Policy Proposals Asia and Oceania Accelerating Development of Asian Bond Markets
December 14, 2010
In order for emerging countries in Asia to continue developing as members of the world's growth center, it is necessary to establish access to a stable supply of medium- and long-term funds for the development of regional infrastructure and corporate activities. To ensure this access, it is important to promote the development of systems and functions in Asian capital markets. This would improve the current limitations of Asian bond markets in terms of the amount of procurable capital, liquidity, and investment opportunities.
Keidanren proposed concrete measures to address these issues in the Joint Statement of the Asian Business Summit, which was held on March 15, 2010, and in a policy proposal released the following day entitled, "Promoting Financial Cooperation for a Prosperous Asia—Supporting Asian Growth through Regional Bond Markets." Recommendations included the development of both hard and soft infrastructure for bond markets, including institutional investors, settlement systems, guarantee agencies, rating agencies, and pertinent legal systems.
Earlier this year, a number of specific measures have been implemented under the Asian Bond Markets Initiative (ABMI), including the establishment of bond guarantee agencies and the government-private sector dialogue on market development. Also, in Japan steps have been taken to enhance Japanese bond markets. Keidanren would like to take this opportunity to confirm the progress of matters raised in previous proposals and to recommend further implementation of the following measures, which should be promoted proactively by the private sector, working hand-in-hand with government. Keidanren calls on the Japanese and other Asian governments, market authorities and market participants to consider these proposals carefully and to act upon them.
1. Fostering Institutional Investors
In order to develop Asian bond markets further, there is a need to foster issuers and institutional investors and to strengthen intermediary functions. To ensure the development of effective bond markets, it is essential for there to be enough investors capable of making appropriate risk-taking decisions backed up by specialized knowledge and experience. An increase in the number and type of investors who do not restrict themselves to buy-and-hold investment strategies could be expected to encourage the development of secondary markets balanced with primary markets. Japanese private financial institutions could play a significant role in helping other countries to foster institutional investors who can become a driving force for the development of markets. It is hoped that Japanese private financial institutions will contribute to cooperation by dispatching personnel to provide technical assistance, promoting the development of financial instruments, mainly to expand the investor base, and participating in bond markets themselves.
The Executives' Meeting of East Asia Pacific Central Banks (EMEAP)#1, which is composed of the central banks of member countries, is promoting the Asian Bond Fund (ABF)#2 as an instrument for investing in the government bonds of Asian countries. Since the launch of the second phase of the ABF, the door has been opened to private investment, creating opportunities for the further development of institutional investors. The percentage of private investment in the Fund is on an upward trend. It would be desirable to increase this percentage even more and to expand the scope of the ABF and the number of target countries, in order for institutional investors to accumulate expertise in investment in Asia.
In addition, in order to develop corporate bond issuance and trading markets in Asia and to promote the market participation of institutional investors, it is important that the yield curves in all relevant countries be made to function at a more practical level by enhancing government bond trading markets and interest rate swap markets. This would increase investment possibilities for institutional investors, since it would make it possible to rationally assess the credit risks and the return on corporate bonds to make reasonable decisions regarding flips between corporate and government bonds and to permit the establishment of a solid basis for risk hedging using derivatives. Financial authorities in all relevant countries should adopt measures to achieve these aims.
2. Training for Financial Authorities, Exchange Officials and Market Players
To promote the development of bond markets, efforts should be taken at the local level to help financial authorities, exchange officials, market participants and academic experts build up their knowledge, experience and know-how to boost the proficiency of trading expertise. The training of officials at financial authorities and self-regulatory organizations in charge of drawing up legislation and systems is especially important to ensure the establishment of appropriate domestic legislation and the multilateral harmonization of legislation.
Human resource training has already been provided by Japan's Ministry of Finance and Financial Services Agency, and by the Bank of Japan, the Japan International Cooperation Agency (JICA), and the Tokyo Stock Exchange. For its part, Japan's business community should enhance its efforts to transfer to other countries the knowledge, experience and expertise of financial specialists by providing systematic training for working-level human resources. These efforts should include the development of programs to promote more substantial interaction with financial authorities and exchanges in other parts of Asia, the proactive acceptance of trainees, and the dispatch of financial specialists from Japan to other countries.
