Development of Asian Development of Asian Bond Market: Latest Bond Market: Latest

Progress and Looking Progress and Looking AheadAhead

Mr. Masato Miyachi, Senior Advisor

Office of Regional Economic Integration Asian Development Bank

25 September 2007AFDC, Shanghai

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OutlineOutline

Overview and progress of Asian Overview and progress of Asian Bond MarketsBond Markets

Issues and ChallengesIssues and ChallengesFuture OutlookFuture Outlook

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Development of Asian Bond Development of Asian Bond Market: Progress and TrendsMarket: 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

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Development of Asian Bond Development of Asian Bond Market: Progress and TrendsMarket: 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.

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Development of Asian Bond Development of Asian Bond Market: Progress and TrendsMarket: 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

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Development of Asian Bond Development of Asian Bond Market: Progress and TrendsMarket: 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

        Suggestions to develop best practices for SWFs such as appropriate disclosure of the funds' rules, operations and asset management guidelines and performance.

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Growth of ASEAN+3 Bond Growth of ASEAN+3 Bond MarketsMarkets

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Growth of ASEAN+3 Bond Growth of ASEAN+3 Bond MarketsMarkets

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Foreign Currency Foreign Currency Denominated BondsDenominated Bonds

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

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LCY Bonds as % of GDPLCY Bonds as % of GDP Debt Securities Outstanding as % of GDP:

Gov't vs. Corp

GR BE

GE

IT

FR

AU

UK

JP

HK

US MY

KR

SG

TH ID CN

PH

VN

0

20

40

60

80

100

120

140

0 20 40 60 80 100 120 140

Corporate % of GDP

Government

% of

GDP

OECD Average

Sources: BIS International Financial Statistics, Hong Kong Monetary Authority, Monetary Authority of Singapore for outstanding data (as of September 2004). National sources and OECD for GDP.

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Benchmark Yield CurveBenchmark Yield Curve

Benchmark yield curveBenchmark yield curve

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Concentration Ratio per Market

Dates vary across markets, from Jun 2004 to Dec 2006

Concentration RatioConcentration Ratio

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Liquidity of Asian Bond Liquidity of Asian Bond MarketMarket

    As of Dec 2006

Turnover ratio Trading Volume

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Size of Local Currency Bond Market of ASEAN+3 Countries

China Hong Kong

(as at end June 2007)

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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

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Size of Local Currency Bond Markets of ASEAN+3 Countries

Thailand

(as at end June 2007)

Viet Nam

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Issues and ChallengesIssues 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

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Issues and ChallengesIssues 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.

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Issues and ChallengesIssues 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

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Issues and ChallengesIssues and ChallengesMarkets Bond Type WHT

ResidentOn IncomeNon-res

Capital Resident

Gains TaxNon-res

Indonesia Govt. 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

Korea All types 15.4%. 15.4%. 16.5%. 11-27.5%.

Malaysia Govt. & Corp

Exempt Exempt Exempt Exempt

Philippines Govt 20% 20% Exempt Exempt

Corp 20% if less than 5 years mat.

20% if less than 5 years mat.

20% if less than 5 years mat.

20% if less than 5 years mat.

Singapore Govt Ind exemptCorp 10%

Ind exemptCorp 10%

Exempt Exempt

Corp Inst. Inv 10% Exempt Exempt Exempt

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Looking AheadLooking Ahead

Asia’s debt markets will continue to attract global investors if they:

Develop risk-based regulatory environmentImprove risk hedging options Adopt measures to improve risk

managementBuild-up market infrastructure

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Looking AheadLooking Ahead

Increase use of securitizationDevelop infrastructure bond

financingStrengthen cooperation in

developing regional bond market

Thank YouThank You

For more information pls. contactFor more information pls. contact

Mr. Masato Miyachi, Senior AdvisorMr. Masato Miyachi, Senior Advisor

Office of Regional Economic Integration Office of Regional Economic Integration

mmiyachi@adb.orgmmiyachi@adb.org

+63-2-632-6832+63-2-632-6832

http://asianbondsonline.adb.orghttp://asianbondsonline.adb.org