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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Asian Bond Conference today (November 14):
The Asian Bond and Securitisation Markets in Perspective
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Distinguished Guests, Ladies and Gentlemen,
I am very pleased to be invited to give this luncheon address today. Let me first congratulate the organisers for successfully putting together this conference which has gathered so many key policy makers, market experts and participants, and rating agencies across the region. The development of the Asian bond market is now at an important stage and a summit like this is certainly a positive contribution. I hope to take this opportunity to give a brief review of the achievements so far in developing the Asian bond markets, in particular from the perspective of Hong Kong's experience, and share with you my observations on the way forward.
The Asian bond markets
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Statistics show that the Asian bond markets have come a long way since the Asian financial crisis. The outstanding amount of local currency bonds in Asia excluding Japan has increased by 167% since 1996, and the amount as a percentage of GDP has increased from 24% to 44.1%. Though the size of these markets has yet to be comparable to that of the more developed markets such as the US and EU countries, the annual growth rate of the local currency bond markets of emerging Asia has far exceeded that of the developed countries since the crisis. While the increase has been particularly apparent for government bonds, it is encouraging to see that issues of private sector bonds have also increased notably. In Hong Kong's case, our bond market has grown substantially in recent years. For the past 10 years, the total outstanding amount of the Hong Kong dollar debt market has increased by more than 300%, and the amount as a percentage of GDP has also increased from 14% to 47.1%. The Asian bond markets not only have grown in size, but also in depth with the introduction of many new instruments and growing liquidity.
Four major building blocks to success
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This encouraging development did not come by chance. I could see four major building blocks which have worked together to bring about the achievements today.
Consensus
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First of all, there has been a strong consensus among the Asian economies concerning the importance of deep and liquid bond markets.
Traditionally, Asian economies relied on bank and equity financing to fund their business activities. A heavy reliance on bank financing led to a significant mismatch in the maturity structure of assets and liabilities. Funding of long-term investments such as infrastructure projects by bank loans made many corporations and regional economies vulnerable to economic swings.
In addition, Asian borrowers in the past tended to borrow in foreign currency and then swapped them into local currency. This created a currency mismatch problem.
The Asian financial crisis highlighted the importance of establishing a deep, liquid and mature bond market so as to avoid over-reliance on bank and equity financing. This strong consensus provides a firm basis for promoting efforts at both domestic and regional levels to foster the growth of Asian bond markets.
High-level policy support
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The second is high-level policy support. Recognising the need to strengthen the robustness of the financial system in the region and to improve financial intermediation, Asian governments have, over the years, demonstrated strong determination and commitment in promoting the domestic and regional bond markets. I myself have met with the finance ministers of other Asian economies at various conferences and meetings, and I notice that we all share this common goal of joining hands to promote the bond markets in the region. We ministers realise this is not just a domestic issue, but a regional matter involving cross-market co-operation if we are to have a large and sustainable pool of investors or issuers. This policy direction is also strongly supported by international institutions such as the IMF, the World Bank, as well as many analysts and commentators around the world.
Domestic reforms
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The third key building block is the commitment to domestic reforms by Asian governments. Many Asian governments have been very active in taking forward reforms in the domestic bond market, with a view to opening up the markets by removing both local and cross-border impediments such as capital controls and taxes, promoting new products and hedging instruments, strengthening market infrastructure and enhancing liquidity.
In Hong Kong, given our fundamental strengths including free and open financial markets with free flow of capital, large international investor base, rule of law, good standards of corporate governance as well as a rich pool of international financial intermediaries, we consider our bond market very well-positioned to be developed into Asia's bond centre, a platform for both issuers and investors in the region. In particular, I hope more and more Mainland enterprises can make use of our bond market to raise capital from Hong Kong and international investors. As of end October, over 20 Mainland enterprises have already issued and listed their bonds in Hong Kong, raising about US$8,500 million. To further promote and strengthen our local bond market, we have spearheaded reforms in recent years. For instance, on regulatory reform, we promulgated new guidelines to facilitate the marketing of debt instruments to the public, and introduced a series of amendments to the Companies Ordinance to streamline bond issuance. The Securities and Futures Commission is consulting the public on further reforms to modernise the regime governing the public offering of shares and debentures. On taxation, Hong Kong is renowned for our simple and low tax regime with no withholding tax. To encourage issuance of good quality, long-term bonds in Hong Kong, we expanded the tax concession for Qualified Debt Instruments in 2003. Also we have put in place world-class multi-currency clearing and settlement systems with real-time links with a number of major Asian and international securities depositories to facilitate secure and efficient settlement of cross-border securities transactions. We enacted legislation last year to establish an oversight regime for important clearing and settlement systems in Hong Kong and provide statutory protection to ensure finality of settlement of transactions effected through such systems. In December, 2004, we improved our Central Moneymarkets Unit (CMU) to facilitate the settlement of interbank Hong Kong dollar repo transactions, using eligible securities lodged with the CMU as collateral.
