Joseph Yam: APEC initiative on development of securitisation and credit
guarantee markets
Opening remarks by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the
Second High-Level Policy Dialogue, APEC Initiative on Development of Securitisation and Credit
Guarantee Markets, Hong Kong, 22 March 2004.
* * *
It is a pleasure to welcome you all to this Second High-Level Policy Dialogue under the APEC Initiative
on Development of Securitisation and Credit Guarantee Markets. We are honoured that
Mr Gwang-Lim Kim and Mr Jamil Kassum will be opening this Dialogue, and the excellent list of
participants promises a very constructive and lively discussion.
Hong Kong, China is pleased to co-chair, with Korea and Thailand, the APEC Initiative on
Development of Securitisation and Credit Guarantee Markets. On behalf of all three co-chairs, I would
like to extend our sincere thanks to the World Bank for its considerable contributions to this Initiative.
These contributions range from active participation to sponsoring experts to provide technical advice
to APEC member economies on how to develop their domestic securitisation and credit guarantee
markets.
It is generally recognised that there is considerable room for improvement in the efficiency of financial
intermediation in this region. The bulk of savings find their way back to the region largely in the form of
foreign portfolio flows and short-term banking credits, which present risks to financial stability. Local
corporations have been relying too much on bank credits and equity markets as the major sources of
financing.
Among the various measures that have been put forward to address the structural impediments to the
development of the bond market, securitisation, coupled with credit enhancement, provides the most
effective and immediate solution. Securitisation enables borrowers to issue asset-backed securities
that can enjoy a credit rating higher than a single borrower can obtain on its own. When combined with
credit enhancement and guarantee arrangements, these securities can further attain a credit rating
high enough to meet the requirements of investment managers. Securitisation will also help smaller
corporations gain access to regional bond markets and reduce their reliance on short-term commercial
bank finance.
Securitisation is gradually gaining momentum in Hong Kong. The Hong Kong Mortgage Corporation
(HKMC) has been issuing mortgage-backed securities since 1999. More recently, synthetic
securitisation and credit card receivables securitisation transactions began to appear. Not only is
securitisation a tool for developing the bond market, it is also useful for financing infrastructure
projects. The Hong Kong SAR Government intends to securitise the income receipts of five toll tunnels
and the Tsing Ma Bridge to raise more than HK$6 billion in the coming months.
It is against this background that the idea for this APEC Initiative was conceived. The objectives of the
Initiative are to promote the understanding and awareness of the importance of securitisation and
credit guarantees to bond market development in the region, and to assist APEC member economies
in identifying market impediments and taking concrete steps to remove them. We tackle the
impediments in the domestic bond markets first, so that the regional bond market can be developed
from liquid and deep domestic bond markets.
The Initiative comprises two core parts. The first part involves expert panel visits to the APEC
economies interested in developing their domestic securitisation and credit guarantee markets. The
first panel visits, to China and Mexico, were launched in 2003, and a second panel visit was made to
Thailand earlier this month. Draft action plans have been prepared for the economies receiving expert
advice. The second part of the Initiative involves the holding of policy dialogues to promote
understanding and exchange views about securitisation and credit guarantee markets. The first policy
dialogue under the Initiative was held in April 2003 in Seoul, Korea. We are delighted that Hong Kong
is now the host for this second policy dialogue.
This APEC Initiative aims at developing the bond markets from the supply perspective. Two other
initiatives in the region tackle the issue in a complementary way. An initiative by ASEAN+3 focuses on
facilitating access for a wide variety of issuers to the regional bond markets and on creating an
environment conducive to the development of bond markets. Working groups have been established
to examine the creation of new securitised debt instruments, issuance of debt by international financial
institutions, regional credit guarantees and enhancement facilities, as well as the establishment of
local and regional credit rating and credit enhancement agencies.
Meanwhile, a group under EMEAP is developing the Asian Bond Fund (ABF). The first phase of ABF,
or ABF1, has a size of about US$1 billion and was launched in June 2003. The Fund is now fully
invested in US dollar denominated bonds issued by sovereign and quasi-sovereign issuers in EMEAP
economies. ABF1 is an important step forward in promoting the efficiency of financial intermediation in
the region. It helps to channel a small portion of the very sizeable official reserves held by the Asian
economies back into the region. After the launch of ABF1, the EMEAP Group is now studying the
extension of the ABF concept to local currency-denominated Asian bond funds, or ABF2.
ABF2 will have a positive impact on the demand and supply of local currency bonds in the region, as
well as improving the market infrastructure. On the supply side, ABF2 will provide a new asset class to
international investors who wish to have a well-diversified exposure to Asia's bond market. On the
demand side, the investment of EMEAP Group in ABF2 will help foster an increased interest in Asian
currency bonds amongst domestic and regional investors. Individual EMEAP economies can also
leverage on the interest and momentum generated from the collective investment of the EMEAP
central banks to further develop their domestic bond markets by improving their market infrastructure
and removing market impediments. This should further contribute to the broadening and deepening of
local currency bond markets in the region.
I think you will agree with me that the heterogeneous nature of the bond markets in this region
presents considerable difficulties to developmental efforts. However, I am very pleased to note the
many initiatives now in place, and governments have moved from "words" into "action". Academics
and market practitioners have also been supporting the public sector initiatives by providing valuable
and practical advice on the action plans to remove market impediments. The timing for development
has never been better. Let us continue to work closely together, through bond market development, to
enhance the diversity, and therefore the stability and efficiency, of financial intermediation in the
region.
Thank you.