MANILA, PHILIPPINES - The Asian Development Bank (ADB) will set the course for further development and integration of the region's local currency bond markets with a key study that kicks off in March.
The study - which will take up to a year - will propose ways to harmonize the various regulations and practices to facilitate cross-border trading and investment in Asian government and corporate bonds. It will look, for example, at the role private placements can play in integrating the region's relatively small corporate bond markets.
The study will also look at setting up a regional bond forum and recommend measures to strengthen self regulatory bond organizations in the region and, if necessary, push to establish new ones such as the International Capital Market Association in Europe.
"Breaking down the legal, policy and other barriers between the various bond markets and harmonizing standards is key to creating a deep and active regional market that can support economic growth in Asia," says Avonechith Siackhachanh, advisor in ADB's Office of Regional Economic Integration.
ADB in December also started a 12-month study on bond settlement and clearing in order to improve the efficiency of cross-border arrangements now in place. That study will also consider whether a regional settlement body would be preferable.
Bond markets in Asia have expanded rapidly in recent years. Between end-2007 and end-2008, total outstanding bonds in ASEAN, People's Republic of China (PRC); Hong Kong, China; and Republic of Korea grew 14.9% to US$3.7 trillion. However, regional cross-border issuance and investment is low with ASEAN+3 countries allocating only 2% of their bond investment to paper denominated in other regional currencies. In large part, that is because accounting, tax and national legal systems make cross-border investment expensive.
The studies are part of a May 2008 agreement by the finance ministers of the ASEAN+3 on a new Asian Bond Markets Initiative (ABMI) roadmap to foster further development in Asia's bond market. Deep markets are crucial to reducing dependence on bank loans and offshore markets that can create currency and maturity mismatches.
The March study is being funded by a $950,000 technical assistance grant. The Republic of Korea e-Asia and Knowledge Partnership Fund is providing $500,000 and Japan's Investment Climate Facilitation Fund (ICFF) is providing $450,000 for that. The ICFF comes under the Regional Cooperation and Integration Financing Partnership Facility. A technical assistance grant of $850,000 from the ICFF will finance the December study.