Asian Bond Market and Tentative Policy

1
Asian Bond Market and Tentative Policy

• Jie Sun
• Institute of World Economics and Politics
• Chinese Academy of Social Sciences

2
Efforts to Promote Regional Cooperation

• Starting from the AMF during the Crisis
• CMI/CMD a milestone for Asia, but are short term
  swap arrangement, link with IMF, bilateral just
  begin to move to multilateral, and symbolic
  scale
• AMU/ACU long agenda, but progress made on
  research and by ADB
• ABF/ABMI double mismatch and heavy bank
  reliance, a possible way to enhance regional
  integration, widely accepted in the region.
• Conclusion active search may
  reflecting practical difficulties as well as the
  common sense, and progress on every means never
  stop.

3
Financial Structure in Asia and China(edited and
recalculated based on data of Barry
Eichengreen(2004) , as of 2001)
FIR Bank Credit/GDP Stock Market /GDP Debt Security
China 2.24 0.63 0.20 0.17
Asia 6 2.52 0.52 0.30 0.18
Latin America 4 1.12 0.37 0.34 0.29
Central Europe 3 0.90 0.47 0.18 0.35
Emerging Markets 1.86 0.48 0.31 0.21
Japan 5.82 0.53 0.16 0.31
United States 4.49 0.36 0.31 0.34
Europe 3.58 0.34 0.44 0.23
4
Why Doesnt Asia Have Big Bond Markets?Eichengree
n and Luengnaruemitchai (2004)

• Historical reason of information disclosure and
  contracting environment gave a strong comparative
  advantage to banking sector and governments found
  banks to be a convenient vehicle for advancing
  their industrial policies
• Structural characteristics of geographical
  endowment limited by minimum efficient scale with
  liquidity
• Legal tradition for investor protection
• Infrastructure of prudential supervision and
  regulation
• Macroeconomic policy of controls on capital flows
  furthermore rob liquidity, currency risk limit
  the local currency securities, interest rate
  volatility make it unattractive to hold
  long-term.

5
Regional Development in Europe A Comparison

• Aiming at Euro as a final goal
• Integration is based on intra-regional trade
• Effort made on macroeconomic policy and exchange
  rate coordination for long time
• Regional bond markets development boomed just
  after the launch of Euro
• World factors contribute to Euro bond return is
  70(Barr and Priestley, 2004), US news give more
  impact on Euro bond market than EU news.
• Conclusion coordination may not be
  substitute by regional bond market, and regional
  market may still sensitive to the outside.

6
ABF The Demand Side

• Joint effort of EMEAP members 11 economies and 9
  funds, HSBC is general custodian and 8 open to
  private investors in ABF2
• ABF1 to ABF2 improved by products, benchmark,
  fund manager and investors
• Exciting performance and returns first year
  increased by 30
• Further push forward with ABF3 invest in
  corporate bond like GEMLOC (Global Emerging
  Markets Local Currency Bond Program of WB).
• Conclusion the successful operation and
  the increasing reserve accumulated in the region,
  expending the size of ABF may enhance the
  interactive among bond markets in Asia.

7
Framework of ABF1
EMEAP Investment in ABF1
BIS ( BIS Investment Pool)
US dollar denominated bonds issued by sovereign
and Quasi-sovereign issuers in 8 EMEAP economies
8
Framework of ABF2

• 
  (1 billion USD)
• Market Funds (1 billion USD)

EMEAP Invstment in ABF2
Pan Asian Index Fund (PAIF)
China
HK
Indo- nesia
Korea
Mala- ysia
Philip- pines
Sing- apore
Thai- land
Domestic currency bonds issued by sovereign and
quasi-sovereign issuers in the 8 EMEAP economies
9
Comparison of ABF1 and ABF2
ABF1 ABF2
Date July, 2003 March, 2005
Products US dollar denominated bonds issued by sovereign and Quasi-sovereign issuers in 8 EMEAP economies Domestic currency bonds issued by sovereign and quasi-sovereign issuers in the 8 EMEAP economies
Benchmark Not disclosed iBoxx ABF index provided by International Index Company
Manager BIS Private Fund Manager (one for each fund)
Investors EMEAP only Phase 1 EMEAP only Phase 2 Offered to the public
10
ABMI The Supply Side

