Steps Towards the Development
and
Integration of the Asian Bond Market
Naoyuki Yoshino,
Professor of Economics, Keio University, Japan
1-1. Three Principal Traits of East Asian Economy
1, a very high savings ratio in many of its countries
2, much of these savings are deposited in banks
3, there is a bias towards domestic financial investment
Gross Saving Ratio (%) S/Y / Gross Investment Ratio (%) I/Y1990 / 1995 / 1998 / 2002 / 2003 / 2004 / 2005 / 2006 / 1990 / 1995 / 98 / 2002 / 2003 / 2004 / 2005 / 2006
Japan / n.a. / n.a / n.a. / 4.4 / 4.7 / 5.5 / 5.5 / 6.1 / n.a. / n.a. / n.a. / 23.1 / 22.8 / 22.7 / 23.3 / 23.5
Korea / 37.2 / 35.6 / 34.4 / 29.3 / 33.0 / 35.0 / 33.2 / 31.7 / 37.7 / 37.7 / n.a. / 29.1 / 29.9 / 29.5 / 29.3 / 29.0
China / 38.7 / 42.5 / 40.8 / 39.4 / 43.0 / 45.6 / 47.3 / 47.3 / 34.7 / 40.8 / n.a. / 36.3 / 39.4 / 40.7 / 42.1 / 43.1
Indonesia / 32.3 / 30.6 / 26.5 / 21.1 / 23.7 / 24.9 / 27.8 / 28.7 / 30.7 / 31.9 / n.a. / 19.4 / 19.5 / 22.4 / 23.6 / 24.0
Malaysia / 34.4 / 39.7 / 48.7 / 41.8 / 40.2 / 40.3 / 39.4 / 40.1 / 32.4 / 43.6 / n.a. / 23.5 / 22.4 / 21.0 / 20.6 / 20.9
Philippines / 18.7 / 14.5 / 12.4 / 19.5 / 19.2 / 18.3 / 18.5 / 18.3 / 24.2 / 22.5 / n.a. / 17.6 / 16.8 / 16.1 / 14.4 / 13.8
Singapore / 43.3 / 50.2 / 53.3 / 44.7 / 43.8 / 46.9 / 48.5 / 50.5 / 36.4 / 34.2 / n.a. / 25.6 / 24.2 / 23.8 / 22.3 / 23.1
Thailand / 34.3 / 37.3 / 35.2 / 29.3 / 30.5 / 31.0 / 29.5 / n.a. / 41.4 / 42.1 / n.a. / 22.8 / 24.1 / 25.9 / 29.0 / 28.6
Cambodia / n.a. / -2.6 / -0.4 / 12.1 / 11.0 / 10.0 / 11.4 / 15.2 / n.a. / n.a. / n.a. / 20.1 / 18.7 / 18.4 / 19.2 / 19.5
Laos / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a. / n.a.
Myanmar / n.a. / 13.4 / 11.8 / 10.2 / 11.0 / 12.1 / n.a. / n.a. / n.a. / n.a. / n.a. / 9.8 / 11.0 / 11.7 / n.a. / n.a.
Vietnam / n.a. / 18.2 / 21.5 / 28.8 / 27.4 / 28.5 / 30.2 / n.a. / n.a. / n.a. / n.a. / 31.1 / 33.4 / 33.3 / 32.9 / 32.8
Buｌnai / n.a. / 36.6 / n.a. / 47.2 / 48.6 / 51.4 / 59.1 / 62.4 / n.a. / n.a. / n.a. / 21.2 / 15.0 / 13.4 / 11.4 / 10.4
Figure 2. Direction of Portfolio Investment
Part 1 Regions to invest from Asian Countries
Part 2 Regions to invest to Asian Countries
Part 3 Regions to invest to European Countries
Figure 3. ASEAN5 Net Portfolio investment, 1995-2005 (Net Flow)
Where are investors coming from to Asian RegionCountry / Liabilities / billion
US Dollar / EU countries(billion Dollar)
UK / Euro Area / Others
Thailand / 1位 EU / 110.85 / 39.44 / 67.57 / 3.84
Total=402.83 / 2位 USA / 105.98
3位 Singapore / 44.76
4位 Hong Kong / 22.19
5位 Japan / 7.46
Singapore / 1位 USA / 363.61 / 107.21 / 119.91
Total=812.3 / 2位 EU / 235.98 / 8.85
3位 Hong Kong / 70.97
4位 Japan / 44.51
5位 Switzerland / 9.32
Hong Kong / 1位 EU / 538.10 / 289.94 / 225.19
Total=1,374.93 / 2位 USA / 462.25 / 22.97
3位 Singapore / 137.46
4位 Japan / 82.94
5位 Bermuda / 46.52
Philippines / 1位 EU / 101.45 / 33.60 / 61.66
Total=219.85 / 2位 USA / 71.79 / 6.19
3位 Japan / 13.82
4位 Hong Kong / 11.19
5位 Singapore / 9.48
Japan / 1位 EU / 5,287.05 / 1,959.36 / 2,751.79
Total=15,424.21 / 2位 USA / 5,200.84 / 575.90
3位Canada / 339.04
4位 Norway / 211.47
5位 Switzerland / 185.58
Source：IMF 『CPIS』
Figure 4. Portfolio Investment from the Asian Region
Portfolio Investment from Asian Region(2005)Country / Those countries who holds Portfolio Assets / Billion of
US dollar / EU countries (billion US dollars)
UK / Euro Area / Others
Thailand / 1位 EU / 10.33 / 4.57 / 5.67 / 0.09
Total=3,108 / 2位 US / 8.88
3位 Singapore / 1.8
4位 Indonesia / 1.57
5位 Hong Kong / 1.55
Singapore / 1位 EU / 629.28 / 356.82 / 260.54 / 11.91
Total=2,016.86 / 2位 USA / 290.31
3位 Australia / 169.66
4位 Malaysia / 167.83
5位 Korea / 90.3
Hong Kong / 1位 EU / 1,291.81 / 695.14 / 552.09 / 0.00
