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

Outline Motivation to develop bond markets Recent developments in the region Hong Kong’s experience Lessons and impediments

What motivates the authorities in the region to develop their local bond markets?

Financing Structure in Asia – 1996

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

The Role of the State A multifaceted role: –Investor protection –Innovation –Provision of market infrastructure Positive non-interventionism –Facilitating, not forcing!

What has happened in the region and what have the authorities done since the Asia crisis?

BIS Classification of Bond Issuance

Size of Domestic Bond Market: Emerging Asia, 1996–2004

Structure of Asian Bond Market (end-2004)

Growth in Government Bonds Regular issuance programmes Benchmark yield curves Improving market infrastructure The need to finance infrastructure investment

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

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

The Hong Kong experience

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 US$80 billion at end-2004 –Almost 50% of GDP

Growth of Hong Kong Dollar Bond Market Sources: HKMA and HK Census and Statistics Department.

Growth By Issuer Source: HKMA US$, bn Non-MDB overseas MDBs Banks Local Corporates Exchange Funds Government and statutory bodies

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

Government Initiatives (II) Government bond issuance –first global bond offering in 2004 Securitised bond –The Hong Kong SAR Government –Hong Kong Mortgage Corporation

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

Clearing and Settlement System USD RTGS (2000) DvP CMU HKD RTGS (1996) Clearstream AustraClear - Australia AustraClear - New Zealand EURO RTGS (2003) DvP KSD - South Korea PvP DvP Euroclear CDC - China 2004

After all these…

Market Composition: Pre-Crisis and Now

Comparing the Financing Structure: Emerging Asia vs. Advanced Economies

Lessons and impediments: anything we can do?

More Work to Do? Macroeconomic policies Government bonds Banking sector soundness Corporate governance Regulatory framework Tax treatment / incentives Investor base

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

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?

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

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