• Six work group and the completion of WG4
• Issuance of bonds denominated in
  local currencies by Multilateral Development
  Banks (MDBs), foreign government agencies and
  Asian multinational corporations can be regarded
  as a initial stage of opening up and integration
  of the region in may, 2005.
• Japans ABMI activities
• TA program in Southeast Asia
  countries and local currency bond issuances made
  by JBIC. Even there are some difficulties, and
  fund raised are limited, they are practical
  progress!
• Three obstacles are still there
• Rating and accounting standard are
  negotiable, swap for international investors is
  hard to be done and back to the regional exchange
  rate arrangement.
• No more progress report since Nov. 2006 available
  by ADB, why?

11
JBIC and ABMI
Thailand Malaysia Indonesia Indonesia Malaysia
Date June 2004 January 2006 March 2006 March 2007 October 2007
Issuer Thai affiliate of Mitsubishi and Isuzu Malaysian affiliate of ORIX Indonesian affiliate of SOF Indonesian affiliate of SOF Malaysian affiliate of ORIX
Amount THB3.5 billion JPY10 billion MYR150 billion JPY4.5 billion IDR1 trillion JPY12 billion IDR1 trillion JPY13 billion MYR200 billion JPY6.9 billion
Role of JBIC Secondary guarantor Secondary guarantor Secondary guarantor Secondary guarantor Secondary guarantor
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Simplified Structure
Local Issuer (affiliate)

• 
  
  Finance Issue
• 
  Primary Guarantee
• 
  Secondary Guarantee
• 
  Redemption
  Purchase

Parent company
Bond denominated in local currency
2
JBIC ( jointly with a Japanese bank)
3
Local Investor
13
Achievements of ABF and ABMI

• Providing a low cost and efficient investment
  product to broaden investor base
• Identifying market infrastructure by improving
  rating, accounting standard, cross-boarder
  regulation, tax barriers and ETF regulation
• Enhancing the market transparency
• The more important lesson from
  Europe is that both ABF and ABMI are not only the
  way of regional integration but also a platform
  to conduct regional cooperation efficiently.

14
Bond Markets in China

• Dominated by government bonds, central bank bonds
  and financial bonds
• Developed with macroeconomic policy suggest the
  need of potential regional coordination
• Infrastructure greatly improved in terms of DVP,
  STP, investor base and yield curve
• Internationalization since 2005
• QFII were given direct access to China's
  inter-bank bond markets Pan-Asia Index Fund and
  the China Index Bond Fund of the ABF2 began to
  operated in May IFC and ADB issued Panda Bonds.
  Bank of Communication is the custody of China
  fund.
• International settlement linkage was
  made to HKMA in 2004

15
Policy Suggestions Conventional

• Improve CMI by size and condition
• Increase ABF amount and expend product, encourage
  private more fund managers and bond investors
  access to the market
• Promote TA and local currency bond issuance under
  ABMI
• Strengthening joint research on ACU/AMU.

16
Policy Suggestions New Searches

• Asian economies should invite regional investors
  to participate in local infrastructure bond
  market, preferably guaranteed by bank, maturity
  may partially solve the swap obstacles and
  promote the interaction or identification of
  market infrastructure in the region.
• interaction or identification of market
  infrastructure may also be move by local currency
  bond issued by MDB.
• Most important macroeconomic policy coordination
  have been put on table again and may achieved
  more effectively on the basis of CMI, EMEAP, TA
  and ABMI. Doing is much better than wording, and
  doing make contact, interaction and a practical
  progress.

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Thanks!