In addition, to promote the development of the local bond market and to fund capital projects, the Government launched a HK$6 billion toll road securitisation bond in May, 2004, and completed a HK$20 billion global bond offering two months later in July the same year. Both issues were well received by local and international investors. The high subscription rates and the participation of many institutional investors from the region and other places such as Europe and the United States have demonstrated Hong Kong's favourable environment for large scale issuance of debt securities. Furthermore, following the one-year pilot scheme, the Hong Kong Monetary Authority launched a refined Retail Exchange Fund Notes Programme in May, 2005, to help promote the development of the retail bond market. All these programmes, together with increased debt issuance activities by the private sector, have helped promote the bond market at both institutional and retail levels, and also served to set the benchmark yield curves for pricing of portfolios and structuring of new issue financing.
Regional co-operation
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The fourth major building block is a strong momentum in regional co-operation. Promoting the bond market is high on the agenda of a number of regional fora. Many constructive initiatives have been taken forward and substantial progress has been made. Under the banner of the APEC Finance Ministers Meeting, the initiative to promote the development of securitisation and credit guarantees, which Hong Kong was one of the co-sponsors, has successfully raised the awareness and understanding of many Asian economies of the benefits of securitisation and credit enhancements, and also helped to identify the market impediments specific to individual economies. I am delighted to see that securitisation continues to grow in Asia, including in Hong Kong. Many economies have already made much progress in regulatory and legal reforms in this regard. For example, the Mainland has recently advanced its pilot program of asset securitization by issuing administrative rules on credit asset securitisation. In Hong Kong, the popularity of the Government's securitization bonds launched in 2004 reflects that retail investors have a strong appetite for such products.
Under the Asian Bond Market Initiative of the ASEAN+3 forum, several economies have agreed to allow multilateral development institutions to issue bonds in their local currencies. Then of course there has been the setting-up of the Asian bond funds (ABFs) by the EMEAP central banks. Being one of the major proponents of this initiative, Hong Kong is very delighted to see the successful launch of the funds. The size of the ABF Hong Kong Bond Index Fund and the Pan Asia Index Fund grew by 42% and 12%, while the size of the ABF Malaysia Bond Index Fund and the ABF Singapore Index Fund increased by 27% and 35 % respectively.
The launching of the ABF2 is of great significance as it involves actually setting up funds to invest in the local currency markets. It is important not just because it enhances demand or turnover in local markets directly. Rather, it has helped to identify, through direct operation in the markets, the barriers that exist to market development and accelerate regulatory reforms in several markets in the region.
In addition, the ABF2 is bringing new instruments for investors to invest in Asian bonds. For instance, the ABF Hong Kong Bond Index Fund is the first ever bond exchange-traded fund to be listed in Hong Kong as well as Asia. The introduction of these funds along with a set of transparent and replicable benchmark indices for Asian local currency bond markets has also improved market infrastructure in Asia, and would facilitate the development of other fixed income and derivative products.
Closing remarks: A positive outlook
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In summary, I am very optimistic about bond market developments in Asia. The four building blocks I just mentioned, namely, consensus, high-level policy support, domestic reforms and active regional cooperation, have contributed to a strong momentum among Asian economies to join hands in pursuing effective and practicable reforms for developing deep and liquid bond markets in Asia. These reforms are instrumental in building the necessary infrastructure and regulatory environment capable of supporting bond markets.
There are often criticisms about the small size and lack of liquidity of the markets, based on comparisons with highly developed markets. I would like to respond with some observations. I think the criticisms actually point to the potential that exists for the Asian bond markets to develop further. We all know that there is no shortage of savings in Asia. According to a world wealth report published recently, the wealth of high-net-worth individuals in Asia Pacific reached US$7.2 trillion in 2004, and is expected to grow by 6.9% per annum in the next five years. On the other hand, the total foreign exchange reserves held by the EMEAP Group of central banks now exceeds US$2 trillion. There are also tremendous assets held by banks, fund managers and insurance companies in the region which look for high quality and long-term bonds for investment. Given sufficient time for the markets to grow and infrastructure to be strengthened, I have no doubt the Asian bond markets will grow to their full potential.
I am confident that the Asian bond markets are developing in the right direction, with a great deal of potential to grow. The implementation of all the domestic and regional initiatives has already laid a solid foundation for further developments. In Hong Kong, we will continue with these efforts, work together with other economies and the industry to keep the momentum going, and develop Hong Kong into a major bond centre for the region.
Finally, I wish this event a great success. Thank you very much.
Ends/Monday, November 14, 2005
Issued at HKT 15:10
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