Developing Bond Markets in Asia: Motivation, Obstacles and Achievements So Far

1
Developing Bond Markets in Asia Motivation,
Obstacles and Achievements So Far
2
Outline

• Motivation to develop bond markets
• Recent developments in the region
• Hong Kongs experience
• Lessons and impediments

3
What motivates the authorities in the region to
develop their local bond markets?
4
Financing Structure in Asia 1996
5
Motivation of the Authorities

• Lessons from the Asia financial crisis
• Currency and maturity mismatches
• Prone to sudden capital reversal
• To foster financial stability
• As back-up facilities
• Diversity in financial intermediation

6
The Role of the State

• A multifaceted role
• Investor protection
• Innovation
• Provision of market infrastructure
• Positive non-interventionism
• Facilitating, not forcing!

7
What has happened in the region and what have the
authorities done since the Asia crisis?
8
BIS Classification of Bond Issuance
9
Size of Domestic Bond Market Emerging Asia,
19962004
10
Structure of Asian Bond Market (end-2004)
11
Growth in Government Bonds

• Regular issuance programmes
• Benchmark yield curves
• Improving market infrastructure
• The need to finance infrastructure investment

12
Government Initiatives

• Domestic development
• Relaxing investment restrictions
• Regional cooperation
• APEC Initiative on the Development of
  Securitisation and Credit Guarantee Markets
• Asian Bond Market Initiative (ABMI)
• Asian Bond Fund (ABF)
• Infrastructure initiatives

13
The Asian Bond Fund

• An EMEAP initiative
• ABF1 (2003)
• Closed-end confined to investment of the central
  banks only
• USD-denominated sovereign and quasi sovereign
  bonds in the region
• ABF2 (2005)
• Open to private sector investors
• Domestic currency-denominated bonds in the region

14
The Hong Kong experience
15
Overview

• Bond market development is high on the policy
  agenda
• streamlining issuance procedures
• tax concessions
• improving infrastructure
• Rapid growth over the past decade
• Outstanding HK-denominated bond reaching US80
  billion at end-2004
• Almost 50 of GDP

16
Growth of Hong Kong Dollar Bond Market
Sources HKMA and HK Census and Statistics
Department.
17
Growth By Issuer
US, bn
US, bn
90
90
80
80
Government and statutory
Local Corporates
bodies
70
70
60
60
Non-MDB overseas
50
50
MDBs
40
40
30
30
Banks
20
20
10
10
Exchange Funds
0
0
1997
1998
1999
2000
2001
2002
2003
2004
Source HKMA.
18
Government Initiatives (I)

• Issuance of Exchange Fund papers
• HK debt instruments issued by the HKMA
• Backed up by the foreign reserve of Hong Kong
• Benchmark yield curve
• Mainly held by banks

19
Government Initiatives (II)

• Government bond issuance
• first global bond offering in 2004
• Securitised bond
• The Hong Kong SAR Government
• Hong Kong Mortgage Corporation

20
Government Initiatives (III)

• Retail bonds initiatives
• Streamline issuing procedures
• Tax concessions
• Pension scheme (not for promoting the bond
  market)

21
Clearing and Settlement System
CDC - China
USD RTGS (2000)
Clearstream
2003
2004
DvP
Euroclear
1994
PvP
2002
PvP
1994
CMU
HKD RTGS(1996)
DvP
1997
AustraClear - Australia
PvP
DvP
1998
1999
AustraClear - New Zealand
KSD - South Korea
EURO RTGS (2003)
22
After all these
23
Market Composition Pre-Crisis and Now
24
Comparing the Financing Structure Emerging Asia
vs. Advanced Economies
1996
2004
25
Lessons and impediments anything we can do?
26
More Work to Do?

• Macroeconomic policies
• Government bonds
• Banking sector soundness
• Corporate governance
• Regulatory framework
• Tax treatment / incentives
• Investor base

27
The Case of Hong Kong

• Supply
• Limitations of Exchange Fund papers
• Government issuance is politically sensitive
• Lack of corporate issuers
• Demand
• Mutual funds invest mainly in equities
• Currency board system

28
Retail Demand for Bonds

• Transaction cost is high for individuals
• Increased competition between banks made deposits
  fiercely competitive
• Attraction is mainly on medium term papers
• There is more interest in holding bonds via other
  investment vehicles
• Any more room for ABF2-typed initiatives?

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Factors Critical to Depth and Liquidity

• Demand
• incentives (eg. tax, transaction cost)
• investment vehicles (eg. mutual funds)
• limited to high quality issues?
• Supply
• fiscal deficit
• structural reforms (eg. privatisation)
• business size
• Infrastructure
• credit rating
• credit bureaux

30
Conclusion

• The Asian Bond market has grown steadily since
  crisis
• Structure of financing still tilted towards loans
• Scope for improvements