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Asia Bond Monitor - November 2004

Asia Bond Monitor - November 2004

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The Asia Bond Monitor (ABM) reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. The ABM covers the 10 Association of Southeast Asian Nations member countries plus the People's Republic of China; Hong Kong, China; and the Republic of Korea.
The Asia Bond Monitor (ABM) reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. The ABM covers the 10 Association of Southeast Asian Nations member countries plus the People's Republic of China; Hong Kong, China; and the Republic of Korea.

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Published by: Asian Development Bank on Nov 04, 2013
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Contents
Introduction
 
East Asian Local CurrencyBond Markets: 1997–2003
 
Size and Composition
 
Market Liquidity
 
Investor Profile
 1
Returns and Volatility
 1
Cross-Border Investment
 1
Addressing the MismatchProblem
 1
Recent Policy Reforms andChallenges Ahead
 2
Recent Policy Reforms
 2
Challenges Ahead: IncreasingMarket Liquidity
 2
Box: The Aggregate EffectiveCurrency Mismatch Index
 1
East Asian Local Currency Bond Markets:Seven Years after the Crisis
Highlights
East Asian local currency bond markets tripled in size between1997 and 2003. But there are large variations across countries,and most markets remain small:Thailand registered the fastest growth, Korea has the largestamount of bonds outstanding, while Malaysia achieved thehighest ratio of local currency bonds outstanding to GDP.Government bonds led market growth. Corporate bondmarkets are growing, but are yet to become a significantsource of corporate finance.The ratio of local currency bonds outstanding to GDP in EastAsia is about 44%, far below those for Japan and the US. Theregion accounted for only 3% of local currency bondsoutstanding worldwide.Although trading volume has increased significantly, liquidity inEast Asian bond markets is still low:The annual turnover ratio for government bonds ranges fromless than 0.5 in Indonesia to 5.5 in Singapore, compared withover 30 in the US.Bid-ask spreads of East Asian benchmark local currency bondsare much higher than those of equivalent benchmark bondsin developed markets.The investor profile for East Asian local currency bond marketsis widening, but overall it remains narrow. Although holdings bycontractual savings institutions are increasing, commercial banksstill hold over half of total government bonds outstanding.East Asian local currency bonds show large variations in returns.But portfolio holdings of these bonds exhibit attractive risk/returntradeoffs, offering good potential for global bond portfoliodiversification.Cross-border investment in East Asian bond markets is small.ASEAN+3 invests less than 2% of its total bond investmentworldwide in East Asia.The development of East Asian local currency bond markets ishelping to address the currency and maturity mismatch problem:A number of indicators suggest that East Asia has substantiallyreduced its reliance on foreign currency borrowings since the1997 crisis.
Continued overleaf 
The Asia Bond Monitor (ABM) reviews thedevelopment of East Asian local currencybond markets. It examines market sizeand composition, market liquidity, investorprofile, and returns and volatility. Recentpolicy reforms and challenges facing thesemarkets are also highlighted. The ABMcovers the 10 Association of SoutheastAsian Nations member countries plus thePeople’s Republic of China and the Republicof Korea.
Asia Bond Monitor 2004
Asian Development BankRegional Economic Monitoring Unit
6 ADB Avenue, Mandaluyong City0401 Metro Manila, Philippines
Telephone
(63-2) 632-5458/4444
Facsimile
(63-2) 636-2183
E-mail
asianbondsonline_info@adb.org
How to reach us
 Asian Development Bank
November 2004http://asianbondsonline.adb.org
 
Local currency bond markets are increasingly becoming animportant source of domestic finance.Policy measures implemented by East Asia since the 1997financial crisis include:Strengthening the legal and regulatory framework,Improving the bond issuing process and pricing mechanisms,Promoting demand for local currency bonds,Improving market infrastructure, andPromoting regional cooperation in developing bond markets.Going forward, improving market liquidity is a key challenge. Thefollowing measures could be considered:Broadening the variety of fixed-income securities,Introducing When-Issued (WI) trading,Introducing Separate Trading of Registered Interest andPrincipal of Securities (STRIPS), andDeveloping derivatives markets.
Acronyms, Abbreviations, and Notes
ABFAsia Bond FundABMAsia Bond MonitorABMIAsian Bond Markets InitiativeADBAsian Development BankAECMAggregate Effective CurrencyMismatchALBIAsian Local Bond IndexASEANAssociation of Southeast AsianNations (Brunei Darussalam,Cambodia, Indonesia, LaoPeople’s Democratic Republic,Malaysia, Myanmar, Philippines,Singapore, Thailand, andViet Nam)ASEAN+3ASEAN, People’s Republic of China, Japan, Republic of KoreaCSIcontractual savings institutionEMEAPExecutivesMeeting of EastAsia Pacific Central BanksEU15Austria, Belgium, Denmark,Finland, France, Germany,Greece, Ireland, Italy,Luxembourg, Netherlands,Portugal, Spain, Sweden, andUnited Kingdom (the 15members of the European Unionprior to 1 May 2004)GDPgross domestic productGPFGovernment Pension FundSTRIPSSeparate Trading of RegisteredInterest and Principal of SecuritiesWIWhen-IssuedNotes:1.“$” denotes US dollars unless otherwisespecified.2.Growth rates are year-on-year unlessotherwise specified.The
 Asia Bond Monitor
is prepared by theRegional Economic Monitoring Unit of theAsian Development Bank (ADB) and does notnecessarily reflect the views of ADB's Boardof Governors or the countries they represent.
 
East Asian Local Currency Bond Markets:Seven Years after the Crisis
Introduction
Since the 1997 financial crisis, East Asia (ASEAN+3
1
 excluding Japan)has taken important steps at both national and regional levels todevelop local currency bond markets. The objectives of these effortsare (i) to reduce the risks associated with excessive reliance on short-term external financing, thereby mitigating the currency and maturitymismatch problem; (ii) to provide an alternative vehicle for channelingdomestic savings into productive investment and reducing dependenceon bank lending; and (iii) to support economic and financial integrationwithin East Asia.These efforts have had significant impact on East Asian local currencybond markets. The purpose of this inaugural issue of Asia Bond Monitoris threefold: (i) to review the development of local currency bondmarkets in East Asia over the past seven years by examining marketsize, composition, market liquidity, investor profile, returns and volatility,and cross-border investment; (ii) to evaluate how the development of local currency bond markets has helped address the dual mismatchproblem; and (iii) to review key policy reforms introduced in East Asiato facilitate development of local currency bond markets, and highlightchallenges ahead.
East Asian Local Currency Bond Markets: 1997–2003
Size and Composition
East Asian local currency bond markets tripled in sizbetween 1997 and 2003.
Total local currency bonds outstanding in East Asia tripled from $356billion in 1997 to $1.2 trillion in 2003 (Table 1), an annual growth rateof 22.5%. Growth was particularly impressive at 35% in Thailand, 25%in People’s Republic of China (PRC), and 23% in Republic of Korea(Korea). These growth rates compare very favorably with 11% in Japan,
1
ASEAN+3 comprises the 10 members of the Association of Southeast Asian Nations(Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia,Myanmar, Philippines, Singapore, Thailand, and Viet Nam) plus People’s Republic of China, Japan, and Republic of Korea.

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