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Historic Challenges and Opportunities for Developing Asian Bond Market
Shanghai, ChinaNovember 2005
ZHU GuangyaoDirector-GeneralInternational DepartmentMOF, China
2
Lessons from 1997-98 Asian Financial Crisis
Heavily relied on banking loan
Mismatch problem: maturity mismatch and currency mismatch
Lack of regional financial cooperation
3
Asian Corporate Financing still Rely More on Banking Loans
1.13%23.03% 14.32%
54.57%
98.87%76.97%
85.68%
45.43%
0%10%20%30%40%50%60%70%80%90%
100%
China Korea Japan US
Corp Bond Bank Loan
Financing Comparison (As of End 2004)
4
Total Amount of Outstanding Corporate Bonds (As of End 2004)
0
500
1000
1500
2000
2500
3000
China Korea Japan US
US
D B
n
Corporate Bond
14.9
5
Corporate bond as percentage of total financing
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
1989
1991
1993
1995
1997
1999
2001
2003
China Korea Japan
6
Commentary: Asian bond market is less developed Historical data shows major Asian economies’
corporate bond as percentage of total financing remain low
US corporate financing is balanced well between bond offering and bank loan, while Asian economies rely heavily on bank loans
Asian economies’ total amount of corporate bonds are far less than in the US
7
US Treasury has been increasing during the past years
5000
5500
6000
6500
7000
7500
8000
Nov-9
9
Mar-0
0
Jul-0
0
Nov-0
0
Mar-0
1
Jul-0
1
Nov-0
1
Mar-0
2
Jul-0
2
Nov-0
2
Mar-0
3
Jul-0
3
Nov-0
3
Mar-0
4
Jul-0
4
Nov-0
4
Mar-0
5
USD
Bn
8
Public debt takes the majority part of US Treasury Financing
Public Debt
41%
Federal Reserv e &
Gov ernment Accounts
21%
Priv ate
20%
Foreign & International
10%
Others
8%
9
Foreign Reserves of major Asian economies
Singapore Malaysia Thailand Indonesia Philippines
Hong Kong, China China
Taiwan, China Korea India Japan
199772,481.9 15,259.9 26,967.7 17,427.2 7,177.6 93,175.0 139,890.0 83,502.0 20,405.5 23,965.0 220,792.0
199875,429.9 26,167.9 29,535.9 23,599.2 9,115.5 89,600.0 144,959.0 90,341.0 52,040.8 26,958.0 215,949.0
199976,732.0 30,863.1 34,780.6 24,352.1 13,122.3 96,300.0 154,680.0 106,200.0 74,054.5 31,992.0 288,080.0
200080,214.3 29,885.5 32,661.3 29,393.7 12,933.1 107,500.0 165,574.0 106,742.0 96,198.1 37,264.0 361,638.0
200176,130.0 30,848.3 32,993.2 28,015.8 13,319.4 111,200.0 212,165.0 122,211.0 102,821.4 45,251.0 401,959.0
200281,408.4 34,583.1 38,923.7 32,037.0 13,016.9 111,919.0 286,407.0 161,656.0 121,412.5 66,994.0 469,728.0
200395,392.6 44,901.6 42,147.7 36,295.7 13,327.6 118,387.0 403,251.0 206,632.0 155,352.4 97,617.0 673,529.0
2004112,083.7 66,712.5 49,831.7 36,320.4 12,781.2 123,569.0 609,932.0 241,738.0 199,066.1 125,164.0 844,543.0
USD million
10
0.0
100,000.0
200,000.0
300,000.0
400,000.0
500,000.0
600,000.0
700,000.0
800,000.0
900,000.0
1997 1998 1999 2000 2001 2002 2003 2004
US$ m
illion
Singapore Malaysia Thailand Indonesia Philippines Hong Kong, China
China Taiwan, China Korea India Japan
Foreign Reserves of major Asian economies
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Foreign Reserves of China, Japan and Korea
0
100, 000
200, 000
300, 000
400, 000
500, 000
600, 000
700, 000
800, 000
900, 000
1997 1998 1999 2000 2001 2002 2003 2004
USD
mill
ion
Chi na Korea J apan
12
Huge foreign exchange reserves in East Asia turn to US assets
-40
-20
0
20
40
60
80
1998 1999 2000 2001 2002 2003 2004 2005
(difference)Asian net purchases of US assetsAsian FX reserve accumulation
Monthly change (US$ bn, 3mma)
13
Bonds dominate in Asian foreign exchange reserves
75%
80%
85%
90%
95%
2000 2001 2002 2003 2004 2005
Asia
Non-Japan Asia
Share of bonds in total FX reserve holdings
`
14
Long Term US Treasury Bond Distribution (As of June 2004)
Region Amount ( USD Bn)Europe 1,274Eurozone 841
Asia 1420America 536Oceania 23Africa 5Supranational 38Others 218Total 3,514
15
Long Term US Treasury Bond Distribution (As of June 2004)
Europe36%
Asia41%
America15%
Others8%
16
US Treasury Bond held by Asian Economies
050
100150200250300350400450
Mar-0
0
Sep-
00
Mar-0
1
Sep-
01
Mar-0
2
Sep-
02
Mar-0
3
Sep-
03
Mar-0
4
Sep-
04
Mar-0
5
China Hong Kong India Korea Singapore Taiwan Thailand
China China
USD Bn
17
US debt as percentage of total FX reserves (As of June 2005)
