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Asian Bond Market and Tentative Policy

Asian Bond Market and Tentative Policy. Jie Sun Institute of World Economics and Politics Chinese Academy of Social Sciences. Efforts to Promote Regional Cooperation. Starting from the AMF during the Crisis;

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Asian Bond Market and Tentative Policy

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  1. Asian Bond Market and Tentative Policy Jie Sun Institute of World Economics and Politics Chinese Academy of Social Sciences NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  3. Financial Structure in Asia and China(edited and recalculated based on data of Barry Eichengreen(2004) , as of 2001) NEAT Workshop, 2008

  4. Why Doesn’t Asia Have Big Bond Markets?Eichengreen 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. NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  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 NEAT Workshop, 2008

  8. Framework of ABF2 EMEAP Invstment in ABF2 (1 billion USD) Market Funds (1 billion USD) 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 NEAT Workshop, 2008

  9. Comparison of ABF1 and ABF2 NEAT Workshop, 2008

  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. • Japan’s 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? NEAT Workshop, 2008

  11. JBIC and ABMI NEAT Workshop, 2008

  12. 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 NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  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 NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  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. NEAT Workshop, 2008

  17. Thanks! NEAT Workshop, 2008

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