Thursday, 21 June 2018

Asian bond market: nine years on, all we get is a guide?

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Very excited today. I received a news flash from the lovely people at the Asia Securities Industry & Financial Markets Association, the bank lobby group, trumpeting the publication of the first ASEAN+3 Bond Market Guide.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

It looks like a real masterpiece. Published in two volumes, it comes in at a table-thumping 1,532 pages – with more data, tables and charts than you could possibly shake a stick at. It’s no doubt a fabulous piece of work; the only problem is that it has taken so long to produce that everyone who might have been holding their breath in anticipation has long since keeled over.

I’m reminded of those B-movies that kick off with a shot of the protagonist – in this case, he’s at the launch of the Asian Bond Markets Initiative back in 2003 (yes, that long ago), when APT finance ministers came up with a plan to recycle Asia’s hefty savings in Asia rather than in the West through the development of efficient and liquid bond markets.

Next, our hero goes into an unexplained coma and, then, miraculously wakes up nine years later to complete the guide he had been working on, as if nothing has happened in the interim.

That’s not far from the truth, because really nothing much has happened since then.

In November 2010, I wrote a blog, entitled ”Where are the Tiger Bonds? Asia’s wasted opportunity”. I lamented the lack of concerted action on a pan-regional Asian bond market with harmonised regulation, supervision, clearing, settlement and governance. Intra-regional financing flows could have sealed off the region from the volatility and reversal of capital flows from the US and Europe at the time of the global financial crisis.

While many of Asia’s local bond markets have developed apace since the Asian crisis of 1997, intra-regional financial flows are still tiny. ASIFMA says a more active intra-regional bond market “would help channel regional resources to regional investments, leading to sustained and balanced economic growth”.

Now, here comes the guide – an initiative of the ASEAN+3 Bond Market Forum (ABMF) and the Asian Development Bank – aimed at encouraging cross-border bond issuance and investment in Asia’s local currency bond markets. (ASEAN+3 is comprised of the ASEAN economies – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – plus China, Japan and South Korea.)

Although it is a very useful reference, I doubt the guide will change anything in and of itself. It covers (in detail) market infrastructure; transaction flows, settlement cycles, and numbering; as well as information about the regulatory framework and market practices in 11 jurisdictions. It’s all very worthy. It’s also, in some respects, 1,532 pages of “So what?”

The ABMF wants the guide to increase investor understanding of regional bond markets, and reckons it will assist in setting up the Asian Multi-currency Bond Issuance Programme, which it hopes to introduce before the end of 2013, including possible pilot bond issuance. Hmmm. Let’s wait and see.

Leaving aside the complex issue of what regional central banks will need to do to neutralise regional currency risks in an open regional capital market, the creation of free capital flows between Asian economies will not be achieved by improving knowledge about market operating infrastructures.

Political project

This is first and foremost a political project. Individual jurisdictions need to accept that ironing out regional funding imbalances means that surplus nations will lose some of their savings to deficit nations. That’s the point of a community. Also, the project needs to be endorsed not just via pan-regional communiqués at the political level, but by action.

Asian governments, government instrumentalities and agencies need to put their money where their collective mouths are and issue benchmark bonds in each other’s currencies, with guaranteed liquidity via obligatory market-making, so that regional issuers are genuinely able, over time, to capture funding opportunities and advantages across the region.

I argued in that 2010 blog, and I repeat now, that Asian governments should issue domestic bonds – call them Tiger Bonds – offered in Asian local markets in regional currency tranches.

They should also issue bonds in each other’s markets – call them APT Bonds or some such. The backdrop for this is almost perfect: a pull-back by European banks, in particular, from lending to the region, as a side-effect of deleveraging, will create funding bottlenecks in Asia.

Asia’s relatively few pan-regional banks will not be able to pick up the slack on their own. Just like in a proper B-movie, it’s time for the bond market to come charging to the rescue.

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