Across Asia, debt markets play a limited role in economic growth. They are small and dominated by governmental or quasigovernmental debt. A more robust corporate debt market is essential for economic growth and is the backbone for R&D investment. It enables companies and lenders to take more risk. At this point, however, the corporate debt market has little liquidity.
In both countries there are problems with respect to supply, demand, and marketplace infrastructure. In India, for example, there is little transparency. Companies disclose debts only to a few investors. Markets in mutual funds and pension funds are exceedingly weak. A good deal of investment could go there, but investors are restricted on where they can invest. For the most part investment is channeled to government debt. Investors have little ability to price risk, and they face unwelcome tax and accounting rules. Thus, debt markets represent a chicken-and-egg situation. It is a supply issue but also a problem of market infrastructure. If the infrastructure problem is addressed, both demand and supply will accelerate. India’s Knowledge Commission is creating awareness of what is needed to grow innovation there, but the choices are politically difficult.
In Lawson’s opinion, both China and India have strong prospects for growth of debt markets (Figure 7). In the slightly longer term by 2016, China’s domestic debt market could grow to the size of today’s U.S. market for Treasuries.
There is a need for larger investors to get things moving in that direction. Building a debt market now can fuel the growth of medium-size corporations over the long term.
Asked about the significance of the money flows associated with China’s real estate boom, the panel said that the boom underscores the need for leaders to create a greater range of investment opportunities. Rising real estate prices do not create value per se and the bursting of the real estate bubble can have disastrous consequences for the economy as a whole. But real estate transactions do help grow a middle class, which in turn has broader positive effects. A growing mortgage market helps spread growth by creating demand for furnishings and related products.