpiricalLiterature,"OECDWorkingPaperSeries,No228.
datafromtheStatisticssectionoftheInternationalFederationofStockExchange'swebsite(www.fibv.com). |
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