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Mr. Zhao, Director General of the International Department, Ministry of Finance, People's Republic of China.
Distinguished participants, Ladies and Gentlemen, Good morning!
On behalf of the Asian Development Bank, I am pleased to welcome you to this seminar on local currency bond issues by foreign multinational corporations jointly organized by the Ministry of Finance of the People's Republic of China and the ADB in this beautiful city of Shanghai.
Following the success of the ASEAN+3 Finance Ministers Symposium on Issuance of Bonds Denominated in Local Currencies by MDBs and Government Agencies in November last year in Beijing, the seminar today will focus on issuance by Multinational Corporations (MNCs).
So why are we all gathered here today? It is by now well recognized that a deep and liquid domestic bond market is an important component of a well-functioning financial system. Well-developed local currency bond markets have important economic benefits. They:
A well-developed bond market is particularly useful for providing the vast long-term funds essential for sustainable growth and poverty reduction in the region. The Asian Development Bank estimates that, between 2005 and 2010, East Asia will require $180 billion, or 6% to 7% of regional GDP annually, in gross investment in physical infrastructure alone. Healthy local bond markets are key to providing the much-needed longer tenors required in infrastructure financing and to avoid currency and maturity mismatches that occur when projects that produce revenue in local currency are financed with foreign currency loans.
In recent years, many countries in the region have accumulated a large amount of foreign exchange reserves, reflecting a surplus of domestic savings. Thus bond markets could also be effective in recycling some of the region's huge savings into regional investment.
At the same time, several events since the onset of the Asian financial crisis give cause for optimism that the numerous initiatives launched in the past few years will lead to concrete policy action in the years ahead. There is a desire among policymakers to insulate their countries from another financial crisis and bond market development is essential to mitigate this risk. Since the crisis, there appears to be a new willingness among countries to cooperate on financial development to lessen the risk of contagion and to provide an alternate channel for investments of regional assets.
Ladies and Gentlemen - Progress in developing local bond markets in the region has been significant: Asian local currency bond markets have experienced significant growth since the Asian financial crisis, doubling in size between 1997 and 2002. Total outstanding amounts are now equivalent to 50% of GDP in the region - significantly higher than before the financial crisis. Governments have made substantial efforts in developing more liquid yield curves, and substantial work on improving the market infrastructure has been carried out, addressing issues in areas such as clearing and settlement systems, credit ratings, credit guarantees, and taxation.
One major regional effort has been the ASEAN+3 Asian Bond Market Initiative, which is a relatively new and comprehensive program for bond market development in countries within the ASEAN+3 group. Since the initiative was launched last year, six working groups have been established to coordinate policy efforts among the member countries in specific areas that are important for bond market development, with the People's Republic of China leading the working group on local currency bonds.
Let me now take this opportunity to highlight ADB activities in this area. In support of the ASEAN+3 working groups mentioned earlier, the ADB has also established six working groups internally. Through its working groups, the ADB has been actively supporting the development of bond markets in the region through various means including loans, technical assistance to governments and regulators, and bond issuance in various Asian markets. Furthermore, in order to facilitate the dissemination of information, on the outset of its 37th Annual Meeting in Jeju in May this year, ADB has supported ASEAN+3 with the recently launched website on regional bond markets, known as AsianBondsOnline. Other efforts involve the development of a networking arrangement among local credit rating agencies to enhance cooperation, as well as studies on a regional credit guarantee mechanism and regional settlement linkages. These studies should be completed by the end of this year.
The ADB also aims to promote regional bond market development as an active issuer in the region. Our borrowing activities in the region date back to the early 1970s when we opened the domestic bond market of Japan to foreign issuers through the first ever Samurai bond issue. Since then there have been many similar transactions in the regional markets such as Hong Kong, China; Korea; Singapore; Taipei,China; and most recently our debut Indian rupee bond issue in February this year.
Progress in developing bond markets in the region has been impressive. Yet, much remains to be done to further improve the development of bond markets in the region, as many markets remain underdeveloped, are dominated by government issues, or suffer from lack of secondary market liquidity. Important issues that need to be addressed are in the areas of market infrastructure, investment regulations, disclosure requirements, legal arrangements, credit ratings, and the development of derivative markets.
Colleagues - In line with the ASEAN+3 Asian Bond Market Initiative, there is a growing interest among governments in the region to open their bond markets to foreign issuers, including multinational corporations. Thailand, for example, recently announced that international financial institutions such as the ADB as well as governments of ASEAN+3 and Germany and their financial institutions are now allowed to tap into its domestic bond market. In Thailand, the ADB has completed all necessary preparations and is ready to launch its debut baht bond issue when the Thai Government gives its final approval, and subject to market conditions and cost considerations.
Other countries such as the PRC, Malaysia and the Philippines are also actively considering market-opening initiatives. The PRC has advised ADB that the State Council has recently agreed in principle to allow international financial institutions to issue renminbi-denominated bonds, and related rules and regulations of such issue are currently under consideration. At the same time, the ADB hopes to start discussions soon with Malaysia regarding the possibility of issuing ringgit-denominated bonds in its domestic capital market. In addition, in light of recent development in potential Peso lending to a private sector entity, ADB will resume its discussion with the Philippine Government for its Peso bond issue in the near future.
Participation of MNCs in domestic bond markets can have significant benefits for the development and deepening of local bond markets. Among the key benefits are to attract additional foreign investors and banks, and to diversify advantages for local investors resulting from a greater choice of investment opportunities. MNCs can also derive significant benefits from accessing local currency markets such as mitigating currency and maturity mismatches, lowering funding costs, and diversifying funding sources.
However, there are also some policy issues that need to be considered when opening domestic bond markets to MNCs and other foreign issuers. In particular, these relate to the required opening of the capital account if local proceeds of a domestic bond issue are to be swapped into foreign currency. The economic policy implications thus need to be carefully assessed in the overall context of financial and economic liberalization. Another potential issue concerns the possible "crowding out" effect if foreign issuers are perceived to compete with local issuers.
As you are well aware, there is significant diversity regarding the development of capital markets amongst the 13 countries that comprise the ASEAN+3 group, ranging from well-developed markets such as Japan, Korea, and Singapore to countries where bond markets do not yet exist such as Cambodia, Laos, and Myanmar. In my view, this diversity offers an important opportunity to learn from the experience of the more advanced countries in the region as well as to identify best practices with regard to bond market development in general, and opening local currency markets to MNCs in particular. I hope that today's seminar will play an important role in catalyzing new learning and insights into these important issues.
With presentations on the benefits and challenges of local currency bond issues, country case studies, and views from both issuers and investors in the market, I believe that this meeting will help countries in setting their policies and regulations for issuance by MNCs in their markets. This is particularly true for those countries that are currently considering opening up their market to foreign issuers.
Today's seminar and the other programs set by the working groups of the ASEAN+3 initiative are important building blocks in paving the way for the development of vibrant bond markets in the region. During the presentations today, I encourage you to engage in frank and free exchange of ideas and issues. In closing, I would like to wish the seminar success!
Thank you for your attention.