Development of Asian Bond Market: Latest Progress and Looking Ahead Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration Asian Development Bank 25 September 2007 AFDC, Shanghai

2 Outline Overview and progress of Asian Bond Markets Overview and progress of Asian Bond Markets Issues and Challenges Issues and Challenges Future Outlook Future Outlook

3 Development of Asian Bond Market: Progress and Trends Emerging East Asian bond markets are expanding rapidly. Excluding Japan, local currency bonds have increased from US $ 448 bn in 1996 to over US $2.8 trillion as of December 2006 Growth in government bonds spurred by strong infrastructure spending and sterilization requirement while growth in corporate bond market fuelled by demand for annuity by contractual savings institutions

4 Development of Asian Bond Market: Progress and Trends ASEAN+3 governments introducing more reforms:   More IFIs allowed to issue bond in local currency in various market. e.g. ADB issuance in Thailand, China and Malaysia   In 2006, Vietnam allowed firms w/ foreign equity and joint-stock companies to issue corporate bonds.   PRC’s new bankruptcy code in 2007; new credit rating regulations   Malaysia now allows FX currency bonds to be issued on domestic markets   Thailand further relaxed foreign exchange controls for capital flows.

5 Development of Asian Bond Market: Progress and Trends US sub-prime market turmoil: implications for Asia Sub-prime market turmoil expected to be contained but still unfolding; Market conditions could worsen as more information trickles in; Early indications of limited impact on Asian markets due to limited exposure to US sub-prime credit market Warning signs remain – need to carefully monitor markets in the coming months

6 Development of Asian Bond Market: Progress and Trends Sovereign Wealth Funds   Global reserves of $5.6 trillion + sovereign wealth fund assets of $1.5 to 2.5 trillion = $7.6 trillion or 15% of total global GDP   China holds $1.3 trillion and Japan $900 billion or total of about $2.2 trillion of more than one third of total global reserves   Large current account surpluses have enabled central banks to transfer excess foreign exchange reserves to stand alone funds – Sovereign Wealth Funds (SWFs) managed separately from the official reserves.   Potential systemic problems if SWFs assume greater role in markets   S uggestions to develop best practices for SWFs such as appropriate disclosure of the funds' rules, operations and asset management guidelines and performance.

7 Growth of ASEAN+3 Bond Markets

8

9 Foreign Currency Denominated Bonds Foreign Currency Bonds continue to dominate the region’s bond markets (FCY bond issued vs total bond outstanding, as at end Dec. 2006)

10 LCY Bonds as % of GDP

11 Benchmark Yield Curve Benchmark yield curve

12 Concentration Ratio per Market Dates vary across markets, from Jun 2004 to Dec 2006 Concentration Ratio

13 Liquidity of Asian Bond Market As of Dec 2006 Turnover ratioTrading Volume

14 Size of Local Currency Bond Market of ASEAN+3 Countries ChinaHong Kong (as at end June 2007)

15 Size of Local Currency Bond Market of ASEAN+3 Countries Indonesia (as at end June 2007) Japan

16 Size of Local Currency Bond Markets of ASEAN+3 Countries Korea (as at end June 2007) Malaysia

17 Size of Local Currency Bond Markets of ASEAN+3 Countries Philippines (as at end June 2007) Singapore

18 Size of Local Currency Bond Markets of ASEAN+3 Countries Thailand (as at end June 2007) Viet Nam

19 Issues and Challenges Lack of liquidity especially for corporate bonds in both primary and secondary markets Lack of diversity of investor base - the more investors the more trading activity Lack of hedging instruments such as currency swaps Lack of investor confidence in legal and judicial systems to hold and enforce contracts

20 Issues and Challenges No reliable benchmark yield curve to price long term risk Bond issuances are not regular and often all or parts of tender issues are rejected to keep interest rates on government bonds low Market infrastructure is immature with weak clearing and settlement systems.

21 Issues and Challenges Lack of readily available public information which limits markets’ ability to assess credit quality Lack of timely information which would typically generate market reaction and market activity Lack of post trade transparency. Transparency helps reduce differences in spreads and promotes liquidity

22 Issues and Challenges MarketsBond Type WHT Resident On Income Non-res Capital Resident Gains Tax Non-res IndonesiaGovt. 20%. - 30% maximum 20% reducible by treaty Interest- bearing bonds, 5-35 % Exempt State- Owned & Corp Indiv. - 20%20% WHT-20%. - 30% Varied depends on treaty KoreaAll types15.4%. 16.5% %. MalaysiaGovt. & Corp Exempt PhilippinesGovt20% Exempt Corp20% if less than 5 years mat. SingaporeGovtInd exempt Corp 10% Ind exempt Corp 10% Exempt CorpInst. Inv 10%Exempt

23 Looking Ahead Asia’s debt markets will continue to attract global investors if they: Develop risk-based regulatory environment   Improve risk hedging options   Adopt measures to improve risk management Build-up market infrastructure

24 Looking Ahead Increase use of securitization Develop infrastructure bond financing Strengthen cooperation in developing regional bond market

Thank You For more information pls. contact Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration