ASEAN+3 Seminar on Developing ASEAN+3 Seminar on Developing

Corporate Bond Markets in AsiaCorporate Bond Markets in Asia

Mr. Masato Miyachi, Senior Mr. Masato Miyachi, Senior AdvisorAdvisor

Office of Regional Economic Integration Office of Regional Economic Integration

Asian Development BankAsian Development Bank

27 September 200727 September 2007

Shanghai, PRCShanghai, PRC

Session 1: Corporate Bond Markets in East Asia:

Challenges and Prospects

OutlineOutline

• Need to develop corporate bond Need to develop corporate bond marketsmarkets

• Factors that support development Factors that support development of corporate bond marketsof corporate bond markets

• Private-Public sector cooperation Private-Public sector cooperation to promote corporate debt to promote corporate debt marketsmarkets

33

Advantages of corporate bond finance

Corporate bond markets can:• Reduce the double mismatch problem

(currency and maturity)• Reduce over-dependence on bank borrowing

and lower borrowing costs• Contributes to efficient resource allocation.• Help develop hedging instruments to mitigate

risks

44

Corporate bond market Corporate bond market developmentdevelopment

• Corporate bonds in ASEAN+ 3 countries grew 36% last year.• However, corporate debt markets continue to be underdeveloped

Less than one-third of the over 100 countries with equity markets have corporate debt markets Corporate debt markets average only one tenth the size of the corresponding equity markets

55

Factors that support Factors that support corporate bond market corporate bond market

developmentdevelopment• Financial development often requires Financial development often requires

government to play a role in initial stage of government to play a role in initial stage of bond market developmentbond market development ex. Malaysia ex. Malaysia and Koreaand Korea MalaysiaMalaysia

promoted development of needed infrastructure for promoted development of needed infrastructure for bond market development incl. bond rating agencies; bond market development incl. bond rating agencies; made bond ratings mandatorymade bond ratings mandatory

actively encouraged Employee Provident fund to invest actively encouraged Employee Provident fund to invest in corporate bonds to help finance infrastructure and in corporate bonds to help finance infrastructure and energy investments energy investments

By 2000corporate debt market in Malaysia amounted By 2000corporate debt market in Malaysia amounted to 47% of GDP from just 4% in 1989to 47% of GDP from just 4% in 1989

66

Factors that support corporate Factors that support corporate bond market development (1)bond market development (1)

KoreaKorea Korean government first approved Capital Korean government first approved Capital

Market Promotion Act of 1968 Market Promotion Act of 1968 In 70's, government introduced guaranteed In 70's, government introduced guaranteed

corporate bonds and ensured that corporate corporate bonds and ensured that corporate bonds issued by the industrial conglomerates bonds issued by the industrial conglomerates (chaebols) carried bank guarantees (chaebols) carried bank guarantees

By 2000, corporate debt market rose to 26% By 2000, corporate debt market rose to 26% of GDP from 11.1% in 1989of GDP from 11.1% in 1989

77

Factors that support corporate Factors that support corporate bond market development (1)bond market development (1)

• Government support for the development of the Government support for the development of the corporate bond markets in MAL and KOR were corporate bond markets in MAL and KOR were substantial and sustainedsubstantial and sustained

• Relatively rapid development of bond markets Relatively rapid development of bond markets in MAL and KOR suggest that government in MAL and KOR suggest that government support is important for bond market support is important for bond market development at least in initial stagedevelopment at least in initial stage

• However, government interventions should be However, government interventions should be carefully designed to avoid problemscarefully designed to avoid problems..

