Published November 20, 2003
Falling US$ fuels Asian bond market urgency
Market players across the region now appear as keen as government officials are to get the market up and running
By ANTHONY ROWLEY IN TOKYO
FOR years, Asian policymakers have talked of developing a regional bond market but little emerged by way of tangible results - until recently, that is, when a deluge of official initiatives occurred.
More local flavour: a second 'Asian Bond Fund' will be launched soon which will invest in Asian-currency securities rather than in US dollar-denominated bonds
Market players now appear as keen as do government officials to get the market up and running, and the key to why this is so can be found in the fact that the US dollar has plunged to new lows against the euro and the price of gold has risen above US$400 an ounce for the first time since 1996.
Central banks and other investors in Asia are feeling dangerously overexposed to the dollar and vulnerable to major capital losses if it continues its downward trajectory, which it almost certainly will.
As a short-term hedge, they are diversifying into euro and into gold. But for the longer term, policymakers want to create a new repository capable of absorbing local savings and channelling them into local investments, and this what is driving the Asian bond market initiatives so fast.
It is not hard to see why there is flight from the US dollar. The United States has heavy and growing twin (current account and budgetary) deficits and, with the economy there picking up steam again, the chances of inflation coming back are real, given the huge amounts of money the Federal Reserve has pumped into the system.
Asia meanwhile has a massive US$1.8 trillion of official foreign exchange reserves of which most is held in US dollars (except where countries like Singapore have been shrewd enough to minimise holdings).
As a paper presented last week during a conference on Asian bond market development held at the University of Hong Kong put it: 'The US dollar's weakness has suggested to the Asian investor that capital preservation may not be compatible with a passive accumulation of US bonds.'
But, as CFC Securities chief investment strategist Michael Preiss noted at the same meeting: 'People in Asia want to reduce their exposure to the dollar but there is nowhere to go.' In China, as Mr Preiss and others noted at the conference organised by the Milken Institute and the Asian Institute of International Financial Law, there is 'a sense of urgency there to develop the Asian Bond Market'.
Japan is equally keen on the idea and is pushing it hard through the Asean+3 group. The Asean-Japan Commemorative Summit to be held later this month in Tokyo will very likely come up with some new initiative with regard to the Asian bond market. Thailand is also a prime mover behind initiatives to launch a market.
Of course, it will not develop overnight and, as Marshall Mays, director of Emerging Alpha Investment Advisors, says, Asian bonds designated in local currencies and designed to be traded across borders will provide only a marginal outlet for regional funds at first. Even so, with 42 per cent of its debt now owned by Japan and China alone, the US government has cause to be nervous.
On the other hand, global investors can find reason to cheer in the fact that the Asian bond market promises to provide new non-dollar outlets, as Charles Dallara, managing director of the Institute of International Finance noted last week.
The true significance of recent official moves to foster an Asian bond market is only now beginning to emerge, against the background of the declining dollar. There is a sense of urgency about the need to get things moving (although still not sufficiently so, it seems, to satisfy the 'godfather' of regional bond market development, Thai Prime Minister Thaksin Shinawatra).
Apart from Asean+3 moves, a pan-Asian group of central banks will shortly announce a new initiative, as reported in this newspaper on Monday.
The central banks and monetary authorities will launch a second 'Asian Bond Fund', following the setting-up of a similar bond fund several months ago. This new vehicle will differ from the first one in a number of important respects, among which the principal one is that it will invest in Asian-currency securities rather than in US dollar-denominated bonds.
It will also embrace a wider group of subscribers and will be of a larger size (probably at least US$1.5 billion) than the original US$1 billion fund.
The eleven central banks involved in the launch of the first Asian Bond Fund were all members of the Executive Meeting for Asia and the Pacific (EMEAP) and comprised the Reserve Bank of Australia, People's Bank of China, Hong Kong Monetary Authority, Bank of Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Banko Sentral ng Pilipinas, Monetary Authority of Singapore and Bank of Thailand.
Those of India and Kazakhstan are expected to be among the ones that will subscribe to the new fund, and India alone has offered to subscribe US$1 billion of its own reserves.
The objective of the Asian Bond Funds is partly to instil confidence among Asian and global investors that local currency-denominated securities issued by Asian sovereign and other entities constitute a viable medium for investment.
Of course, there are still many other issues to address such as the need for more efficient bond trading, settlement and clearing systems in Asia, abolition or reduction of withholding taxes on interest and capital gains earned on holdings of government bonds by non-resident investors plus the need for common rating systems.
But these will come once acceptability of Asian bonds is established.
The Thai government will meanwhile seek to accelerate the growth of a cross-border market in Asian currency bonds by issuing special bonds with a total value of 200 million baht (S$8.6 million), to be sold principally to Japanese institutional investors.
Thailand is in the process of launching a special trading facility for 'Asian bonds' and institutional investors from South Korea, Malaysia and Taiwan have already purchased baht-denominated issues. Thailand also plans to form an Asian Bond Institute to coordinate the plethora of regional initiatives designed to promote bond market development.
The scope for creating an Asian bond market of much larger dimensions than exists now appears to be real. Japan has a government debt market worth some 5 trillion yen (S$79.5 billion), and in China, where the current size of the government debt market is only around US$240 billion, this is expected to grow very rapidly as state debt is converted into bonds. South Korea and India have government debt markets worth some US$200 billion in total. All these are expected to expand significantly in future under the impact of increased government spending on social welfare and recapitalising banking systems.
