ASEAN+3 Seminar on Developing Corporate Bond Markets in Asia Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration Asian Development Bank 27 September 2007 Shanghai, PRC Session 1: Corporate Bond Markets in East Asia: Challenges and Prospects

Outline Need to develop corporate bond marketsNeed to develop corporate bond markets Factors that support development of corporate bond marketsFactors that support development of corporate bond markets Private-Public sector cooperation to promote corporate debt marketsPrivate-Public sector cooperation to promote corporate debt markets

3 Advantages of corporate bond finance Corporate bond markets can: Reduce the double mismatch problem (currency and maturity) Reduce over-dependence on bank borrowing and lower borrowing costs Contributes to efficient resource allocation. Help develop hedging instruments to mitigate risks

4 Corporate bond market development Corporate bonds in ASEAN+ 3 countries grew 36% last year. However, corporate debt markets continue to be underdeveloped  Less than one-third of the over 100 countries with equity markets have corporate debt markets  Corporate debt markets average only one tenth the size of the corresponding equity markets

5 Factors that support corporate bond market development Financial development often requires government to play a role in initial stage of bond market development ex. Malaysia and Korea Financial development often requires government to play a role in initial stage of bond market development ex. Malaysia and Korea  Malaysia promoted development of needed infrastructure for bond market development incl. bond rating agencies; made bond ratings mandatory promoted development of needed infrastructure for bond market development incl. bond rating agencies; made bond ratings mandatory actively encouraged Employee Provident fund to invest in corporate bonds to help finance infrastructure and energy investments actively encouraged Employee Provident fund to invest in corporate bonds to help finance infrastructure and energy investments By 2000corporate debt market in Malaysia amounted to 47% of GDP from just 4% in 1989 By 2000corporate debt market in Malaysia amounted to 47% of GDP from just 4% in 1989

6 Factors that support corporate bond market development (1)  Korea Korean government first approved Capital Market Promotion Act of 1968 Korean government first approved Capital Market Promotion Act of 1968 In 70's, government introduced guaranteed corporate bonds and ensured that corporate bonds issued by the industrial conglomerates (chaebols) carried bank guarantees In 70's, government introduced guaranteed corporate bonds and ensured that corporate bonds issued by the industrial conglomerates (chaebols) carried bank guarantees By 2000, corporate debt market rose to 26% of GDP from 11.1% in 1989 By 2000, corporate debt market rose to 26% of GDP from 11.1% in 1989

7 Factors that support corporate bond market development (1) Government support for the development of the corporate bond markets in MAL and KOR were substantial and sustainedGovernment support for the development of the corporate bond markets in MAL and KOR were substantial and sustained Relatively rapid development of bond markets in MAL and KOR suggest that government support is important for bond market development at least in initial stageRelatively rapid development of bond markets in MAL and KOR suggest that government support is important for bond market development at least in initial stage However, government interventions should be carefully designed to avoid problems.However, government interventions should be carefully designed to avoid problems.

8 Factors that support corporate bond market development (2) Presence and robustness of institutional investors Presence and robustness of institutional investors  Diversified institutional investors (pension, insurance, mutual funds) key to development of debt markets  Presence of defined contribution schemes creates long-term savings that may create demand for long-term debt securities

9 Factors that support corporate bond market development (3) Presence of large companies within the economy contribute to development of bond marketsPresence of large companies within the economy contribute to development of bond markets  Financially sound firms with good historical performance  Able to issue bonds regularly and on large enough scale  Accurate, reliable and timely information on these firms available to market

10 Factors that support corporate bond market development (3) Corporate debt markets can only develop if there is active involvement of banks in development of debt markets Corporate debt markets can only develop if there is active involvement of banks in development of debt markets  Banks oppose development of debt markets bec. of potential competition  Highly concentrated banking systems may succeed in frustrating development of corporate bond markets

11 Factors that support corporate bond market development (3) Complementary relationship between banks and corporate debt market Complementary relationship between banks and corporate debt market  Promote more active role of banks as issuers, investors and intermediaries of bond markets  Encourage banks to lead efforts in niche markets

12 Public-Private Sector Cooperation in Developing Corporate Bond Market Financial sector stability is the key word   Constructive partnership bet. govt, banks, corporate sector in creating diversified and competitive financial sector Sustained government support in development of corporate bond market   Creating benchmark yield curve   Strengthening institutional investors   Adopting outward looking policies

13 Public-Private Sector Cooperation in Developing Corporate Bond Market Firms need to adopt to rapid changes in the international market to remain competitive   Make data on bond prices and quantities available on real-time   Develop professional information services

14 Public-Private Sector Cooperation in Developing Corporate Bond Market Fostering complementary relationship between banks and corporate bond market   Promote supportive role of banks in corporate bond market development   Continue to strengthen banking system at the same time initiate development of corporate bond market by removing barriers

15 Malaysia Bond Market Experience

16 Malaysia Bond Market Experience Malaysia Capital market Development Blueprint

17 Malaysia Bond Market Experience

18 Learnings from Malaysian Experience

19 Learnings from Malaysian Experience Deliberate and planned effort to develop the Malaysian government and commercial bond marketDeliberate and planned effort to develop the Malaysian government and commercial bond market Efficient and well-functioning market infrastructureEfficient and well-functioning market infrastructure All rules and regulations to ensure the functioning of an orderly market were issued and enforcedAll rules and regulations to ensure the functioning of an orderly market were issued and enforced

Thank you For More Information Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration (OREI)