Developing Bond Markets in Asia – Progress & Challenges Thierry de Longuemar Vice President (Finance & Risk Management) Asian Development Bank The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.
Outline • Bond market development in Asia • Remaining issues and challenges • Regional policy dialogues to develop bond markets • Provide prospects and future direction. 2
1. Bond market development in Asia 3
Local currency bond markets have grown rapidly… Growth of developing Asian local currency bond markets, 1995 – 2012 7 USD Trillion Government Corporate 6 • LCY bonds outstanding more than USD 6.5 trillion in 2012 5 • Share of emerging East Asia in world LCY 4 outstanding : 2.1% in 1996 ⇒ 8.6% in 2012 3 2 1 0 Source: AsianBondsOnline(ABO), ADB 4
..in many economies and in both government and corporate bonds Size of LCY bond outstanding, % of GDP 140 120 Corp Gov't 100 77.0 43.0 80 60 35.2 48.8 40 4.9 1.4 13.3 0.2 62.2 48.5 20 0.3 38.0 0.4 35.4 2.4 32.7 32.2 31.1 25.7 16.6 0.0 14.4 11.4 0 0.3 4q2000 2q2013 4q2000 2q2013 4q2000 2q2013 4q2000 2q2013 4q2000 2q2013 4q2000 2q2013 Korea, Rep. Malaysia PRC Philippines Viet Nam Indonesia of Source: AsiaBondsOnline (ABO), ADB 5
The market became more open with increased foreign bond holdings… Foreign holdings of local currency government bonds, % of total 35 31.85 30 30.34 25 20 17.9 15 10 9.47 5 0 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Indonesia Korea, Rep. of Malaysia Thailand Source: AsianBondsOnline(ABO), ADB 6
…more diversified maturity structure… Gov't securities maturity profile, Corp securities maturity profile, years, % share years, % share 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1q2006 2q2013 1q2006 2q2013 1q2006 2q2013 1q2006 2q2013 1q2006 2q2013 1q2006 1q2013 1q2006 2q2013 1q2006 2q2013 1q2006 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 4q2010 2q2013 PRC HKG INO KOR MYS PHI SIN THA VIE PRC HKG INO KOR MYS PHI SIN THA VIE [1-3] [3-5] [5-10] [>10] [1-3] [3-5] [5-10] [>10] Source: AsiaBondsOnline (ABO), ADB Source: AsiaBondsOnline (ABO), ADB PRC=People’s Republic of China; HKG=Hong Kong, China; INO=Indonesia; KOR=Rep. of Korea; MYS=Malaysia; PHI=Philippines; SIN=Si ngapore; THA=Thailand; VIE=Viet Nam 7
…more diversified investors in some economies… Republic of Korea Thailand KRW THB trillion billion 700 3500 600 3000 500 2500 400 2000 300 1500 200 1000 100 500 0 0 2007 2008 2009 2010 2011 2012 Mar-13 2005 2006 2007 2008 2009 2010 2011 2012 Mar-13 Central Bank Banks Central Bank Banks Insurance Companies Contractual Savings Funds Insurance Companies Pension Funds Foreign Holders Government Foreign Holders Government Others Others Source: AsianBondsOnline(ABO), ADB 8
...more trading mainly for government bonds… Bond Trading Volume, Tn US$ Bond turnover ratio 1.6 Gov't Corp 1.4 4q2005 1q/2q 2013 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 4q2005 2q2013 4q2005 2q2013 4q2005 1q2013 4q2005 2q2013 4q2005 1q2013 4q2005 1q2013 4q2005 2q2013 Gov't Corp Gov't Corp Gov't Corp Gov't Corp Gov't Corp Gov't Corp Gov't Corp PRC KOR THA MYS PHI SIN INO PRC KOR THA MYS PHI SIN INO Source: AsiaBondsOnline (ABO), ADB Source: AsiaBondsOnline (ABO), ADB PRC=People’s Republic of China; INO=Indonesia; KOR=Rep. of Korea; MYS=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand Note: Data for Hong Kong, China; the Philippines; Singapore; and Thailand as of March. The rest as of June. No corp. bond trading and turnover data for the Philippines and Singapore. 9
...and increase in foreign bond and off-shore bond issuance including Dim Sum Bonds RMB bonds Issued & Lodged with CMU RMB deposits: month-end figures RMB bn 250 223 700 200 600 172 148 500 150 400 100 300 43 50 200 16 12 10 100 0 2007 2008 2009 2010 2011 2012 2013/Aug 0 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 • Issued over RMB 624 billion since 2007 As of end Jul 2013, RMB deposits in HK • Outstanding of RMB 366 billion (Aug 3013) accounted for 19.9% of FX deposits and • Almost all are fixed rate issues 10.2% of total deposit base in HK Source: Hong Kong Monetary Authority (HKMA) 10
2. Remaining issues and challenges 11
