Transcript Hong Kong Debt Market Development

Developing Bond Markets in Asia:
Motivation, Obstacles and
Achievements So Far
Outline
• Motivation to develop bond markets
• Recent developments in the region
• Hong Kong’s experience
• Lessons and impediments
What motivates the authorities
in the region to develop their
local bond markets?
Financing Structure in Asia – 1996
% of GDP
350
Stock
300
Bond
250
Loan
200
150
100
Thailand
Taiwan
Singapore
Philippines
Malaysia
Korea
Indonesia
India
China
0
Hong Kong
50
Motivation of the Authorities
• Lessons from the Asia financial crisis
– Currency and maturity mismatches
– Prone to sudden capital reversal
• To foster financial stability
– As back-up facilities
– Diversity in financial intermediation
The Role of the State
• A multifaceted role:
– Investor protection
– Innovation
– Provision of market infrastructure
• Positive non-interventionism
– Facilitating, not forcing!
What has happened in the region
and what have the authorities
done since the Asia crisis?
BIS Classification
of Bond Issuance
Issued by
residents
Issued by nonresidents
In domestic
currency
Domestic
International
In foreign
currency
International
International
Size of Domestic Bond Market:
Emerging Asia, 1996–2004
US$ billion
1800
1600
1400
1200
1000
800
Private Sector
600
400
Public Sector
200
0
1997
1998
1999
2000
2001
2002
2003
2004
Structure of Asian
Bond Market (end-2004)
Government
Total bond
Country
outstanding US$, bn
China
521.2
320.7
Hong Kong
99.3
15.6
India
226.8
216.6
Indonesia
63.6
47.1
Korea
565.3
146.7
Malaysia
135.3
45.2
Philippines
55.0
26.7
Singapore
93.9
41.4
Taiwan
198.9
85.3
Thailand
72.1
34.5
Subtotal
2,031.4
979.8
Source: Bank for International Settlement.
Domestic
Financial Institutions
%
US$, bn
61.5
163.6
15.7
24.3
95.5
1.1
74.1
2.7
26.0
194.0
33.4
16.4
48.5
0.1
44.1
16.1
42.9
29.6
47.9
7.2
48.2
455.1
International
Corporate
%
US$, bn
31.4
12.2
24.5
5.3
0.5
2.5
4.2
3.5
34.3
150.2
12.1
45.0
0.2
0.0
17.1
5.3
14.9
59.5
10.0
20.3
22.4
303.8
%
2.3
5.3
1.1
5.5
26.6
33.3
0.0
5.6
29.9
28.2
15.0
US$, bn
24.7
54.1
6.6
10.3
74.4
28.7
28.2
31.1
24.5
10.1
292.7
%
4.7
54.5
2.9
16.2
13.2
21.2
51.3
33.1
12.3
14.0
14.4
Growth in Government Bonds
• Regular issuance programmes
• Benchmark yield curves
• Improving market infrastructure
• The need to finance infrastructure
investment
Government Initiatives
• Domestic development
– Relaxing investment restrictions
• Regional cooperation
– APEC Initiative on the Development of Securitisation
and Credit Guarantee Markets
– Asian Bond Market Initiative (ABMI)
– Asian Bond Fund (ABF)
– Infrastructure initiatives
The Asian Bond Fund
• An EMEAP initiative
• ABF1 (2003)
– Closed-end: confined to investment of the central banks
only
– USD-denominated sovereign and quasi sovereign bonds
in the region
• ABF2 (2005)
– Open to private sector investors
– Domestic currency-denominated bonds in the region
The Hong Kong experience
Overview
• Bond market development is high on the
policy agenda
– streamlining issuance procedures
– tax concessions
– improving infrastructure
• Rapid growth over the past decade
– Outstanding HK$-denominated bond reaching US$80
billion at end-2004
– Almost 50% of GDP
Growth of Hong Kong Dollar
Bond Market
US$, bn
80
%
60
Others (lhs)
70
Public sector (lhs)
50
60
50
Total outstanding as a %
of GDP (rhs)
40
40
30
30
20
20
10
10
0
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Sources: HKMA and HK Census and Statistics Department.
Growth By Issuer
US$, bn
90
US$, bn
90
80
Local Corporates
70
80
Government and statutory
bodies
60
70
Non-MDB overseas
50
50
MDBs
40
40
30
30
Banks
20
20
10
10
Exchange Funds
0
1997
Source: HKMA.
60
0
1998
1999
2000
2001
2002
2003
2004
Government Initiatives (I)
• Issuance of Exchange Fund papers
– HK$ debt instruments issued by the HKMA
– Backed up by the foreign reserve of Hong
Kong
• Benchmark yield curve
• Mainly held by banks
Government Initiatives (II)
• Government bond issuance
– first global bond offering in 2004
• Securitised bond
– The Hong Kong SAR Government
– Hong Kong Mortgage Corporation
Government Initiatives (III)
• Retail bonds initiatives
• Streamline issuing procedures
• Tax concessions
• Pension scheme (not for promoting the
bond market)
Clearing and Settlement System
CDC
USD
RTGS
(2000)
- China
Clearstream
Euroclear
CMU
HKD
RTGS
(1996)
DvP
AustraClear
- Australia
AustraClear
- New Zealand
KSD
- South Korea
EURO
RTGS
(2003)
After all these…
Market Composition:
Pre-Crisis and Now
1996
2004
Ma la ys ia
Kore a
T a iwa n
S in g a p ore
T h a ila n d
In d ia
P h ilip p in e s
Ma in la n d
Hon g Kon g
Public
In d on e s ia
Private
Ave ra g e
100
80
60
40
% of GDP
20
0
0
20
40
60
% of GDP
80
100
Comparing the Financing Structure:
Emerging Asia vs. Advanced Economies
% o f G DP
% o f G DP
1996
16 0
% o f G DP
% of GDP
2004
16 0
16 0
14 0
14 0
14 0
14 0
12 0
12 0
12 0
12 0
10 0
10 0
10 0
10 0
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
0
E u ro a re a
Un ite d
Kin g d o m
Bank loans
Un ite d
S ta te s
Ja pa n
No n -J a p a n
As ia
Stock market capitalisation
16 0
0
0
E u ro a re a
Un ite d
Kin g d o m
Un ite d
S ta te s
Bond market (public)
Ja pa n
No n -J a p a n
As ia
Bond market (private)
Lessons and impediments:
anything we can do?
More Work to Do?
•
•
•
•
•
•
•
Macroeconomic policies
Government bonds
Banking sector soundness
Corporate governance
Regulatory framework
Tax treatment / incentives
Investor base
The Case of Hong Kong
• Supply
– Limitations of Exchange Fund papers
– Government issuance is politically sensitive
– Lack of corporate issuers
• Demand
– Mutual funds invest mainly in equities
– Currency board system
Retail Demand for Bonds
• Transaction cost is high for individuals
• Increased competition between banks made
deposits fiercely competitive
• Attraction is mainly on medium term papers
• There is more interest in holding bonds via
other investment vehicles
• Any more room for ABF2-typed initiatives?
Factors Critical to
Depth and Liquidity
• Demand
– incentives (eg. tax, transaction cost)
– investment vehicles (eg. mutual funds)
– limited to high quality issues?
• Supply
– fiscal deficit
– structural reforms (eg. privatisation)
– business size
• Infrastructure
– credit rating
– credit bureaux
Conclusion
• The Asian Bond market has grown steadily
since crisis
• Structure of financing still tilted towards
loans
• Scope for improvements