1

Historic Challenges and Opportunities for Developing Asian Bond Market

Shanghai, ChinaNovember 2005

ZHU GuangyaoDirector-GeneralInternational DepartmentMOF, China

2

Lessons from 1997-98 Asian Financial Crisis

Heavily relied on banking loan

Mismatch problem: maturity mismatch and currency mismatch

Lack of regional financial cooperation

3

Asian Corporate Financing still Rely More on Banking Loans

1.13%23.03% 14.32%

54.57%

98.87%76.97%

85.68%

45.43%

0%10%20%30%40%50%60%70%80%90%

100%

China Korea Japan US

Corp Bond Bank Loan

Financing Comparison (As of End 2004)

4

Total Amount of Outstanding Corporate Bonds (As of End 2004)

0

500

1000

1500

2000

2500

3000

China Korea Japan US

US

D B

n

Corporate Bond

14.9

5

Corporate bond as percentage of total financing

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1989

1991

1993

1995

1997

1999

2001

2003

China Korea Japan

6

Commentary: Asian bond market is less developed Historical data shows major Asian economies’

corporate bond as percentage of total financing remain low

US corporate financing is balanced well between bond offering and bank loan, while Asian economies rely heavily on bank loans

Asian economies’ total amount of corporate bonds are far less than in the US

7

US Treasury has been increasing during the past years

5000

5500

6000

6500

7000

7500

8000

Nov-9

9

Mar-0

0

Jul-0

0

Nov-0

0

Mar-0

1

Jul-0

1

Nov-0

1

Mar-0

2

Jul-0

2

Nov-0

2

Mar-0

3

Jul-0

3

Nov-0

3

Mar-0

4

Jul-0

4

Nov-0

4

Mar-0

5

USD

Bn

8

Public debt takes the majority part of US Treasury Financing

Public Debt

41%

Federal Reserv e &

Gov ernment Accounts

21%

Priv ate

20%

Foreign & International

10%

Others

8%

9

Foreign Reserves of major Asian economies

　

Singapore Malaysia Thailand Indonesia Philippines

Hong Kong, China China

Taiwan, China Korea India Japan

199772,481.9 15,259.9 26,967.7 17,427.2 7,177.6 93,175.0 139,890.0 83,502.0 20,405.5 23,965.0 220,792.0

199875,429.9 26,167.9 29,535.9 23,599.2 9,115.5 89,600.0 144,959.0 90,341.0 52,040.8 26,958.0 215,949.0

199976,732.0 30,863.1 34,780.6 24,352.1 13,122.3 96,300.0 154,680.0 106,200.0 74,054.5 31,992.0 288,080.0

200080,214.3 29,885.5 32,661.3 29,393.7 12,933.1 107,500.0 165,574.0 106,742.0 96,198.1 37,264.0 361,638.0

200176,130.0 30,848.3 32,993.2 28,015.8 13,319.4 111,200.0 212,165.0 122,211.0 102,821.4 45,251.0 401,959.0

200281,408.4 34,583.1 38,923.7 32,037.0 13,016.9 111,919.0 286,407.0 161,656.0 121,412.5 66,994.0 469,728.0

200395,392.6 44,901.6 42,147.7 36,295.7 13,327.6 118,387.0 403,251.0 206,632.0 155,352.4 97,617.0 673,529.0

2004112,083.7 66,712.5 49,831.7 36,320.4 12,781.2 123,569.0 609,932.0 241,738.0 199,066.1 125,164.0 844,543.0

USD million

10

0.0

100,000.0

200,000.0

300,000.0

400,000.0

500,000.0

600,000.0

700,000.0

800,000.0

900,000.0

1997 1998 1999 2000 2001 2002 2003 2004

US$ m

illion

Singapore Malaysia Thailand Indonesia Philippines Hong Kong, China

China Taiwan, China Korea India Japan

Foreign Reserves of major Asian economies

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Foreign Reserves of China, Japan and Korea

0

100, 000

200, 000

300, 000

400, 000

500, 000

600, 000

700, 000

800, 000

900, 000

1997 1998 1999 2000 2001 2002 2003 2004

USD

mill

ion

Chi na Korea J apan

12

Huge foreign exchange reserves in East Asia turn to US assets

-40

-20

0

20

40

60

80

1998 1999 2000 2001 2002 2003 2004 2005

(difference)Asian net purchases of US assetsAsian FX reserve accumulation

Monthly change (US$ bn, 3mma)

