Bond Markets in the Pacific Rim:
Development, Market Structure and Relevant
Issues in Fixed-income Capital Markets
Stephen Yan-leung Cheung
Professor (Chair) of Finance
Department of Economics and Finance
City University of Hong Kong
1. Economic Situation
• Asian Region
–
–
–
–
Fast growth
Setback during the Asian Financial Crisis
A rebound in 2000
Slowdown because of the slowdown in US
economy
– 911 incident
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2. Asian Equity Markets
Index Performance
2.5
Index
2
Hong Kong
Japan
Taiwan
Korea
Singapore
US
1.5
1
0.5
0
96
97
98
00
01
02
Year
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2. Asian Equity Markets
(IT Bubble)
Index Performance
4.00
3.50
3.00
Index
2.50
KOSDAQ
2.00
GEM
1.50
NASDAQ
1.00
0.50
0.00
97
99
00
01
Year
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3.1. Balanced Financial Market
Table 3.1.1. Outstanding bank loans, bonds, and equity markets in South
East Asia, December 1998 (US$ billion)
Country / Economy
Bank loans
Corporate bonds
Equity market
Indonesia
60.21
1.5
16.2
Korea
Malaysia
Thailand
U.S.
43.5
148.4
108.7
38.8
27.3
5.1
2.6
43.2
30.7
134.4
26.3
158.1
1
At the end of 1997.
Source: Kim, Y.H. Policy Agenda For Bond Market Development in Asia, In Bond Market
Development in Asia, OECD, Paris, p.143.
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3.2. International Bank Lending
to Asian Countries
Table 3.2.1. International bank lending to Asian countries
December December
June
December
June
December
June
December
June
1996
1997
1998
1998
1999
1999
2000
2000
2001
Total Developng Countries (TD)
692.6
891.7
860.7
836.6
895.4
877.2
860.5
873.8
828.8
Total Asia (TA)
367.1
378.8
319.6
299.0
287.1
270.9
282.6
275.2
251.3
Indonesia
55.5
58.0
48.4
44.9
45.0
41.7
40.4
40.2
36.9
100.0
93.7
71.6
65.5
67.2
64.8
61.1
58.8
52.8
Malaysia
22.2
27.3
22.8
20.9
18.8
18.6
17.3
20.8
21.6
Thailand
70.2
58.5
46.4
41.2
39.4
32.4
29.0
26.6
23.1
China
55.0
62.8
58.7
58.4
72.3
63.5
61.3
58.2
53.8
Taiwan
22.4
26.0
22.5
20.9
20.4
21.0
19.3
18.1
16.1
325.3
326.3
270.4
251.8
263.1
242.0
228.4
222.7
204.3
(TA/TD)%
53.0
42.5
37.1
35.7
32.1
30.9
32.8
31.5
30.3
(TS/TD)%
47.0
36.6
31.4
30.1
29.4
27.6
26.5
25.5
24.7
63.0
62.8
56.5
55.6
49.3
48.1
49.5
46.4
47.6
61.5
60.3
53.0
52.5
51.4
51.0
47.6
44.9
45.9
Korea, Republic of
Total Selected Asian Countries (TS)
Average Maturity (Selected Countries)
Less than 1 and 1 year (%)
Average Maturity (Total Asian Countries)
Less than 1 and 1 year (%)
Source: BIS, “Consolidated International Banking Statistics”, various issues, 1998-2001.
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3.3. Net Private Capital Flows
to Emerging Market (US$ billion)
Table 3.3.1. Net private capital flows to emerging markets (in billions of U.S. dollars)
1992
1993
1994
1995
1996
1997
1998
1999
2000
116.9
124.3
141.3
189.0
224.2
126.2
45.2
71.5
32.2
Bank loans and other
28.5
-14.0
-49.5
49.5
18.7
-62.1
-127.2
-135.6
-172.1
Net portfolio investment
53.0
81.6
109.9
42.6
85.0
43.3
23.8
53.7
58.3
35.5
56.7
80.9
96.9
120.4
144.9
148.7
153.4
146.0
15.0
41.5
67.1
74.4
113.9
18.9
-55.4
2.0
-2.6
-12.7
-9.5
3.4
6.3
31.2
-48.4
-119.1
-88.4
-97.8
12.9
18.0
18.9
19.7
27.1
7.1
6.5
36.6
45.9
14.7
33.0
44.7
48.5
55.5
60.2
57.2
53.8
49.3
Emerging markets
Total net private capital inflows
Net foreign direct
investment
Asia
Total net private capital inflows
Bank loans and other
Net portfolio investment
Net foreign direct
investment
Source: IMF (2001), “International Capital Markets: Developments, Prospects, and Key Policy Issues”, p.43.
