FIMA Research Center, University of Hawai'i 1 Regional Bond Markets in the Asia-Pacific Region: Reality or Wishful Thinking? S. Ghon Rhee K. J. Luke Chair of International Finance and Banking University of Hawaii The ADBI/FIMA Symposium The ADBI/FIMA Symposium May 10, 2001, Honolulu, Hawaii May 10, 2001, Honolulu, Hawaii

FIMA Research Center, University of Hawai'i 2 Looking Back: The Asian Financial Crisis  Reversal of Capital Flows to Crisis- Affected Economies: $105-$110 billion or 10% of the Pre-Crisis Combined GDP  Was the Reversal Too Large for the Asian Economies as a Group to Cushion Its Impact on Their Currency and Equity Markets?

FIMA Research Center, University of Hawai'i 3 Magnitude of Reversal Less than 5% of Pre-Crisis Combined Domestic Savings of $2.3 Trillion Less than 5% of Pre-Crisis Combined Domestic Savings of $2.3 Trillion Only 1/6 th of Pre-Crisis Foreign Exchange Reserves of $700 Billion Only 1/6 th of Pre-Crisis Foreign Exchange Reserves of $700 Billion Accumulated by 5 Crisis-Affected Economies Plus China, Hong Kong, Japan, Singapore, and Taiwan

FIMA Research Center, University of Hawai'i 4 What Would Have Happened? Had These Domestic Savings Been Channeled Into Corporate Financing Without Relying on Short-term Financing from Abroad Had These Domestic Savings Been Channeled Into Corporate Financing Without Relying on Short-term Financing from Abroad Had 15% of Foreign Exchange Reserves Been Allocated for the Region’s Capital Account Crises Had 15% of Foreign Exchange Reserves Been Allocated for the Region’s Capital Account Crises

FIMA Research Center, University of Hawai'i 5 Valuable Lessons from the Recent Crisis Sufficient Funds Were There in Asia, but the Region Lacked: A Vehicle for Utilizing Foreign Exchange Reserves A Vehicle for Utilizing Foreign Exchange Reserves Fully Developed Domestic Bond Markets and Regional Bond Markets Fully Developed Domestic Bond Markets and Regional Bond Markets

FIMA Research Center, University of Hawai'i 6 Two Major Initiatives “Chiang Mai Initiative” by “Chiang Mai Initiative” by ASEAN + Three Bilateral “swap” arrangements and repurchase agreements Need A New Initiative to Create Regional Bond Markets Need A New Initiative to Create Regional Bond Markets

FIMA Research Center, University of Hawai'i 7 Gaisai Bond Issues Unit: ¥ trillion Unit: ¥ trillion Number of Samurai Number of Shogun Number of Samurai Number of Shogun Year Issues Bonds Issues Bonds Year Issues Bonds Issues Bonds * * *From April 2000 to February 2001 *From April 2000 to February 2001

FIMA Research Center, University of Hawai'i 8 New Miyazawa Initiative Three measures under the NMI are related to regional bond market activities a.Acquisition of sovereign bonds by Japan Bank for International Cooperation b.Use of credit guarantee and/or interest subsidies c.Establishment of international guarantee institution

FIMA Research Center, University of Hawai'i 9 Why the Tokyo Market Failed to Serve the Region? Without joint effort by the region’s economies, Japan alone cannot create a truly a regional bond market Without joint effort by the region’s economies, Japan alone cannot create a truly a regional bond market The Japanese Government Bond (JGB) Market Suffers From Its Own Weaknesses The Japanese Government Bond (JGB) Market Suffers From Its Own Weaknesses Cause: MOF’s dual role as issuer and buyer of JGBs

FIMA Research Center, University of Hawai'i 10 Negative Consequences of the Dual Role   The lack of intense competition on the primary market   Additional Uncertainty on the long-term interest rates on the secondary market

FIMA Research Center, University of Hawai'i 11 What about Hong Kong, Singapore, and Sydney? Outstanding Government Securities (as of December 2000) Hong Kong:$13.94 billion Singapore:$24.97 billion Sydney:$40.33 billion (as of March 2001) US:$2,966.9 billion Japan:$3,176.7 billion

FIMA Research Center, University of Hawai'i 12 Major Positive Developments in Domestic Bond Markets Hong Kong Hong Kong US Dollar Clearing System Singapore Internationalization of S$ Sydney REPO & Derivatives Markets Real Time Gross Settlement

FIMA Research Center, University of Hawai'i 13 Big Bang Financial Reforms: Japan (I) 1.Deregulation of cross-border transactions and foreign exchange business 2.Adoption of a competitive auction method to issue financing bills 3.Abolition of securities transaction tax 4.Deregulation of brokerage commission 5.Preparation of legal framework for loan/asset securitization 6. Allowance of off-exchange trading

FIMA Research Center, University of Hawai'i 14 Big Bang Financial Reforms: Japan (II) 7. Allowance of banks and financial institutions to issue bonds 8. Entry by banks, securities companies, and insurance companies into each other’s business 9.Introduction of individual stock options 10. Replacement of merit-based licensing system with a disclosure-based registration system for securities companies

FIMA Research Center, University of Hawai'i 15 Creation of Regional Bond Markets A comprehensive study and detailed blueprint are needed a.Asian Monetary Union b.Credit Enhancement and Guarantee Agency c.Regional Clearing and Settlement Systems d.Cross-Border Securities Borrowing and Lending Facilities e.Cross-border Trading Systems f.Regional Rating Agency g.Harmonization of Tax and Accounting Rules

Asian Monetary Union Major Benefit of the Euro for Europe’s Bond Markets Major Benefit of the Euro for Europe’s Bond Markets i.Elimination of Exchange Risk ii.Harmonization of Market Practices iii.Re-denomination of European Government Bonds in Euro Full or Partial Currency Unification in the Region? Full or Partial Currency Unification in the Region? Coordinated Monetary and Fiscal Policies? ASEM Meeting (Jan 13, 2001) ASEM Meeting (Jan 13, 2001) G-7 FMs and CB Governors (April 28, 2001) G-7 FMs and CB Governors (April 28, 2001)

FIMA Research Center, University of Hawai'i 17 Credit Enhancement and Guarantee Agency  Regional credit enhancement & guaranty agency New Miyazawa Initiative but no follow through  Structured financing arrangements  Bond Insurance  Borrow the idea of Municipal Bond Bank concept?

Cross-Border Clearing and Settlement GovernmentCorporate Securities Bonds AustraliaReserve Bank InformationFinancial Transactions and Transfer SystemRecording and Clearance System Hong KongCentral MoneyMarkets Central Clearing & UnitSettlement System JapanBOJ Financial Networkn.a. System (BOJ-NET) SingaporeGovernment Book-EntryDebt Securities SystemC&S system

FIMA Research Center, University of Hawai'i 19 Regional Bond Borrowing and Lending To promote cross-border REPO transactions and C&S To promote cross-border REPO transactions and C&S a.Uniform Legal Framework for Securities Borrowing and Lending and Sell-and- Buyback Arrangements b.Uniform Tax and Accounting Treatment

Bond Trading Systems Order- vs. Quote-Driven Trading 1.Market Makers’ Involvement Pre-trading negotiations and personal relationships among market markets 2.Inter-Dealer Brokers

FIMA Research Center, University of Hawai'i 21 A Regional Credit Rating Agency? a.Economically Feasible? b.How to Harmonize Accounting and Disclosure Standards? c.How to Improve the Dialogue Between Credit Rating Agencies and Asian Issuers

Mahalo!