44%
87%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Korea Japan
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Main Challenges
Less developed bond market infrastructure Lack of sound bond issuers (bond supply) Lack of stable bond investors (bond demand) Dollarization trend , lack of wide-accepted re
gional denominated currency
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The attempt of ABMI working groups• Creating New Securitized Debt
Instruments• Credit Guarantee & Investment
Mechanisms• Foreign Exchange Transactions and
Settlement Systems• Local and Regional Rating Agencies
+ Plus, Ad-hoc Support Team
20
Opportunities
The willingness of the Asian economies to develop bond markets
Improvement of local market infrastructure Sustained development of regional cross-
border trade and investment Plentiful fund because of high savings rate The active participant of public and private
sector
The breakthrough in China’s bond market
The launch of Panda Bond
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Panda Bond – Development in China’s Bond Market
Panda Bonds: debt instruments issued by international lending institutions in local Chinese currency.
Issuer: international financial institutions lending or investing for development purposes
Key requirement for issuer: 1) a credit rating above AA2) Its total lending to and investment in domestic projects or enterprises has exceeded USD1 billion3) funds be used to finance the medium and long-term fixed asset lending to or equity investment in projects in China
23
Panda Bond – Development in China’s Bond Market (Cont)
Recent approval:IFC : 1.13bn RMBADB: 1 bn RMBin interbank market
Related development of China financial market open to foreign institutions:1) It is the first time foreign institution can issue rmb-denominated bond in China.2) In interbank market, foreign commercial banks that have RMB licence can participate in the bond issuance, syndicate and trading.3) Market bring in the first offshore institutional investor - pan Asia Bond Fund.
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Panda Bond – Development in China’s Bond Market (Cont)
Timelines related:
2002 IFC and ADB seek to issue RMB-denominated onshore to fit its demand in local loan.
Beginning of 2004 PBOC started to study the possibility of international financial institutions with The Ministry of Finance, The State development and Reform Commission and The China Securities Regulatory Commission.
Sept 2004 PBOC submitted the Provisional Administrative Rules on
International Development Institutions' Issuance of RMB Bonds to state council for approval.
February 18, 2005 PBOC annouced Provisional Administrative Rules on
International Development Institutions' Issuance of RMB Bonds.
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Benefits of Panda Bond
The development and openness of local bond market The new regulation reduce the cost of capital for local
enterprises. Before the approval, these international financial institutions issue foreign currency denominated bonds offshore, and lend the money to local enterprises through banks or financial departments. In this way, enterprises take the foreign exchange risk.
The new regulation benefit local enterprises by getting rid of currency risk and improving the efficiency of capital usage.
These bonds that carry no credit risk and, will set a benchmark for gauging the risk of other corporate and municipal borrowers.
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Potential impact of Panda Bond
A vibrant local market would mean that companies would not have to look to offshore markets for funding, which would help keep down China's foreign debt.
The market could help cut China's balance of payments surplus over time, because raising funds at home naturally reduces capital inflows.
Allowing foreign agencies to raise capital locally reduce the need to raise funds overseas and bring foreign currency into China, which may help relieve upward pressure on the yuan over time.
27
Reference Data Sources
The Bank for International Settlement The World Bank The International Monetary Fund The Asian Development Bank UBS Research Deutsche Bank Research