3. Supporting Development of Asian Local Rating Agencies That Have Expertise in Evaluating Local Companies
To ensure the healthy development of bond markets, the existence of rating agencies able to provide market participants with pertinent credit risk information is essential. These agencies would form an extremely important part of market infrastructure.
In light of experience gained during the recent global financial crisis, countries everywhere are continuing to examine rating appropriateness and regulations required for rating agency oversight. In this regard, it is most welcome that the Association of Credit Rating Agencies in Asia (ACRAA)#3 is taking the initiative to foster and improve high-integrity rating agencies with a deep understanding of Asian companies and to promote the enhancement of information intermediary functions. In order to encourage cross-border trading, constant effort is required to standardize rating practices across Asia and to improve rating reliability. Japan's business community should foster and enhance local rating agencies by using the services of local rating agencies when it issues bonds denominated in local currencies.
Financial authorities can also play a significant role in supporting the development of rating agencies. Since the financial crisis of 2008, countries worldwide have moved to strengthen regulations governing rating agencies. However, in Asia, issuers and rating agencies are relatively small, and in many cases they are unable to meet demand soon for more personnel who can address the introduction of stricter procedures. Therefore, when planning to introduce new regulations, financial authorities in all relevant countries need to carefully consider how to ensure a balance with each development stage of the market.
4. Promoting the Asian Bond Markets Initiative (ABMI)#4
The Asian Bond Markets Initiative (ABMI), launched in 2003 to meet the challenges posed by the Asian Currency Crisis, has promoted the issuing of local currency-denominated bonds by international organizations and government-affiliated financial institutions. It has also expanded diversification of bond issuers and bond types. These developments have made it possible for various countries to ensure the smooth issuance of government bonds, which financially support economic measures to deal flexibly with global financial crises and other difficulties. Cross-border bond issuing has recently begun, as seen by the Thai baht-denominated bonds issued by the government of Laos. It is anticipated that many other such issuances would bring greater impetus to bond dealing in Asia.
National governments should continue to collaborate proactively in the ABMI. They should also take advantage of ABMI achievements in order to strengthen required functions, including enhancing bond market systems, sustaining fair trading practices at exchanges, ensuring transparency in trading and corporate information, and providing listed products to meet investment needs.
(1) Expanding Credit Guarantees for Bond Issues
One of the positive outcomes of the ABMI was the November 2010 establishment of the Credit Guarantee and Investment Facility (CGIF)#5, which provides credit guarantees for the bonds of Asian issuing organizations. Its objectives include promoting the issusance of local currency-denominated bonds by Asian companies. The Japan Bank for International Cooperation (JBIC) is providing strong support from Japan, drawing on its experience, to develop systems for the CGIF. Japan should consider dispatching management personnel to the CGIF. The development of low cost, simple procedures for the CGIF would be an important step, helping it serve as a model for credit guarantee systems in other countries.
The CGIF's guarantee and risk management functions should apply common criteria when screening the credit risk of companies in the region. This could be effectively achieved by the CGIF, operating in collaboration with the ACRAA.
(2) Promoting Efforts for Deregulation and Harmonization
The ASEAN+3 Bond Market Forum (ABMF)#6 was established in 2010 as a common platform for government and private entities to promote cross-border bond trading by harmonizing the regulations and market practices of member countries in the ASEAN+3. In the process, it is to be hoped that relevant parties in the private sector will conduct dialogues with financial authorities to discuss issues in accordance with the realities of business to promote steady progress that achieves positive results by compiling a roadmap for deregulation and harmonization of legislation and the development of other infrastructure.
During those discussions, representatives of Japan's government and private sector should work together, participating actively and exhibiting leadership. In addition, the governments of all relevant countries should make an effort for easing regulations on foreign capital investments and accelerating procedures in order to expand the size of their markets, while taking into consideration the level of economic development in each country.