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4. Asian Crisis
• Lessons
– Maturity mismatch
– Currency mismatch
• Liquid and Mature Bond Markets Stabilize
– Banking sector
– Corporate sector
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5. Market Value of Listed
Bonds at year end (US$ billion)
Table 6. Market value of listed bonds at year end (US$ million)
Hong Kong
Indonesia
Colombo
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
1995
1996
1997
1998
1999
2000
NA
NA
NA
110,438
98,910
89,401
405
NA
3,886,535
339
5.3
3,821,540
109
46.6
3,600,291
50
64.4
4,472,648
21
70.2
5,263,913
165
NA
5,083,839
162,421
3,497
-
208,167
3,444
6
132,222
1,788
4
277,788
1,310
0
321,697
1,753
0
335,718
1,563
150,539
31,813
161,239
36,750
171,626
32,919
182,946
36,578
198,939
44,284
218,792
48,445
1,945
927
351
352
155
NA
Source: International Federation of Stock Exchanges, web site www.fibv.com
NA : Not Available
Stephen Cheung
- : Not Applicable
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5. Market Value of Listed
Bonds
• From 1995-1999:
– Japan increased by 35%, Korea by 99%,
Singapore by 32%, and Taiwan by 38%
• In 2000:
– Korea, Taiwan and Singapore increased
marginally
– Others declined
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6. Advantages of Developing
the Asian Bond Market
•
•
•
•
Fast growth region (?)
High saving rate of 30%
Large number of infrastructure projects
Growth of pension and provident funds
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7. A Deep, Liquid and Mature
Bond Market Will…
• Lower the cost of government borrowing by helping to mobilize
domestic saving more efficiently
• Help implementation of monetary policy
• Provide risk management instrument for investors and
borrowers
• Introduce great discipline on corporations and governments
• Help development of the derivative instruments on interest rates
• Help solving the Non-performing loan problem
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8. Preconditions of a Successful
Bond Market
• Adequate supply of high quality issuers
• Adequate demand by institutional investors
• Rating and good disclosure standards
• Standardization of papers and procedures to facilitate trading
and liquidity of market
• Favorable tax and transaction costs
• Infrastructure for payment, clearing and settlement both
regionally and internationally
• Clear and fair regulatory framework
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9. Issues in Development of
Debt Markets
1. Benchmarks
– No benchmark curve
– Some have short benchmark curve no more than three
years
– Very thinly traded, only indicative
– Could be helped by the issuance of local currency
denominated debt paper by the multilateral agencies,
such as WB, IFC, and ADB
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9. Issues in Development of
Debt Markets
2. Regulatory Framework
– Heavy bureaucratic control
– Regulatory framework in many countries is
also unclear in the secondary market
– No legal clarity, domestic and foreign
investors are unwilling to take legal and
regulatory risks
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9. Issues in Development of
Debt Markets
2. Regulatory Framework
– Overlapping and multiple regulatory regime
impede market development
– Effective regulatory regime should meet the
international standards
– Regulatory framework should be developed
jointly by the market participants and the
regulators
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Box A: Tax incentives and other
measures
• Exemption for profits tax on income derived
from Hong Kong dollar bonds issued by
multilateral development banks.
• Concessionary tax rate on other private
sector Hong Kong dollar bonds with 5 years
maturity or longer.
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9. Issues in Development of
Debt Markets
3. Market Infrastructure
– Some Asian Papers still in bearer form and
shorten the the settlement periods
– The lack of an efficient market infrastructure
increases payment and settlement risks
– Hong Kong has introduced the Central
Moneymarkets Unit (CMU) and the RTGS
payment system to decrease the settlement and
payment risks
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9. Issues in Development of
Debt Markets
Table 9.3.1. Indicators of good financial infrastructure
Judicial system
Quality of
effectiveness**
information***
HIGH
LOW
HIGH
LOW
HIGH
LOW
MEDIUM
MEDIUM
MEDIUM
MEDIUM
MEDIUM
MEDIUM
LOW
HIGH
LOW
HIGH
MEDIUM
MEDIUM
LOW
MEDIUM
MEDIUM
LOW
MEDIUM
MEDIUM
Country
Creditor rights *
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Source: Raw data from Herring and Chatuscripitak, “The case of the missing market: The bond market
and why it matters for financial development”, pp. 15-17, Asian Development Bank Institute
Working Paper # 11, July 2000.
