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Asian Bond Markets InitiativeAsian Bond Markets Initiative

Woo Chull ChungResident Director General

Japanese Representative OfficeAsian Development Bank

August 2006

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Asian Economic Integration: Asian Economic Integration: 4 Pillars4 Pillars

• Sub-regional Economic Cooperation: Physical Connectivity in GMS, CARs etc

• Monetary & Financial Integration: CMI, ASEAN+3, ABMI

• Trade & Investment Integration: FTAs, FDIs, Global Trade Issues

• Regional Public Goods: Environment, HIV/AIDS/Avian Flu, etc.

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Why Asian Bond MarketsWhy Asian Bond Markets

• Need of bond market development in Asia – a clear lesson learnt from the Asian Financial Crisis in 1997-98

- Double mismatches (currency and maturity) of financing of Asian borrowers

- Too much dependence on bank financing (bank loan market) vs much less on bond financing (debt capital market)

- Government authorities in Asia are much more supportive of bond market development since 1997

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Why Asian Bond Markets Why Asian Bond Markets (Cont(Cont’’d)d)

• To recycle Asian savings (C/A surplus + FX Reserves) to Asian investments vs cycled to international (FC) markets and recycled to Asian investments in FC

• Benefits of Recycling Asian savings to Asian investments:

- Economic development- FX Crisis prevention (Double mismatch, etc.)- Diversification of investments (country & currency)- Better risk/return profile of investments

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Benefits of Developed Bond MarketsBenefits of Developed Bond Markets

• Efficient MT & LT direct financing for issuers• Help Asian savings directly invested in Asian

financing/projects (Retention of Asian savings in the region) and enable them to depend less on foreign currency borrowings

• Access to LT financing for those entities who have no access to stock market (equity capital market) (Government and public agencies)

• Opportunities of LT fixed asset investments for pension funds, mutual funds, etc.

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Benefits of Developed Bond Benefits of Developed Bond Markets (ContMarkets (Cont’’d)d)

• Diversify credit risks away from banks to capital market

• FIs (banks) can help SMEs access the debt capital market through securitization of their assets (which otherwise have no access)

• Help banks reduce non-performing loan (NPLs) through securitization of the loans leading to a healthy banking sector

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Financing IntermediationFinancing Intermediation• Savings/ Investments

Borrowings - Real Assets (Factories…

- Indirect Financing- Banks intermediate financing on their own risks

• Savings/ InvestmentsBorrowings (Stocks, Bonds)Investors/Buyers

- Bond Market (debt capital markets)- Stock Market (equity capital markets)

- Direct Financing- Investors investing directly taking risks themselves

BANKS

Capital Markets

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Asian Bond MarketsAsian Bond Markets

• Consisting of local currency bond markets and regional bond market (US$ mostly)

• Expansion and deepening of local currency bond markets:

- Total outstanding in major Emerging East Asia (EEA) quadrupled from US$ 356 billion in 1997 to US$ 1.5 trillion in March 2005

- The share of local currency bonds in EEA’s capital market is rising from 13% in 1997 to 19% in 2003

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Asian Bond Markets (ContAsian Bond Markets (Cont’’d)d)

• Relative market size and liquidity are still small and low:

- Despite encouraging growth, local currency bond markets in EEA remain small – about 3%of total LC bonds worldwide ($40 trillion) and only 44% of EEA GDP

- Market liquidity (measured by trading volume and turnover ratios) has increased significantly in recent years, but remains low compared with developed country markets

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ABMI Initiatives and ActivitiesABMI Initiatives and Activities

• Speared-headed and supported by:

- ASEAN+3 Finance Ministers’ Meeting (AFMM+3)

- Executives’ Meeting of East Asia Pacific Central Banks (EMEAP)

- Asian Development Bank (ADB)

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Progress in 3 Main Progress in 3 Main ForaFora

EMEAP APEC ASEAN + 3

Use of FX Reserves

Discussion by Central Banks

Asian Bond Funds (ABF & ABF2)