The writer is BT's Tokyo correspondent
Grüße
NL
Falling US$ fuels Asian bond market urgency
Market players across the region now appear as keen as government officials are to get the market up and running
By ANTHONY ROWLEY IN TOKYO
FOR years, Asian policymakers have talked of developing a regional bond market but little emerged by way of tangible results - until recently, that is, when a deluge of official initiatives occurred.
More local flavour: a second 'Asian Bond Fund' will be launched soon which will invest in Asian-currency securities rather than in US dollar-denominated bonds
Market players now appear as keen as do government officials to get the market up and running, and the key to why this is so can be found in the fact that the US dollar has plunged to new lows against the euro and the price of gold has risen above US$400 an ounce for the first time since 1996.
Central banks and other investors in Asia are feeling dangerously overexposed to the dollar and vulnerable to major capital losses if it continues its downward trajectory, which it almost certainly will.
As a short-term hedge, they are diversifying into euro and into gold. But for the longer term, policymakers want to create a new repository capable of absorbing local savings and channelling them into local investments, and this what is driving the Asian bond market initiatives so fast.
It is not hard to see why there is flight from the US dollar. The United States has heavy and growing twin (current account and budgetary) deficits and, with the economy there picking up steam again, the chances of inflation coming back are real, given the huge amounts of money the Federal Reserve has pumped into the system.
Asia meanwhile has a massive US$1.8 trillion of official foreign exchange reserves of which most is held in US dollars (except where countries like Singapore have been shrewd enough to minimise holdings).
As a paper presented last week during a conference on Asian bond market development held at the University of Hong Kong put it: 'The US dollar's weakness has suggested to the Asian investor that capital preservation may not be compatible with a passive accumulation of US bonds.'
But, as CFC Securities chief investment strategist Michael Preiss noted at the same meeting: 'People in Asia want to reduce their exposure to the dollar but there is nowhere to go.' In China, as Mr Preiss and others noted at the conference organised by the Milken Institute and the Asian Institute of International Financial Law, there is 'a sense of urgency there to develop the Asian Bond Market'.
Japan is equally keen on the idea and is pushing it hard through the Asean+3 group. The Asean-Japan Commemorative Summit to be held later this month in Tokyo will very likely come up with some new initiative with regard to the Asian bond market. Thailand is also a prime mover behind initiatives to launch a market.
Of course, it will not develop overnight and, as Marshall Mays, director of Emerging Alpha Investment Advisors, says, Asian bonds designated in local currencies and designed to be traded across borders will provide only a marginal outlet for regional funds at first. Even so, with 42 per cent of its debt now owned by Japan and China alone, the US government has cause to be nervous.
On the other hand, global investors can find reason to cheer in the fact that the Asian bond market promises to provide new non-dollar outlets, as Charles Dallara, managing director of the Institute of International Finance noted last week.
The true significance of recent official moves to foster an Asian bond market is only now beginning to emerge, against the background of the declining dollar. There is a sense of urgency about the need to get things moving (although still not sufficiently so, it seems, to satisfy the 'godfather' of regional bond market development, Thai Prime Minister Thaksin Shinawatra).
Apart from Asean+3 moves, a pan-Asian group of central banks will shortly announce a new initiative, as reported in this newspaper on Monday.
The central banks and monetary authorities will launch a second 'Asian Bond Fund', following the setting-up of a similar bond fund several months ago. This new vehicle will differ from the first one in a number of important respects, among which the principal one is that it will invest in Asian-currency securities rather than in US dollar-denominated bonds.
It will also embrace a wider group of subscribers and will be of a larger size (probably at least US$1.5 billion) than the original US$1 billion fund.
The eleven central banks involved in the launch of the first Asian Bond Fund were all members of the Executive Meeting for Asia and the Pacific (EMEAP) and comprised the Reserve Bank of Australia, People's Bank of China, Hong Kong Monetary Authority, Bank of Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Banko Sentral ng Pilipinas, Monetary Authority of Singapore and Bank of Thailand.
Those of India and Kazakhstan are expected to be among the ones that will subscribe to the new fund, and India alone has offered to subscribe US$1 billion of its own reserves.
The objective of the Asian Bond Funds is partly to instil confidence among Asian and global investors that local currency-denominated securities issued by Asian sovereign and other entities constitute a viable medium for investment.
Of course, there are still many other issues to address such as the need for more efficient bond trading, settlement and clearing systems in Asia, abolition or reduction of withholding taxes on interest and capital gains earned on holdings of government bonds by non-resident investors plus the need for common rating systems.
But these will come once acceptability of Asian bonds is established.
The Thai government will meanwhile seek to accelerate the growth of a cross-border market in Asian currency bonds by issuing special bonds with a total value of 200 million baht (S$8.6 million), to be sold principally to Japanese institutional investors.
Thailand is in the process of launching a special trading facility for 'Asian bonds' and institutional investors from South Korea, Malaysia and Taiwan have already purchased baht-denominated issues. Thailand also plans to form an Asian Bond Institute to coordinate the plethora of regional initiatives designed to promote bond market development.
The scope for creating an Asian bond market of much larger dimensions than exists now appears to be real. Japan has a government debt market worth some 5 trillion yen (S$79.5 billion), and in China, where the current size of the government debt market is only around US$240 billion, this is expected to grow very rapidly as state debt is converted into bonds. South Korea and India have government debt markets worth some US$200 billion in total. All these are expected to expand significantly in future under the impact of increased government spending on social welfare and recapitalising banking systems.
The writer is BT's Tokyo correspondent
Grüße
NL
