fima research center, university of hawai'i 1 regional bond markets: rationale and roadmap s....

FIMA Research Center, University of Hawai'i

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Regional Bond Markets: Rationale and Roadmap

S. Ghon RheeS. Ghon RheeK. J. Luke Distinguished Professor of Finance K. J. Luke Distinguished Professor of Finance

Executive DirectorExecutive DirectorAsia-Pacific Financial Markets Research CenterAsia-Pacific Financial Markets Research Center

University of HawaiUniversity of Hawai‘‘ii

Boao Forum for Asia Annual Conference 2003 “Asia Searching for Win-Win: Development through Cooperation”

November 2--3, 2003 Boao, Hainan Province, China


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Two Questions

1.1. How much are Asian bond How much are Asian bond market activities integrated market activities integrated with global market with global market activities?activities?

2.2. Why do we need a regional Why do we need a regional bond market?bond market?


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Reality Check of Regional Bond Market Activities (I)

Fact 1: Fact 1: Active Participation of Asian Active Participation of Asian Investors in Asian Bond Investors in Asian Bond Issues Issues

71 bonds (US$41.2 billion) issued by Asian 71 bonds (US$41.2 billion) issued by Asian borrowers in April 1999-August 2002borrowers in April 1999-August 2002

44%-46% of these bonds were purchased by 44%-46% of these bonds were purchased by Asian investorsAsian investors

Source: BIS Study Source: BIS Study (2002)(2002)


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Reality Check of Regional Bond Market Activities (II)

Fact 2: Fact 2: Active Participation of Asian Active Participation of Asian Borrowers/Investors in Borrowers/Investors in Singapore Singapore Bond MarketsBond Markets

Bonds Issued in 2002Bonds Issued in 2002 S$-bonds: S$-bonds: S$3.22 Billion S$3.22 Billion

(27% by Asian Issuers)(27% by Asian Issuers) Non-S$ bonds:Non-S$ bonds: US$11 billionUS$11 billion

(40% by Asian Issuers) (40% by Asian Issuers) Who are the Buyers?Who are the Buyers?

Source: MASSource: MAS


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Reality Check of Regional Bond Market Activities (III)

Fact 3: Fact 3: Active Participation of Asian Active Participation of Asian Investment Banks in Investment Banks in International Bond Issues International Bond Issues

Borrowers from 6 Asian counties raised US$53 Borrowers from 6 Asian counties raised US$53 billion, 1991-2001billion, 1991-2001

1/3 of these issues: Asian Investment Banks1/3 of these issues: Asian Investment BanksSource: Park & Bae (2002)Source: Park & Bae (2002)


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Reality Check of Regional Bond Market Activities (IV)

Fact 4: Fact 4: Tokyo Market Fails to Serve Tokyo Market Fails to Serve Region’s Financing Needs Region’s Financing Needs

Foreign Currency-Denominated Bonds Foreign Currency-Denominated Bonds Virtually Non-ExistentVirtually Non-Existent

Limited Role of the Yen-Denominated Bond Limited Role of the Yen-Denominated Bond Market during the East-Asian Financial Crisis Market during the East-Asian Financial Crisis

Source: Rhee (2001)Source: Rhee (2001)


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Gaisai Bond Market In Japan Unit: ¥ trillionUnit: ¥ trillion

Number of Samurai Number of ShogunNumber of Samurai Number of Shogun YearYear IssuesIssues BondsBonds IssuesIssues Bonds Bonds 19911991 27 27 0.71 0.71 1 1 0.41 0.41 19921992 37 37 1.57 1.57 0 0 0 0 19931993 49 1.23 49 1.23 1 1 0.59 0.59 19941994 60 60 1.26 1.26 0 0 0 0 19951995 85 85 2.11 2.11 0 0 0 0 19961996 154 3.79 154 3.79 0 0 0 0 19971997 66 66 1.58 1.58 0 0 0 0 19981998 10 10 0.15 0.15 0 0 0 0 19991999 24 24 0.87 0.87 0 0 0 0 2000 2000 63 63 2.38 2.38 0 0 0 0 2001 47 1.55 0 02001 47 1.55 0 0 2002 29 0.64 0 02002 29 0.64 0 0

Source: Japan Securities Dealers AssociationSource: Japan Securities Dealers Association


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Reality Check: Foreign Holdings of US Treasury Securities (VI)

Unit: US $ billion

Economy August 2003

December 2002

December 2001

Japan 451.2 364.7 317.9 China 123.9 102.9 78.6 Hong Kong SAR

52.9 48.1 47.7

Korea 44.4 43.1 32.8 Taipei,China 38.4 34.5 35.3 Singapore 21.1 17.8 20.0 Thailand 13.0 16.3 15.7 Total (Asia) 744.9 627.6 521.3 Total (Foreign) 1,423.1 1,204.5 1,040.1

