Financial Architecture in East Asia

In this paper, we explore what is an appropriate design of new financial systems in East Asia. Viewing East Asian financial systems in terms of legal systems and accounting systems, the protection of shareholders and creditors, though weaker than in the UK or America, tends to be higher than the global average. As for the level of concentration in stock ownership structure, however, unique East Asian characteristics can be observed in a number of countries. Corporate control by specific families may strengthen relationships with government-related bodies and personnel through lobbying activities based on their economic power. Moreover, an excessive concentration of ownership substantially weakens the influence of minority shareholders protected by the law, and dilutes external discipline. If one takes the stance of prioritizing procurement mechanisms in market-based financial markets, one will naturally assert that the concentration of ownership in East Asian companies provides a major foothold to attaining sustainable economic growth. However, the concentration of corporate controlling rights in the shareholding ratios of specific individual shareholders or parent companies has both good and bad aspects. It produces obstacles in that businesses are run autocratically in line with the wishes of their specific owners, while conversely various agency costs accompanying procurement among interested parties tend to be low. It may be useful, to a degree, for governments to gently intervene in financial markets, thereby retaining these positive traditional aspects of East Asian financial systems while complementing the more fragile aspects of those systems.