5. Boosting the Use of Japan's Bond Markets
When taking steps to foster Asian bond markets, one highly important step would be to increase the utilization of Japan's bond markets, thereby increasing their presence. In order to achieve this aim, it is necessary to actively promote market improvements to motivate foreign companies to make use of Japan's bond markets. For instance, the provision of permission to use English in disclosure documents to newly issue bonds, a provision that is now under discussion at the Financial Services Agency, should be rapidly realized. It is expected that these steps would make Japan's bond markets into a model for other parts of Asia.
To achieve more active use of Japan's bond markets, it is also necessary to have a sufficient number of financial specialists available in Tokyo. For example, publishing disclosure documents in English would require many lawyers who are able to provide services in English at low cost. The Japanese government should encourage the increase of such lawyers in Japan and also promote the use of foreign lawyers by clarifying the scope of practice of personnel who do not have the qualifications of a Japanese lawyer.
(1) Boosting Use of Samurai Bond Markets
It is important to promote the issuance of "samurai bonds" in the Tokyo market by governments, government agencies and companies of emerging countries in Asia that have major capital procurement needs. This would open up the doors to some of Japan's personal financial assets, estimated at ¥1,400 trillion, which could be utilized for growth in Asia. This would also increase the international presence of Japan's capital markets.
While working toward these goals, it will be necessary to create an environment where the companies of various Asian countries have easier access to Japan's samurai bond markets. This would involve easing regulations on bond issuance and simplifying procedures, such as the simplification of disclosure requirements for a bond issue, permission for the financial statements of a company's home country to be used in some cases and deregulation of the adoption of sovereign standards.
Systematic support is also required to reduce risks associated with the issuance of samurai bonds by Asian companies. In this regard, JBIC announced in April 2010 it would enhance its samurai bond issuance support by establishing the Guarantee and Acquisition toward Tokyo Market Enhancement (GATE) facility, under which JBIC itself may acquire some bonds. JBIC had previously provided guarantees for samurai bonds issued by the Philippine, Indonesian, and other governments, and the new facility is expected to attract more foreign bond issuers to the Tokyo market, to encourage long-time market participation, and to expand and diversify the range of investment opportunities available to Japanese investors. These developments would promote more active use of the Tokyo market.
(2) Boosting Use of Bond Markets for Professional Investors
Following the establishment in June 2009 of TOKYO AIM, an equity market for professional investors (designated investors and non-residents), the TOKYO PRO-BOND Market will be established in the spring of 2011. This market is expected to lengthen the possible period for bond issuance in a year by adopting more simplified issuing procedures.
For the future establishment of a regional bond market in Asia, it is extremely important that Tokyo markets be given a stronger presence. To enhance this new market after its launch, it is vital for market participants to use it actively. To this end, the market should introduce low cost, simplified procedures, for instance, allowing issuer companies that have already issued security registration statements and reports to apply the same documents in the TOKYO PRO-BOND Market.
6. Utilizing Private-sector Funds for the Interregional and Local Infrastructure Development
The Asian Development Bank (ADB) estimates that Asia will need approximately US$8 trillion in infrastructure investments for the 11-year period beginning with 2010, primarily for the power supply, transportation and road sectors. Mobilization of this amount of capital will require the creation of systems that utilize the region's private capital as investment capital.
In pursuit of this goal, the Japanese government should, in partnership with the private sector, develop infrastructure fund schemes that can mobilize official development assistance (ODA) and other official flows (OOF) for the sake of investors who want stable, long-term returns. In addition, the private sector should also consider establishing infrastructure funds on its own. The development of infrastructure fund products that are attractive to pension funds and other investors will require bold ideas and action from private financial institutions. When developing such financial instruments, it is important for financial instruments to support a package of overseas infrastructure development measures under the initiative of Japanese companies using their world-leading technologies.
