Domestic Bond Markets

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Introduction

At the APEC Finance Ministers Meeting held on 23-24 May 1998 in Kananaskis, Canada, Finance Ministers agreed to begin work on a new collaborative initiative on the Development of Domestic Bond Markets in the region. Hong Kong, China agreed to co-ordinate this initiative.

The launch of the collaborative initiative is very timely in giving an impetus to capital market development, which is essential to promoting sustainable recovery in the region. The Asian financial crisis has highlighted the problems of excessive reliance on bank-intermediated financing or on foreign and volatile short-term financing, given the potential problems of currency and maturity mismatches. There is clear consensus that a key priority for the region is to develop deeper, longer-maturity, more stable and more transparent debt markets in Asia in order to recycle the large amount of Asian domestic savings which generally exceed 30% of GDP. This need is especially pressing in the face of falling capital flows into Asia and tight domestic liquidity in the wake of the financial crisis on the one hand, and the significant need for financing the long-term investment and restructuring programmes in the region on the other.

Under the collaborative initiative, Hong Kong, China conducted a survey in August 1998 to review the state of domestic bond markets in all APEC member economies and to seek members’ views on the potential for development and the impediments to growth. The survey findings revealed an enormous potential for the development of bond markets in Asia in view of the generally high savings ratios and low bond-to-GDP ratios across the region. Outstanding bonds in APEC member economies, excluding US and Japan, represented only on average 34% of their GDP, compared to 105% for the entire APEC region as at mid-1998. This indicates that bond markets in the region are generally under-developed and there is plenty of room for further improvement. The survey further shows that the main impediments to the development of domestic bond markets include a lack of reliable benchmark yield curves, a weak local institutional investors base, insufficient market liquidity, a lack of credible risk assessment and under-developed securities trading, clearing and settlement systems.

The findings from the survey were consolidated and reviewed at the Workshop for the Development of Domestic Bond Markets convened in Hong Kong on 18 December 1998. The Workshop discussed in detail the major impediments to the development of deep and liquid bond markets in the region. The Workshop also heard presentation from some private sector representatives on the difficulties and issues relating to bond market development.

The discussions at the Workshop were very useful and members agreed to pursue two suggestions to further the objectives of this initiative. The first project is the compilation of a Compendium of Sound Practices to cover five areas critical to the development of domestic bond markets, namely Government Policies, Regulatory Framework, Market Infrastructure, Liquidity and Risk Management. The Compendium would serve as guidelines to facilitate the development of domestic bond markets in APEC member economies. The second project is a Website which would provide a resource centre for sharing information about the debt markets in APEC member economies. The Website would link up relevant reports, statistics and other details concerning the development of domestic bond markets. The Asian Development Bank has agreed to set up this APEC Bond Market Initiative Website on behalf of the APEC member economies. The Website is attached to the ADB Internet site and preparation is in progress.

A number of member economies and international financial institutions have agreed to participate in the above two projects. Another Workshop was convened in Hong Kong, China on 28 May 1999 to discuss issues in relation to the five areas referenced above. The objective was to come up with a list of essential elements under these five areas for inclusion in the Compendium of Sound Practices.

The discussions in the May Workshop were followed by collaboration in preparing the list of essential elements and a draft report on the work undertaken by this Collaborative Initiative to prepare a Compendium of Sound Practices. All APEC member economies and relevant international financial institutions were invited to attend a final Workshop held in Hong Kong on 3-4 August 1999 to discuss the draft report and the Compendium. Participants exchanged views on the Compendium and agreed that the report would be submitted to the Finance and Central Bank Deputies at their meeting to be held in Wellington, New Zealand on 26-27 August 1999. Participants also agreed to update the statistics of the August 1998 survey by the end of 1999 to cover 1998 data and the results would be posted to the Bond Market Initiative Website for public access.

Participants at the final Workshop have considered the possibility of pursuing further work of the Collaborative Initiative, in particular on the formulation of specific guidelines for implementation of the sound practices embodied in the Compendium. However, noting that similar work on such implementation manuals were being pursued in some other forums, participants agreed that the need for further work under this Collaborative Initiative should be considered after reviewing those initiatives to avoid unnecessary duplication of efforts.

The current report summarises the work undertaken in pursuance of the Collaborative Initiative and is presented to the Finance and Central Bank Deputies.