Eddie Yue: Developing local-currency bond markets in Asia
Statement by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority
and Head of the Delegation of Hong Kong, at the 45th Asian Development Bank Annual
Meeting, Manila, 4 May 2012.
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I would like to thank the Government of the Philippines for hosting the 45th Annual Meeting
of the Asian Development Bank (ADB). I would also like to congratulate ADB on the
successful conclusion of the Tenth Replenishment of the Asian Development Fund (ADF XI),
which would provide critical resources to ADB to further its work in poverty reduction in Asia.
The global economy has shown signs of improvement in 2012 following a marked slowdown
amid the intensification of the euro zone debt crisis in the latter part of last year.
Nevertheless, significant downside risks remain, with the euro zone debt crisis yet to be fully
resolved and rising oil prices adding further uncertainty to the recovery outlook.
Asia has remained resilient so far, in large part attributable to the reforms taken by regional
economies over the years to strengthen economic fundamentals, improve fiscal discipline
and enhance the resilience of their financial systems since the Asia financial crisis.
Nevertheless, the region is not immune from the lingering fragility in the global environment.
To date, the deleveraging by European banks has not caused significant short-term credit
tightening in Asia, with banks in the region and elsewhere having stepped in to fill the gap left
by European banks. However, the ability of Asian banks to continue to take up the slack
could be constrained by the already high loan-to-deposit ratio and limited access to US dollar
funding. More importantly, it is doubtful whether these non-European banks would have the
appetite to take up long-term project and infrastructure financing, which is a specialised
business traditionally dominated by the European banks.
Any cutback in infrastructure financing could have serious repercussions for developing Asia,
which has a strong need to build and upgrade infrastructure networks to promote sustainable
growth, create employment opportunities and boost competitiveness. ADB estimates that
Asia requires as much as US$8.3 trillion in overall infrastructure investment between 2010
and 2020, with an average of US$750 billion in annual infrastructure spending. It is therefore
vital to further develop the capital markets in Asia, in particular the local-currency bond
markets, to effectively channel the region's vast savings to meet its huge demand for
infrastructure financing.
Asian governments have been making efforts to develop the bond markets. At the national
level, initiatives such as consolidation of issuance in a few benchmark maturities and
development of interdealer markets have helped increase liquidity and improve reliability of
yield curves in a number of jurisdictions. Meanwhile, collaborative efforts are being made in
regional forums. A notable example is ASEAN+3's Asian Bond Markets Initiative with the
strong support from ADB. The Initiative has been looking into both demand and supply side
issues pertinent to the development of the bond markets. Under the Initiative, a Credit
Guarantee and Investment Facility has been set up as a Trust Fund of ADB to provide credit
guarantee to allow investment-rated issuers to issue local currency bonds in
ASEAN+3 markets. Another good example is the Asian Bond Fund project of the Executives'
Meeting of East Asia-Pacific Central Banks (EMEAP). The launch of the ABF funds
introduced to the region's bond markets a new low-cost and efficient product in the form of
passively-managed index bond funds and helped catalyse infrastructure, tax and regulatory
reforms at both the regional and domestic levels. The Hong Kong Monetary Authority took an
active part in the design and implementation of the project.
These efforts, along with the rapid economic growth and improved investment climate, have
contributed to considerable growth in the local currency bond markets. According to ADB, the
amount of local currency bonds outstanding in emerging East Asia increased by more than
ten folds from US$528 billion prior to the Asian financial crisis in 1996 to US$5,479 billion in
2011. We have also seen the interesting development of offshore bond markets. In Hong
Kong, the RMB bond market has grown substantially since the first issuance in 2007, with
total issuance increased to over RMB 100 billion in 2011 from RMB 10 billion in 2007. The
range of issuers has also diversified, from predominantly the sovereign and banks in China
to multinational companies and international financial institutions. Among the latter, ADB was
the first to issue RMB bond in Hong Kong in October 2010. A number of multilateral agencies
also issued RMB bonds in Hong Kong after ADB's debut issue. With the rapid growth of
China's cross-border trade and investment flows, the offshore RMB bond market would
provide a useful financing platform and facilitate the greater use of RMB in these
transactions, thereby minimising the currency risk associated with the use of a third currency.
Notwithstanding the encouraging developments over the past years, the capacity of the
regional bond markets is still limited compared with the huge infrastructure and other
financing needs of the region, resulting in heavy reliance on bank financing. Much work still
needs to be done, including but not limited to expanding the issuer and investor types,
gradual liberalisation of barriers to entry of non-resident investors, promoting financial
infrastructure linkages, improving corporate disclosure and transparency, more
standardisation in legal and governance terms, to name a few. Policymakers will have a key
role to play in facilitating market developments and removing market impediments in the
process. And we hope to see ADB, the region's long-standing partner in promoting bond
market development, to further its efforts and cooperation with governments in the region on
this front.
Thank you.