Total=4,365.57 / 2位 USA / 581.56
3位 Cayman / 548.15
4位 Bermuda / 450.65
5位 China P.R. / 412.99
Indonesia / 1位 EU / 3.87 / 2.19 / 1.68 / 0.00
Total=11.66 / 2位 Singapore / 2.17
3位 Australia / 2.03
4位 USA / 1.12
5位 China P.R. / 1.02
Korea / 1位 USA / 196.68 / 24.04 / 113.64 / 1.54
Total=436.65 / 2位 EU / 139.19
3位Cayman / 36.84
4位 Japan / 14.63
5位 Hong Kong / 10.18
Philippines / 1位 USA / 21.15 / 10.30 / 7.44 / 0.30
Total=48.51 / 2位 EU / 18.04
3位Singapore / 1.63
4位 Australia / 1.1
5位 Russian / 0.98
Japan / 1位 EU / 7,549.64 / 1,139.91 / 6,012.74 / 396.99
Total=21,148.88 / 2位 USA / 7,477.47
3位Cayman / 2,976.69
4位 Australia / 449.53
5位 Canada / 415.53
Figure 5. Net Capital Flows in Asian
------Bank Loans, FDI, Portfolio Investment------
Figure 6. FDI in Asian Region (Net Flows)
Figure 7. FDI in ASEAN by Sources of Countries
]
Figure 8. Bank Loans (Net Flow)
Figure 9. Bank Loans from Japan to Asean Countries
Figure 10. ASEAN Portfolio Investment
1-2. Two Types of Investors
(i)Retail Investors
(ii)Individual Investors
1-3. Four Types of Portfolio Investment
(i)maturity diversification;
(ii)regional diversification;
(iii)country diversification;
(iv)sector diversification.
1-4. Reduction of Asymmetric Information
among East Asian Countries
(i)macro data (for example growth rate and interest rates);
(ii)data relating to tax rates, the legal system and the accounting system;
(iii)regional and sector information;
(iv)day to day information
(including interest rates, exchange rate and productivity).
To make the information exchange as useful as possible, there should be a harmonization of financial markets within the Asian region including the areas of rules, regulations and taxes.
1-5. Several Steps to Create a Bond Market
in East Asia
A, Sovereign Bond (Government Bonds)
B, Semi-Government Bond (Power plant)
C, Mortgage Markets in Europe and US
D,InfrastructureRevenue Bond, PPP (PFI)
E, Small Business Financing,
1-8. Small and Medium-Sized Business’ Financing (SME-Financing)
1-9. Creation of New Independent Regulator and the Creation of Regulators’ Network
Creation of a Regulators Network among East Asian Countries would enhance information exchange and promote common rules of various financial activities.
1-10. Consumer education in Financial Activities
Consumer education in financial activities requires several steps:
(i)education in financial activities at such levels as universities, schools;
(ii)education of financial activities to “unsophisticated” individuals such as households and retired individuals.
Section 2: Development of the Infrastructure Bond
1, Declining efficiency of social overhead capital
Table 3. Changes in Marginal Productivity of Infrastructure in Japan
2, Public Infrastructure Financing Through Revenue Bond
Regional debt instruments are lacking whose maturity is long-term. Current Asian debt instruments cannot satisfy the needs of regional institutional investors who want to manage their assets for long-term investments from the perspective of asset-liability management.
Table 4. Estimates on Annual Infrastructure Financing Needs
Infrastructure Needs (billion $) / Financing Gap(billion $)
UN ESCAP / 608 / 220
Source) UN ESCAP (2006)
3. Community Fund
windmill power plant funds
4. Fundraising for social overhead capital
The current methods of raising funds for social overhead capital are:
(1) by the central government — i) tax revenues, ii) bond issuing proceeds;
(2) by the Fiscal Investment and Loan Program — proceeds of FILP bond issues;
(3) by local governments — i) local allocation grants from the central government, ii) municipal bond issues, etc.
2-9. Prisoners’ Dilemma to avoid moral hazard problem
Figure 11. To Avoid Moral Hazard Problem
2-10,
1