Initiative on Securitization & Guarantee

Holding Government Bond Seminar

Comprehensive Initiatives on ABMI

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Asian Bond Markets Initiative Asian Bond Markets Initiative (ABMI) Objective(ABMI) Objective

• To develop efficient and liquid bond markets in Asia

• To enable better utilization of Asian savings for Asian investments

• To mitigate currency & maturity (Double) mismatch in financing of Asian borrowers

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ABMI Focus of ActivitiesABMI Focus of ActivitiesFacilitating market access through a wide variety of issuers and products (demand side)

- Asian Governments (Sovereign issues): to establish bond markets

- Asian Government Financial Institutions- Multilateral Development Banks and Foreign

Government Agencies- Foreign direct investment corporations- Creation of asset-backed securities including

collateralized debt obligations (CDOs)- Expansion of local currency-denominated bonds- Introduction of currency-basket bonds

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Enhancing Market Infrastructure to foster bond markets in Asia

- Both domestic (local currency) and regional bond markets (US$)

- Provision of credit guarantees by existing and new guarantors: Asian Regional Guarantee Facility

- Strengthening of the rating system: domestic rating agencies and an Asian credit rating board

- Facilitating FX transactions and addressing cross-border settlements issues

- Enhancing capacity building to support market research, policy dialogue and human resources development among member countries

- Harmonization of legal and institutional infrastructure: corporate laws, securities transaction laws and tax laws

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ABMI ActivitiesABMI Activities6 Working Groups (WG) on ABMI set up at the ASEAN+3 Finance Ministries’ Meeting in 2003

- WG1: New securitized investments- WG2: Credit guarantee and investment mechanisms- WG3: Foreign exchange transactions and settlement

issues- WG4: Issuance of local currency bonds by MDBs,

foreign government agencies and Asian MNCs- WG5: Rating systems and information dissemination on

Asian Bond Markets- WG6: Technical Assistance Coordination

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ABMI Activities (ContABMI Activities (Cont’’d)d)Since the establishment, the 6 WGs have done much work

- ASEAN+3 officials have conducted regular dialogues and discussion among themselves as well as with academics, think tanks and the market

- Concrete outcome achieved including MDB’sissuance of local currency bonds in 7 countries

- Some of WGs have completed designated tasks: WG4 on local currency bond issue by MDGs

- Some reorganization made in 2004 and 2005

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Other Related InitiativesOther Related Initiatives

• Executives’ meeting of East Asian Pacific Central Banks (EMEAP), a forum of Central Banks and Monetary Authorities in East Asia set up for strengthening cooperation among its members

• Eleven (11) members of EMEAP are the central banks of Australia, PRC, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand

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EMEAP InitiativesEMEAP Initiatives

• EMEAP established 3 working groups on

- Payment and settlements system- Financial markets- Banking supervision

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EMEAP Initiatives (ContEMEAP Initiatives (Cont’’d)d)

• Working group on financial markets studied the feasibility of establishing an Asian Bond Fund with the aim of:

- Providing a catalyst, as a lead investor, in investing in Asian issues, particularly local currency bonds

- To diversify region’s central banks’investment of foreign currency-denominated assets away from US and European securities into Asian bonds

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Asian Bond Funds LaunchedAsian Bond Funds Launched

• Asian Bond Fund (ABF)- Closed-end fund launched in June 2003- US$ 1 Billion contributed by EMEAP central

banks- To invest in a basket of USD denominated

bonds issued by Asian sovereign and quasi-sovereign issuers in EMEAP economies (Except Japan, Australia and New Zealand

- Managed by Bank for International Settlements in a passive manner

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Asian Bond Funds Launched Asian Bond Funds Launched (Cont(Cont’’d)d)

• Asian Bond Fund 2 (ABF2)- Open-ended fund with private sector

participation possible launched in April 2005- US$ 2 billion investment contributed by

EMEAP central banks- To invest in local currency bonds issued by

sovereign and quasi-sovereign issuers in EMEAP economies (except for Japan, Australia and New Zealand)