  

88

Factors that support corporate Factors that support corporate bond market development (2)bond market development (2)

• Presence and robustness of institutional Presence and robustness of institutional investorsinvestors Diversified institutional investors Diversified institutional investors

(pension, insurance, mutual funds) (pension, insurance, mutual funds) key to development of debt marketskey to development of debt markets

Presence of defined contribution Presence of defined contribution schemes creates long-term savings schemes creates long-term savings that may create demand for long-that may create demand for long-term debt securitiesterm debt securities

99

Factors that support corporate Factors that support corporate bond market development (3)bond market development (3)

• Presence of large companies within the Presence of large companies within the economy contribute to development of economy contribute to development of bond marketsbond markets Financially sound firms with good Financially sound firms with good

historical performancehistorical performance Able to issue bonds regularly and on Able to issue bonds regularly and on

large enough scalelarge enough scale Accurate, reliable and timely Accurate, reliable and timely

information on these firms available to information on these firms available to marketmarket

1010

Factors that support corporate Factors that support corporate bond market development (3)bond market development (3)

• Corporate debt markets can only Corporate debt markets can only develop if there is active develop if there is active involvement of banks in involvement of banks in development of debt marketsdevelopment of debt markets Banks oppose development of debt Banks oppose development of debt

markets bec. of potential competitionmarkets bec. of potential competition Highly concentrated banking systems Highly concentrated banking systems

may succeed in frustrating may succeed in frustrating development of corporate bond development of corporate bond marketsmarkets

1111

Factors that support corporate Factors that support corporate bond market development (3)bond market development (3)

• Complementary relationship Complementary relationship between banks and corporate between banks and corporate debt marketdebt market Promote more active role of banks Promote more active role of banks

as issuers, investors and as issuers, investors and intermediaries of bond marketsintermediaries of bond markets

Encourage banks to lead efforts in Encourage banks to lead efforts in niche marketsniche markets

1212

Public-Private Sector Public-Private Sector Cooperation in Developing Cooperation in Developing

Corporate Bond Market Corporate Bond Market • Financial sector stability is the

key word Constructive partnership bet. govt, banks,

corporate sector in creating diversified and competitive financial sector

• Sustained government support in development of corporate bond market

Creating benchmark yield curve Strengthening institutional investors Adopting outward looking policies

1313

Public-Private Sector Public-Private Sector Cooperation in Developing Cooperation in Developing

Corporate Bond MarketCorporate Bond Market

• Firms need to adopt to rapid changes in the international market to remain competitive Make data on bond prices and quantities

available on real-time Develop professional information

services

1414

Public-Private Sector Public-Private Sector Cooperation in Developing Cooperation in Developing

Corporate Bond Market Corporate Bond Market • Fostering complementary

relationship between banks and corporate bond market Promote supportive role of

banks in corporate bond market development

Continue to strengthen banking system at the same time initiate development of corporate bond market by removing barriers

1515

Malaysia Bond Market ExperienceMalaysia Bond Market Experience

Size of LCY Bond Market in % GDP

VN3%

ID5%

HK16%

MY24%

PH11%

SG23%

TH18%

Size of LCY Bond Market in USD

SG19%

PH8%

MY23%

ID10%

HK18%

VN1%

TH21%

1616

Malaysia Bond Market ExperienceMalaysia Bond Market Experience

Malaysia Capital market Malaysia Capital market Development BlueprintDevelopment Blueprint

1717

Malaysia Bond Market ExperienceMalaysia Bond Market Experience

1818

Learnings from Malaysian Learnings from Malaysian ExperienceExperience

1919

Learnings from Malaysian Learnings from Malaysian ExperienceExperience

• Deliberate and planned effort to Deliberate and planned effort to develop the Malaysian government develop the Malaysian government and commercial bond marketand commercial bond market

• Efficient and well-functioning Efficient and well-functioning market infrastructuremarket infrastructure

• All rules and regulations to ensure All rules and regulations to ensure the functioning of an orderly the functioning of an orderly market were issued and enforcedmarket were issued and enforced

Thank youThank you

For More InformationFor More Information

Mr. Masato Miyachi, Senior AdvisorMr. Masato Miyachi, Senior AdvisorOffice of Regional Economic Integration (OREI)Office of Regional Economic Integration (OREI)

Mmiyachi@adb.orgMmiyachi@adb.org+63-2-632-6832+63-2-632-6832