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Box B: An efficient, reliable and low
cost clearing and settlement
1. Hong Kong Monetary Authority developed
Central Money Unit in 1990, which cleared
initially the Exchange Fund Bills and Notes, and
later private sector bonds.
2. The system was further linked up with the Hong
Kong dollar interbank payment system to
provide DVP.
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9. Issues in Development of
Debt Markets
4. Ratings
– The presence of international rating agencies is
limited
– Limited understanding of the local culture and
situation
– Local credit rating agencies, frequent failure
experience
– Joint venture with an international partner
– Make the credit rating mandatory during the listing
process
– Should not deviate from the international standards
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9. Issues in Development of
Debt Markets
5. Demand
– A high saving rate of 30 %
– Increasing income and aging population
– Growing pension fund, about 1% of GDP would be
added annually to institutional investors
– Commercial banks hold the debt papers for liquidity
purposes
– Some governments have removed tax disincentives on
bonds, discriminatory taxation of bonds between local
and foreign investors
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9. Issues in Development of
Debt Markets
Table 9.5.1. Foreign reserves and savings rates in Asia-Pacific economics
Foreign reserves
2000
(US$ billion)
Savings ratio
1999
(%)
China
Hong Kong
Singapore
Thailand
S. Korea
Malaysia
Indonesia
Philippines
166
108
80
32
96
29
22
13
40
30
52
33
34
47
32
20
East Asia
Australia
Japan
U.S.A
Germany
U.K.
901
17
347
31
50
39
36
22
28
18
23
16
Source: International Financial Statistics, IMF;
World development indicators 2001, World Bank
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Box C: Mandatory Provident Fund (MPF)
• The scheme was launched during 2000.
Employed and employer need to contribute
5%.
• US$1.3 billion, or 1% of GDP in the initial
year of operation.
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9. Issues in Development of
Debt Markets
6. Supply
–
–
–
–
–
Removal of discriminatory tax policy may invite foreign issuers
Let the foreign companies to tap into the domestic market
Traditional Asian corporations prefer bank loan than bond market
because they do not want the rating results to make public and do
not like the feeling of being rated especially incase of bad rating
and the rating fee is relatively high.
Restructuring of the state-owned enterprises and the troubled
corporate sector in the crisis-hit economies
Mindset
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9. Issues in Development of
Debt Markets
7. Secondary Markets
– Mainly by commercial banks
– Big domination
– Securitization and innovative debt financing structures
such as asset-backed and mortgage-backed securities
– Brokers have no incentives
– Banks have no incentives
– Lack of the market-making process
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Box D: Narrow investor base
• At end-1999, banks and financial
institutions held around US$11 billion or
84% of the Exchange Fund paper and
around US$16 billion or 43% of the private
sector paper.
• The rest is held by a few institutional
investors, such as the public funds and
pension funds.
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Box E: Secondary Market
• In September 1999 the Hong Kong
Monetary Authority and the Stock
Exchange of Hong Kong arranged to list
Exchange Fund Notes on the Exchange.
• The board lot size was reduced to face
value of US$6,141 to promote retail
investor participation.
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9. Issues in Development of
Debt Markets
8. Corporate Governance
–
–
–
–
–
–
Accounting standards
Accountability
Information disclosure: Accuracy and timely
Important for international investment community
Setting up audit committee and include outside
directors
Internationally acceptable standards such as OECD
standards
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9. Issues in Development of
Debt Markets
9. Human Resource
–
–
When the market is booming, hard to find
qualified financial analysts for the
government agencies that have to compete
with the investment banks with better offers
Staffed with young graduates who will move
to the market when the market is booming
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9. Issues in Development of
Debt Markets
10. Education – Return/Risk analysis
–
–
Investor
Broker
 Financial Planning
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9. Issues in Development of
Debt Markets
11. Regional Cooperation to promote the Asian Debt
Market
–
–
–
–
Better infrastructure for clearing, settlement, and payment
systems
Better coordination in trading, clearing, payment,
regulation, listing to enable mutual listing of debt securities
across different markets
Linkage of domestic depositories will enhance trading and
holding of Asian bonds by domestic participants, hence
enlarging the investor base and improving the liquidity
No euroclear, a need to develop Asiaclear
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9. Issues in Development of
Debt Markets
12. Political Will
– Formal management structure for the project (leader,
coordination, supervision)
– Identify clear priorities and sequencing in reforms
– Consensus among key players; regulators, investors,
brokers, and issuers
– Strong leadership
– Ensure strong interaction among players
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