Regional Bond Markets in the Asia-Pacific Region: Reality or Wishful Thinking?

1. Regional Bond Markets in the Asia-Pacific Region: Reality or Wishful Thinking? S. Ghon Rhee K. J. Luke Chair of International Finance and Banking University of Hawaii The ADBI/FIMA Symposium May 10, 2001, Honolulu, Hawaii

2. Looking Back: The Asian Financial Crisis • Reversal of Capital Flows to Crisis-Affected Economies: $105-$110 billion or 10% of the Pre-Crisis Combined GDP • Was the Reversal Too Large for the Asian Economies as a Group to Cushion Its Impact on Their Currency and Equity Markets?

3. Magnitude of Reversal • Less than 5% of Pre-Crisis Combined Domestic Savings of $2.3 Trillion • Only 1/6th of Pre-Crisis Foreign Exchange Reserves of $700 Billion Accumulated by 5 Crisis-Affected Economies Plus China, Hong Kong, Japan, Singapore, and Taiwan

4. What Would Have Happened? • Had These Domestic Savings Been Channeled Into Corporate Financing Without Relying on Short-term Financing from Abroad • Had 15% of Foreign Exchange Reserves Been Allocated for the Region’s Capital Account Crises

5. Valuable Lessons from the Recent Crisis Sufficient Funds Were There in Asia, but the Region Lacked: • A Vehicle for Utilizing Foreign Exchange Reserves • Fully Developed Domestic Bond Markets and Regional Bond Markets

6. Two Major Initiatives • “Chiang Mai Initiative” by ASEAN + Three Bilateral “swap” arrangements and repurchase agreements • Need A New Initiative to Create Regional Bond Markets

7. Gaisai Bond Issues Unit: ¥ trillion Number of Samurai Number of Shogun YearIssuesBondsIssues Bonds 1991 27 0.71 1 0.41 1992 37 1.57 0 0 1993 49 1.23 1 0.59 1994 60 1.26 0 0 1995 85 2.11 0 0 1996 154 3.79 0 0 1997 66 1.58 0 0 1998 10 0.15 0 0 1999 24 0.87 0 0 2000* 61 2.40 0 0 * From April 2000 to February 2001

8. New Miyazawa Initiative Three measures under the NMI are related to regional bond market activities a. Acquisition of sovereign bonds by Japan Bank for International Cooperation b. Use of credit guarantee and/or interest subsidies c. Establishment of international guarantee institution

9. Why the Tokyo Market Failed to Serve the Region? • Without joint effort by the region’s economies, Japan alone cannot create a truly a regional bond market • The Japanese Government Bond (JGB) Market Suffers From Its Own Weaknesses Cause:MOF’s dual role as issuer and buyer of JGBs

10. Negative Consequences of the Dual Role • The lack of intense competition on the primary market • Additional Uncertainty on the long-term interest rates on the secondary market

11. What about Hong Kong, Singapore, and Sydney? Outstanding Government Securities (as of December 2000) Hong Kong: $13.94 billion Singapore: $24.97 billion Sydney: $40.33 billion (as of March 2001) ---------------------------------- US: $2,966.9 billion Japan: $3,176.7 billion

12. Major Positive Developments in Domestic Bond Markets Hong Kong US Dollar Clearing System Singapore Internationalization of S$ Sydney REPO & Derivatives Markets Real Time Gross Settlement

13. Big Bang Financial Reforms: Japan (I) 1. Deregulation of cross-border transactions and foreign exchange business 2. Adoption of a competitive auction method to issue financing bills 3. Abolition of securities transaction tax 4. Deregulation of brokerage commission 5.Preparation of legal framework for loan/asset securitization 6.Allowance of off-exchange trading

14. Big Bang Financial Reforms: Japan (II) 7.Allowance of banks and financial institutions to issue bonds 8.Entry by banks, securities companies, and insurance companies into each other’s business 9. Introduction of individual stock options 10.Replacement of merit-based licensing system with a disclosure-based registration system for securities companies

15. Creation of Regional Bond Markets A comprehensive study and detailed blueprint are needed a. Asian Monetary Union b. Credit Enhancement and Guarantee Agency c. Regional Clearing and Settlement Systems d. Cross-Border Securities Borrowing and Lending Facilities e. Cross-border Trading Systems f. Regional Rating Agency g. Harmonization of Tax and Accounting Rules

16. Asian Monetary Union • Major Benefit of the Euro for Europe’s Bond Markets i. Elimination of Exchange Risk ii. Harmonization of Market Practices iii. Re-denomination of European Government Bonds in Euro • Full or Partial Currency Unification in the Region? Coordinated Monetary and Fiscal Policies? • ASEM Meeting (Jan 13, 2001) • G-7 FMs and CB Governors (April 28, 2001)

17. Credit Enhancement and Guarantee Agency • Regional credit enhancement & guaranty agency New Miyazawa Initiative but no follow through • Structured financing arrangements • Bond Insurance • Borrow the idea of Municipal Bond Bank concept?

18. Cross-Border Clearing and Settlement Government Corporate SecuritiesBonds Australia Reserve Bank Information Financial Transactions and Transfer System Recording and Clearance System Hong Kong Central MoneyMarkets Central Clearing & Unit Settlement System Japan BOJ Financial Network n.a. System (BOJ-NET) Singapore Government Book-Entry Debt Securities System C&S system

19. Regional Bond Borrowing and Lending To promote cross-border REPO transactions and C&S a. Uniform Legal Framework for Securities Borrowing and Lending and Sell-and- Buyback Arrangements b. Uniform Tax and Accounting Treatment

20. Bond Trading Systems Order- vs. Quote-Driven Trading 1. Market Makers’ Involvement Pre-trading negotiations and personal relationships among market markets 2. Inter-Dealer Brokers

21. A Regional Credit Rating Agency? a. Economically Feasible? b. How to Harmonize Accounting and Disclosure Standards? c. How to Improve the Dialogue Between Credit Rating Agencies and Asian Issuers

22. Mahalo!