The Spread of People's Capitalism

Foreigners generate most of Indonesia's stock trades; small investors prefer bank accounts.

THE Jakarta Stock Exchange has failed to raise the investment interest of most Indonesians. They prefer astronomical interest rates at domestic banks to the risks of a relatively new market prone to volatility and the whims of big brokers. Indonesians have left the market mainly to foreign investors, who generate 70 percent of daily turnover.

Analysts say there is hope that will change. In May, the JSE moved into a new 30-story skyscraper with a 400-terminal computerized trading room. But the stock market is not yet fully computerized. At the end of the day, staff still sort out paper shares on which trading is based. The government plans to pass a new law regulating capital markets by yearend.

Regulators want to make it harder to cheat and harder for large international investors to call the shots. Currently, trading practises that are standard internationally often do not apply, perhaps because the market is so small. Charges of insider trading, for example, would be almost impossible to prove, says Kiki Boenawan, head of fund management at Jardine Fleming Nusantara in Jakarta, an investment house.

"The goal is to increase liquidity and the participation of local investors in the stock market," says Hengki Suherman, spokesman for the state-owned JSE.

Fewer than 500,000 Indonesians invest in the stock market. They come from the upper crust of Indonesia's 192 million people, with an average $800 per-capita annual income.

Though it has been said that Indonesians avoid capital markets because they view them as an unethical form of gambling, the general lack of public interest is rooted in the country's economy. Indonesian banks offer interest rates of 19 percent on three-month time deposits. Rates of return for the past five years on stocks have averaged only 10 percent to 14 percent due to volatility.

The stock market has not existed long enough in Indonesia's postcolonial period for many people to even know much about it. Closed during World War II, the JSE reopened in 1987 with a 30 percent to 35 percent capital-gains tax. "The dealers played dominoes all day," admits Marzuki Usman, head of the JSE.

The number of companies listed on the exchange has grown in eight years from 24 to about 200, with new companies listing almost every month.

Early this year, the capital-gains tax was lifted, but current market regulations don't favor the individual investor. Open-ended mutual funds, which issue shares to meet demand, are banned; disclosure requirements are lax; and Indonesian companies that fail to meet their prospectus obligations are not held responsible.

The country has only one mutual fund, Dana Reksa, managing about $500 million, and only 125 registered pension funds.

But the wind may be changing. The Capital Markets Regulatory Agency is processing about 300 applications from firms that want to set up their own pension funds.

Meanwhile, brokerages appear to be ahead of the game. Today, 197 brokerage houses have offices in Jakarta, including about 40 foreign firms such as Barings of Britain, Jardine Fleming of Hong Kong, and Japan's Nomura. Merrill Lynch is rumored to be negotiating to form a joint venture.

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