Source: Department of the Treasury/Federal Reserve Board Http://www.ustreas.gov/tic/mfh.txt


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Findings from Reality Check

1.1. Regional and global bond market activities Regional and global bond market activities are more integrated than normally perceivedare more integrated than normally perceived

2.2. Participation of Asian investment banks is Participation of Asian investment banks is significant significant

3.3. At least 40% of Asian bonds end up in Asian At least 40% of Asian bonds end up in Asian Portfolios Portfolios

Why Do We Need a Regional Bond Why Do We Need a Regional Bond Market?Market?


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Regional Bond Markets Are Justified for Two Reasons

Two Major FactorsTwo Major Factors

1.1. Asian Common CurrencyAsian Common Currency 2.2. Credit Enhancements for Region’s Credit Enhancements for Region’s

BorrowersBorrowers


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Asian Common Currency

Lessons from EU: Major Benefit of the Lessons from EU: Major Benefit of the Euro for Europe’s Bond Markets Euro for Europe’s Bond Markets

i.i. Elimination of Exchange RiskElimination of Exchange Riskii.ii. Harmonization of Market PracticesHarmonization of Market Practicesiii.iii. Re-denomination of European Government Bonds Re-denomination of European Government Bonds in in Euro…. Euro…. A bigger, deeper, more liquid, and more A bigger, deeper, more liquid, and more

homogeneous European bond homogeneous European bond market market

Full or Partial Currency Unification in the Full or Partial Currency Unification in the RegionRegion : : Coordinated Monetary and Fiscal Policies?Coordinated Monetary and Fiscal Policies?

Regional Efforts are Missing!Regional Efforts are Missing!


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Credit Enhancements (I) Taniguchi Proposal (2003): Taniguchi Proposal (2003):

ADB and JBIC serve as credit enhancing ADB and JBIC serve as credit enhancing organizations? organizations?

Asian Bond Fund (ABF) by EMEAP (2003)Asian Bond Fund (ABF) by EMEAP (2003)Useful only for Demand Side of Equation Useful only for Demand Side of Equation but Too Smallbut Too Small

Ito Proposal (2003): Asian Basket Currency (ABC) Ito Proposal (2003): Asian Basket Currency (ABC) BondsBondsGood Idea but Operational Framework Good Idea but Operational Framework MissingMissing


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Credit Enhancements (II): Creation of Asian Bond Bank

Modeled After the Municipal Bond Modeled After the Municipal Bond Banks in Canada and the United Banks in Canada and the United StatesStatesSuccessful Examples:Successful Examples:

a.a. Bond Bank of AlaskaBond Bank of Alaskab.b. Municipal Finance Authority of Municipal Finance Authority of

British ColumbiaBritish Columbia Source: Rhee and Stone (2003)Source: Rhee and Stone (2003)


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Asian Bond Bank (III)

Major Benefits of ABBMajor Benefits of ABB1.1. Economies of Scale in borrowing costEconomies of Scale in borrowing cost

2.2. Greater liquidity with larger size bond Greater liquidity with larger size bond issuesissues

3.3. ““Credit rating arbitrageCredit rating arbitrage”:”: ABB re- ABB re-lends funds raised at its higher credit lends funds raised at its higher credit rating to participating Asian borrowersrating to participating Asian borrowers

through structured debt issuancethrough structured debt issuance


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Asian Bond Bank May Implement One or More Credit Enhancing Programs

A.A. Internal EnhancementsInternal Enhancementsa.a. Cash ReservesCash Reservesb.b. Structured Bond Issue:Structured Bond Issue:

Collateralized Bond ObligationsCollateralized Bond Obligationsc.c. Sinking FundsSinking Funds


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Asian Bond Bank (V)

B.B. External EnhancementExternal Enhancementi.i. Third-party Guarantees: Third-party Guarantees:

Multilateral Financial InstitutionsMultilateral Financial Institutionsii.ii. Letters of Credit: Letters of Credit:

Commercial Banks Commercial Banks iii. iii. Bond InsuranceBond Insurance: :

Monoline Municipal Bond Monoline Municipal Bond InsurersInsurers

C.C. ABB Bears Foreign Exchange RiskABB Bears Foreign Exchange Risk

Thank You!For Further References,

Please visit http://www2.hawaii.edu/~rheesg

fima research center, university of hawai'i 1 regional bond markets: rationale and roadmap s....

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