13

Bonds dominate in Asian foreign exchange reserves

75%

80%

85%

90%

95%

2000 2001 2002 2003 2004 2005

Asia

Non-Japan Asia

Share of bonds in total FX reserve holdings

`

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Long Term US Treasury Bond Distribution (As of June 2004)

Region Amount ( USD Bn)Europe 1,274Eurozone 841

Asia 1420America 536Oceania 23Africa 5Supranational 38Others 218Total 3,514

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Long Term US Treasury Bond Distribution (As of June 2004)

Europe36%

Asia41%

America15%

Others8%

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US Treasury Bond held by Asian Economies

050

100150200250300350400450

Mar-0

0

Sep-

00

Mar-0

1

Sep-

01

Mar-0

2

Sep-

02

Mar-0

3

Sep-

03

Mar-0

4

Sep-

04

Mar-0

5

China Hong Kong India Korea Singapore Taiwan Thailand

China China

USD Bn

17

US debt as percentage of total FX reserves (As of June 2005)

44%

87%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Korea Japan

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Main Challenges

Less developed bond market infrastructure Lack of sound bond issuers (bond supply) Lack of stable bond investors (bond demand) Dollarization trend , lack of wide-accepted re

gional denominated currency

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The attempt of ABMI working groups• Creating New Securitized Debt

Instruments• Credit Guarantee & Investment

Mechanisms• Foreign Exchange Transactions and

Settlement Systems• Local and Regional Rating Agencies

+ Plus, Ad-hoc Support Team

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Opportunities

The willingness of the Asian economies to develop bond markets

Improvement of local market infrastructure Sustained development of regional cross-

border trade and investment Plentiful fund because of high savings rate The active participant of public and private

sector

The breakthrough in China’s bond market

The launch of Panda Bond

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Panda Bond – Development in China’s Bond Market

Panda Bonds: debt instruments issued by international lending institutions in local Chinese currency.

Issuer: international financial institutions lending or investing for development purposes

Key requirement for issuer: 1) a credit rating above AA2) Its total lending to and investment in domestic projects or enterprises has exceeded USD1 billion3) funds be used to finance the medium and long-term fixed asset lending to or equity investment in projects in China

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Panda Bond – Development in China’s Bond Market (Cont)

Recent approval:IFC : 1.13bn RMBADB: 1 bn RMBin interbank market

Related development of China financial market open to foreign institutions:1) It is the first time foreign institution can issue rmb-denominated bond in China.2) In interbank market, foreign commercial banks that have RMB licence can participate in the bond issuance, syndicate and trading.3) Market bring in the first offshore institutional investor - pan Asia Bond Fund.

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Panda Bond – Development in China’s Bond Market (Cont)

Timelines related:

2002 IFC and ADB seek to issue RMB-denominated onshore to fit its demand in local loan.

Beginning of 2004 PBOC started to study the possibility of international financial institutions with The Ministry of Finance, The State development and Reform Commission and The China Securities Regulatory Commission.

Sept 2004 PBOC submitted the Provisional Administrative Rules on

International Development Institutions' Issuance of RMB Bonds to state council for approval.

February 18, 2005 PBOC annouced Provisional Administrative Rules on

International Development Institutions' Issuance of RMB Bonds.

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Benefits of Panda Bond

The development and openness of local bond market The new regulation reduce the cost of capital for local

enterprises. Before the approval, these international financial institutions issue foreign currency denominated bonds offshore, and lend the money to local enterprises through banks or financial departments. In this way, enterprises take the foreign exchange risk.

The new regulation benefit local enterprises by getting rid of currency risk and improving the efficiency of capital usage.

These bonds that carry no credit risk and, will set a benchmark for gauging the risk of other corporate and municipal borrowers.

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Potential impact of Panda Bond

A vibrant local market would mean that companies would not have to look to offshore markets for funding, which would help keep down China's foreign debt.

The market could help cut China's balance of payments surplus over time, because raising funds at home naturally reduces capital inflows.

Allowing foreign agencies to raise capital locally reduce the need to raise funds overseas and bring foreign currency into China, which may help relieve upward pressure on the yuan over time.

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Reference Data Sources

The Bank for International Settlement The World Bank The International Monetary Fund The Asian Development Bank UBS Research Deutsche Bank Research