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Toy Jun Zheng; August 2007

After decades of worldwide recognition as a joint stock market with Singapore, the Malaysian stock market finally detangled itself as a separate market in 1973 and eventually renamed itself from the initial Kuala Lumpur Stock Exchange to the recently-known Bursa Malaysia in 2004. The journey was tough, with the domestic stock market experiencing four crashes, which were the 1973, 1981, 1987 and the devastating 1997. Each survival from the previous crash made the stock market stronger and more matured, and finally led to the establishment of the Securities Commission (SC) in 1993, a statutory body empowered to supervising all the public companies in Malaysia. This had exhibited the commitment of the Malaysian Government in stabilizing and promoting a healthier domestic financial system. Our domestic stock market capitalization reached and stood at a handsome $300 billion at the month of April 2007. But what’s next ahead of our 50 years of independence?

From an economic viewpoint, the Malaysian economy could be seen as a “finance-led” growth economy, with the growth of the finance sector especially the stock market, assisting or even creating the momentum of the economic growth. The stock market is seen to be acting the role of allocating resources in efficient manners which would then spur growth (Chong, Zulkornain Yusop, Law & Sen 2003). Funds,especially from foreign investors through the domestic stock market play significant roles in financing the domestic enterprises which in the end would increase the domestic output. As so, the development of the domestic stock market should not be neglected when we are considering of stimulating the domestic economic growth but should be seen as a whole. Some more, the endogenous growth model which emphasizes the importance of the role of stock market development along the path of real development prompts us to pay much more efforts than we have to develop the domestic stock market when speaking of pushing the economic growth (Bose 2005). But, unfortunately, the next 10 or 50 years to come would post great challenges in our efforts to do so. This is due to the emergence of plenty of new and attractive markets in the world that would shed our domestic market’s attractiveness globally. All these, in my opinion, should bring to our great concern and should constitute the main themes for developing the stock market in the future. But, where should we start?

An examination into the current weaknesses and issues of our domestic stock market and solving them would help in the first place, before we should even think of promoting our stock market internationally. Attractiveness should be from the inside and not from mere seen beauty. As so, we should first examine the two important issues of our domestic stock market, which are laid out below.

The Malaysian stock market is always seen as the one with poor institutional structures. Concentrated ownerships, loose judiciary system and etc are some of the main culprits. Poor institutional structures such as the examples mentioned would to some extend deprive a person’s freedom to own and increase wealth and would then discourage people to invest. Why would a person invest in businesses when the judiciary power to enforce contracts is not stringent? Why would foreign investors invest when they can’t perform their shareholders’ rights to the degree of what they should have regarding to the operations of businesses, due to concentrated ownerships? As a result, these poor institutional structures would cause the stock market to be less developed and would eventually retard the domestic economic growth (Castaneda 2006).

The second problem applies to all stock markets through out the world and not just to our domestic stock market: the disequilibrium between the growth of the financial market and the economic growth. In essence, it means that the growth of the financial market (in terms of the amount of funds brought in) do not synchronize with the ability of the domestic economy to absorb. Overgrowth occurs and fueled future crashes. A high investment to GDP ratio would not necessarily be a good sign if the funds could not be allocated efficiently (Liu & Hsu 2006). Adverse selection and moral hazards take place and consume the financial sensibility. This is identical to what had happened to our domestic stock market in 1997. Thus, great efforts should be put into synchronizing the growth of the stock market and the economic growth, which would be extremely difficult, if not impossible.

What steps that we can take to solve the problems or at least, improve our domestic stock market to a better stage? First, we can have further deregulations of the financial system. Self regulation is always a better way to develop the financial system rather than the central regulative actions. But, all these improved-openness should be within the boundaries of a more stringent judiciary system that protects investors. We could also practice capital controls on foreign direct investments, such as the one done in the past. The control of these foreign inflows of funds would prove to be useful when we try to minimize the gap of the disequilibrium between the stock market growth and the economic growth. Though, the trade-off of a higher economic growth rate without controls should be taken into considerations as well.

What we have done in developing the domestic stock market or the financial system as a whole in the past has been great. What to come after our 50 years of independence? Only time has the answer.

Main | Malaysian Economy | Asian Crisis | Teaching Subjects  

Har Wai Mun @ 2007