Ebook Background Paper East Asian Finance Study Deepening Capital Markets in East Asia
Since 1997, East Asian countries have made remarkable progress in adopting sound macroeconomic policies, reducing the portion of foreign debt in their total debt profile, strengthening domestic financial markets and diversifying their financial markets through development of domestic bond markets and derivatives. The East Asian financial markets are becoming more diversified and sophisticated. The growth of East Asian financial markets during 1998-2004 has also been impressive. As of December 31, 2004, total assets of the financial sector amounted to US$9.3 trillion, which was larger than the financial markets of United Kingdom and Germany. Total assets of the East Asian financial markets have increased three folds from US$3.3 trillion in 1997 to US$9.3 trillion at the end of 2004. There is a keen interest among key decision makers to further diversify their financial markets especially bond markets to improve efficiency of intermediation within the region and increase access for investment to Asian corporations particularly the second tier companies which do not have ready access to investment capital.
With its total size of US$5.5 trillion, the banking sector continues to dominate the financial sector in most East Asian countries. However, the growth of the bond and equity markets has been more rapid since 1997. At the end of 2004, the stock and bond market s together accounted for 40% of the financial sector compared with 37% at the end of 1997. The share of the capital market is likely to increase due to continue growth of the contractual savings industry (pension funds, insurance companies, social securities organizations), which is fueled by high domestic savings and rapidly ageing East Asian societies. The contractual savings institutions will require both equity and fixed income securities in their investment portfolios to match their liabilities.
The development of bond markets in East Asia has been given considerable importance by the key decision makers since 1997. The efforts made by the governments and regulators in the region in developing domestic bond markets have begun to bear fruits and the Asian bond market has become a reality with the total size of over US$1.4 trillion. There are now three bond markets (China, Korea and Malaysia) in East Asia with over US$ 100 billion in market capitalization and growing. Two largest corporate bond markets (Korea and Malaysia) relative to the GDP are in East Asia. The Asian Bond Fund II of US$2.0 billion launched in December 2005 has begun to have notable impact in opening the domestic bond markets to investors.
The East Asian bond market is diverse and can be divided into three groups (Chapter 2). Hong Kong and Singapore, as the premier financial centers, with well- developed bond markets and all the required supporting trading and market infrastructures (efficient trading platforms, custody, and clearing and settlement). Derivative markets are also well developed and participants in these bond markets can hedge interest, currency and credit risks. As the premier financial centers, Singapore and Hong Kong have developed their bond markets mainly to provide benchmarks for private sector and open up their markets to international investors and borrowers. In the second group are Korea, Malaysia, and Thailand which have vibrant bond markets but still below the international benchmarks. Korea and Malaysia have broadly diversified bond markets and their corporate bonds are large by international standards. The bond market in Thailand is developing well and all the required market infrastructures are in place. In the third group are the bond markets of People’s Republic of China (the PRC), Indonesia, and the Philippines that are at different stages of development and further reforms are required to bring them to the international standards.
In East Asia, governments are the major issuers in domestic bond markets accounting for about 46% of outstanding bonds followed by financial institutions (31%) and corporates (23%). There are now four bond markets in East Asia with market capitalization over US$100 billion. Development of corporate bond markets in most countries have been relatively slow and the access is limited to large blue chip companies. However, Korea and Malaysia have been more successful in building their bond markets.
Although the growth of the East Asian bond market has been impressive, the progress in developing a liquid bond markets has been mixed and additional policy measures are required to improve the efficiency of these markets. Secondary markets in most countries are illiquid even in benchmark issues. Liquid government bond markets will facilitate pricing of other debt instruments and riskier financial assets. They will also have direct impact on the degree to which other segments of financial markets (forward and futures markets, including foreign exchange hedging) can be developed to support risk management functions. An efficient and well functioning government bond market is also essential for the conduct of open market operations by the central banks.
Content
Executive Summary
Chapter 1: Introduction
Chapter 2: East Asian Bond Markets
Overviews
The East Asian Bond Markets
Agenda for the Bond Market Development
Measures to improve the efficiency of the East Asian Bond Markets
Chapter 3: The Stock Markets
Chapter 4: Regulatory Framework of Securities Market
Chapter 5: Summary and Conclusions
Annex: Country Profile
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