To promote this type of fund, JICA's overseas investment and loan scheme should be re-launched and fully utilized, while at the same time, JBIC's investment and loan scheme and its guarantee instruments, as well as the insurance tools of Nippon Export and Investment Insurance (NEXI), should be used. The costs of these schemes should be reduced to be easily accessible to both Japanese financial institutions and companies participating in infrastructure development projects. In addition, consideration should be given to extending insurance eligibility to include funds that do not have a corporate status and to setting limits on the duration of insurance and non-exempt property, based on the characteristics of the fund. It would also be worth considering tie-ups with funds being conceived by the ADB and ASEAN, and in this regard, JBIC and JICA could act as intermediaries.
- The EMEAP was established in 1991 upon the suggestion of Japan. It is an unofficial meeting held to freely exchange information and views mainly on the monetary policy management of member countries. The EMEAP is comprised of 11 central banks and financial authorities, including those of Japan, China, Korea, Australia and ASEAN member countries.
- The Asian Bond Fund develops investment trust products that are invested in government or agency bonds of Asian countries and that are jointly purchased by the central banks of EMEAP member economies. The EMEAP announced in June 2003 that it would launch the Fund in order to (1) raise investor awareness of Asian bonds and (2) promote the reform of markets and regulations through the work of the ABF. The Fund's second phase (ABF2), which was launched in December 2004, expanded investment instruments from U.S. dollar-denominated bonds to include bonds denominated in local currencies, and it opened the Fund to private investors too.
- The ACRAA was established in September 2001 by 15 credit rating agencies from 10 countries and regions, under the initiative of the Asian Bankers Association (ABA) and the Japan Credit Rating Agency, Ltd. (JCR). At present (2010), membership has expanded to 25 organizations in 14 countries and regions. ACRAA objectives are: (1) to promote cooperation aimed at improving the rating practices of rating agencies in Asia; (2) to raise the quality and comparability of rating in Asia through the implementation of best practices and common standards (standardization); and (3) to contribute to the development of Asian bond markets through these activities. In December 2008, ACRAA published a handbook listing the best practices of rating agencies and monitored the status of achievement of member organizations. It also holds workshops to train human resources and harmonize standards and exchanges opinions with regulatory authorities.
- In response to challenges posed by the Asian Currency Crisis, the ABMI was launched as a way to use private-sector savings in Asia as medium- to long-term investments needed for regional economic development. ABMI was agreed upon by the ASEAN+3 Finance Ministers Meeting in Manila in August 2003 and has promoted the issuance of bonds denominated in local currencies. In May 2008, the ASEAN+3 Finance Ministers Meeting in Madrid endorsed the New ABMI Roadmap to further develop Asian bond markets. The following four task forces were established to address specific issues:
Task Force 1: Promoting the issuance of local currency-denominated bonds (Co-Chairs: Thailand and China)
Task Force 2: Facilitating the demand of local currency-denominated bonds (Co-Chairs: Singapore and Japan)
Task Force 3: Improving the regulatory framework (Co-Chairs: Malaysia and Japan)
Task Force 4: Improving the related infrastructure for the bond markets (Co-Chairs: Philippines and Korea).
- The CGIF was established to facilitate the bond issues of companies by raising their credit worthiness when they meet with difficulty procuring funds and to reduce the impact of a credit crunch on smaller companies and on infrastructure and service providers by helping them reduce their dependence on bank loans and other forms of indirect financing. An agreement to establish the US$700 million CGIF was reached at the ASEAN+3 Finance Ministers Meeting in May 2010. Of this amount, Japan contributes US$200 million through JBIC.
- The ABMF was established under Task Force 3 of the ABMI to promote the standardization of market practices for cross-border bond trading within the region and to promote regulatory harmonization through the joint efforts of governments and the private sector. ABMF participants include private financial institutions in Asia and elsewhere, as well as ASEAN+3 finance ministries and central banks. The ABMF has created two sub-forums, one to collect information on bond market regulations and market practices, the other to examine the harmonization of transaction procedures and bond messaging formats. The first meeting of the ABMF was held in September 2010.