Developing the bond market(s) of East Asia: global, regional or domestic?

1. Developing the bond market(s) of East Asia: global, regional or domestic? Presentation to Korea University / BIS Conference Seoul, 22 March 2004 Robert N McCauley and Yung-Chul Park BIS & Korea University

2. Outline • Definitions. • Three alternative images of Asian bond market development. • Policy and the images. • Conclusions.

3. I. Definitions • Asian bond is bond issued by Asian borrower, whatever the currency of denomination. • Global markets require broad international participation on the sell and the buy side, but can conceptually operate in as few as one or as many as all the world’s currencies. • A regional bond market is defined primarily as bringing together issuers and investors from a region, and secondarily as using the currencies of the region. • Yen issues of Asian issuers, whether euro-yen, Samurai or private placement. • HKD or SGD issues of Asian borrowers. • Potential baht bond issued in Tokyo. • Domestic bond markets feature mostly domestic issuers and investors, although foreign investors may play a more or less important role, while the currency of choice is the local currency. • We play down importance of the distinction between onshore and offshore (or euro in the old sense) markets, considering a dollar issue global whether SEC-registered, 144a, or strictly offshore.

4. II. Alternative images of development • East Asian issuers and investors integrate into global bond markets. • Global bond market has an oligopoly of currencies or • Global bond market has free competition of currencies. • East Asian issuers and investors meet in regional bond market(s). • East Asian issuers and investors meet in national bond markets.

5. A1: East Asian issuers and investors in global bond markets with few currencies. • E Asian issuers sell bonds in $, euro, yen, benefiting from network externalities of major markets. • E Asian investors buy bonds in $, euro, yen, benefiting from wide choice of duration and diversification possibilities. • Well-developed derivatives markets allow issuers and investors to attain appropriate mix of currency exposure.

6. Integration into global markets—the Canadian example • Canadian companies used to issue overwhelmingly in Canadian dollars at home. • Now, they issue mostly US dollar bonds, mostly in New York and some in Eurodollar market. • Much higher dollarisation rate in bond market than in money, etc, suggests power of bond market liquidity

7. Currency denomination of outstanding bonds issued by Canadian companies

8. A2: East Asian issuers and investors in global bond markets with many currencies • If Polish zloty and South African rand accepted by global investors, why not won bonds? • Global investors show taste for high-coupon currencies

9. B. East Asian issuers and investors meet in regional bond market(s). • Regional currencies are serving Asian issuers only to a limited extent. • Yen would seem strong natural candidate. • Recent KAL issue shows potential to securitise yen receivables. • But Asian issuance of yen bonds has not recovered pre-crisis levels while Asian issuance of dollar bonds has. • Nishi and Vergus (2004) argue that Japanese tolerance for credit risk, always problematic, hurt by domestic and foreign defaults (Mycal and Argentina). • HKD: local use or swap-driven “arbitrage” issues only, given currency board • SGD—currency swap required if not for local use.

11. C. East Asian issuers and investors meet in national or domestic bond markets. • Over $1 trillion in size. • Currently is the locus of most corporate issuance in the region (Fernandez and Klassen (2003, 2004)). • Helps contain risk of currency mis-matches. • Face impediments.

12. III. Policies and images • Those who see integration into global markets as benign would push for • Development of hedging markets to prevent mis-matches. • Allowing bonds denominated in Asian currencies to be sold in global markets. • Allowing restricted portfolios to diversify into foreign assets. • Regional emphasis consistent with proposals for • Targeted easing of restrictions on investing in foreign assets in region. • Regional rating agency, regional clearing and settlement. • Regional credit enhancement capacity could serve global or domestic markets as well. • National emphasis consistent with proposals to remove national impediments, open domestic markets to foreign investment.

13. IV. Conclusions • Three very different images of bond market development • Status quo combines elements of all three images, although most issuance in national markets. • We urge concentration on domestic bond market, and their liberalisation and opening to foreign investment