Asian financial systems continue to be bank-dominated Size and composition of financial systems (% of GDP) Financial sector assets Total bonds Deposit-taking Nonbank financial outstanding financial institutions 1 institutions 2 1997 2010 1997 2010 1997 2010 China, People’s Rep. of 145 184 1 16 9 52 Hong Kong, China 615 708 76 459 23 29 India 44 90 2 29 18 46 Indonesia 84 36 5 8 2 13 Korea, Rep. of 132 151 23 73 29 110 Malaysia 186 214 28 109 54 101 Philippines 258 147 55 36 20 34 Singapore 762 582 81 79 24 58 Taipei,China 233 294 24 97 7 71 Thailand 156 155 6 37 22 57 Average 3 262 256 30 94 21 57 1 Data for 1997 refer to 1999 for Rep. of Korea and 2000 for Taipei. Data for 2010 refer to 2009 for PRC. 2 Data for 1997 refer to 1999 for India and 2000 for Taipei. Data for 2010 refer to 2009 for PRC and Hong Kong and 2008 for India. 3 Simple average of ratios. Sources: ADB calculations based on data from national sources, AsianBondsOnline, Bloomberg, IMF (World Economic Outlook Database). 12
Banking sector relatively small; bond markets even smaller compared to advanced countries Structure of finance sector (% of GDP, 2009) Selected Asian Eurozone United States 350 300 250 200 150 100 50 0 Deposit-taking Financial Non-bank Financial Total Bonds Outstanding Institutions Institutions The selected Asian region ncludes Bangladesh, the People‘s Republic of China (PRC), India, Indonesia, Kazakhstan, Lao PDR, Malaysia, Nepal, Pakistan, Papua New Guinea, Pakistan, Philippines, Solomon Islands, Sri Lanka, Thailand, and Tonga. Source: Financial Sector Operational Plan, ADB, 2010 13
Increased capital volatility became a key policy issue besides market development Selected Emerging Asia, capital Selected Emerging Asia, capital flows, Bn US$ flows, % of GDP 400 25 OI: Liab. OI: Asset OI: Liab. OI: Asset PI: Liab. PI: Asset PI: Liab. PI: Asset 20 300 DI: Liab. DI: Asset DI: Liab. DI: Asset Net FA Position Net FA Position 15 200 10 100 5 0 0 -100 -5 -10 -200 -15 -300 1q2005 4q2005 3q2006 2q2007 1q2008 4q2008 3q2009 2q2010 1q2011 4q2011 3q2012 1q2005 4q2005 3q2006 2q2007 1q2008 4q2008 3q2009 2q2010 1q2011 4q2011 3q2012 Sources: CEIC,IMF & National agencies. Note: DI-Direct Inv; PI-Portfolio Inv; OI- Sources: CEIC and IMF; Note: DI-Direct Inv; PI-Portfolio Inv; OI-Other Inv Other Inv (including lending) (including lending) Note: Composition-PRC, Indonesia, Rep. of Korea, Philippines, Singapore and Thailand 14
There is a need to enhance the role of regional channeling of regional resources… Developing Asia’s Debt Securities Portfolio Outflows by region (%, 2011) 32.0% 35% 30.0% 29.6% 30% 25% 20% 15% 8.4% 10% 5% 0% ASEAN+3 Europe United States Rest of the World Source: The International Monetary Fund Coordinated Portfolio Investment Survey; Note: This refers to the debt securities investments of ASEAN+3 within and outside of the ASEAN+3 region 15
3. Regional policy dialogues to develop bond markets 16
In addition to individual policy efforts, regional policy dialogues to develop markets have been continued ASEAN ASEAN+3 EMEAP ASEAN Bond Asian Bond market Standard + Initiative (ABMI) Asian Bond Fund ASEAN Capital (ABF) : ASEAN+3 Bond Market Forum Market Forum (ACMF) (ABMF), etc Bond market development in ASEAN Infrastructure Asia & Pacific Fund (AIF) APEC ADB Asian Region Fund Issuing bonds in local currencies Passport (ARFP) Asia Pacific Financial Program/project operations for bond mkt. Forum (APFF) Support regional initiatives 17
For example, ABMI under ASEAN+3 has been discussing various issues since 2003 … Finance Ministers and Central Bank Governors Meeting Deputy Ministers and Deputy Governors Meeting CMIM * ABMI Regional safety net Asian Bond Market Initiative * Chiang Mai Initiative Multilateralization TF 1 TF 2 TF 3 TF 4 (Supply) (Demand) (Regulation) (Infra.) ASEAN+3 Bond Market Cross-border settlement Forum (ABMF) Infrastructure Forum ASEAN+3 SRO Working Group 18
…produced some meaningful outputs Credit guarantee and Investment Facility (CGIF) (2010) to support local currency (LCY) bond issuance ASEAN+3 Bond Market Forum (ABMF) (2010) endorsed by Finance Ministers as a common platform for discussion on harmonization of regulations AsianBondsOnline (ABO) (2004) information hub in the region 19
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