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- Consists of two components:(i) Pan-Asian Bond Index Fund (PAIF)

A single fund of US$ 1 billion + private sector investment, investing in sovereign and quasi-sovereign local currency bonds issued in 8 EMEAP economies: Managed by State Street Global Advisors Singapore Ltd. : Listed on the HKSE

(ii) Fund of Bond Funds (FoBF)A two-tiered structure with a parent fund investing in eight single-market funds, each of which investing in local currency sovereign and quasi-souvereign bonds issued in their respective markets: US$ 1 billion allocated to 8 single-market funds: Listed or to be listed on each country’s stock exchange

Asian Bond Funds Launched (ContAsian Bond Funds Launched (Cont’’d)d)

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8 Single8 Single--Market Fund ManagersMarket Fund ManagersABF China Bond Index Fund: China Asset Management Co., Ltd.

ABF Hong Kong Bond Index Fund: HSBC Investments (HK) Ltd.

ABF Indonesia Bond Index Fund: PT Bhana TCW Investment Management

ABF Korea Bond Index Fund: Samsung Investment Trust Management Co., Ltd.

ABF Malaysia Bond Index Fund: AM Investment Management Sdn.Bhd.

ABF Philippines Bond Index Fund: Bank of the Philippines Islands

ABF Singapore Bond Index Fund: DBS Asset Management Ltd.

ABF Thailand Bond Index Fund: Kasikorn Asset Management Co., Ltd.

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ADB and ABMIADB and ABMI

• ADB, as the premier regional MDB and strong supporter of Asian Economic Integration, is supporting ABMI significantly:

- Hosting meetings and facilitating discussions for various WGs of ABMI,

- Engaged experts and financed several studies on key subjects WGs were tasked, such asMulti-currency bond issues: dual currency structure, A regional basket currency bond (2nd phase) for WG1Regional guarantee mechanism: market consultation: several institutional options (WG2)

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ADB and ABMI (ContADB and ABMI (Cont’’d)d)

Regional settlement linkage: Review of FX settlement Risks in bond market transactions in Asia (2nd phase) (WG3)Domestic credit rating agencies in Asia: training on analytical skills and best practices: A study on impact of based II on rating industry in Asia (WG5→4)Investor education and information dissemination: “Asian Bonds Online” website (http://asianbonsonline.adb.org/regional/regional.php) set up for a one stop shop of information for Asian bonds: The site is also linked at ADB website (www.adb.org): “How to buy bonds”section is added recently

- Publishes “Asia Bond Monitor” a regular review of development of East Asian local currency bond markets (10 ASEAN + China and Korea)

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- ADB successfully issued local currency bonds in several countries with regulatory systems improved (WG4):China (Oct. 2005) RMB 1 billionPhilippines (Oct. 2005) PHP 2.5 billionThailand (May 2005) THB 400 billionMalaysia (Dec 2004) MYR 400 millionHong Kong (June 2004) HK$ 1 billionSingapore (June 2004) S$ 200 millionIndia (Feb 2004) INR 5 billion(Another issue of $300-400m equivalent is planned in India in next few months)

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ABMI Agenda: Going ForwardABMI Agenda: Going Forward

• ASEAN+3 countries commitment to ABMI supported by ADB (technical and facilitation support): ADB’snew office, OREI

• Development of a regional bond market – a LT process to be led by development of local currency bond markets in East Asia: Improvement of regulatory environment in ASEAN+3 countries toward development of regional bond market: opening of capital accounts: convertibility of currencies:

• Capacity building of market institutions, regulators and public education to promote interest in Asian bond markets

• ADB will continue the catalytic role

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Thank you!Thank you!

For more Information:For more Information:

Woo Woo ChullChull ChungChungResident Director GeneralResident Director GeneralAsian Development BankAsian Development Bank

wchung@adb.orgwchung@adb.org

http://http://asianbondonline.adb.orgasianbondonline.adb.orgwww.adb.orgwww.adb.org