## _wp11132 - References

## Source details

**Canonical URL:** [_wp11132 - References](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11132.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11132.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11132.pdf.json)

---

### I. Introduction
- Post-1997–1998 regional crisis policy focus: develop domestic debt markets to reduce foreign exchange mismatches and concentration of credit and maturity risks in banks (Committee on the Global Financial System [CGFS] 2007b; Turner 2009).
- Local currency bonds emphasized as they constitute a significant share of emerging bond markets, especially in Asia (Figure 1).
- Purposes of liquid and deep domestic debt markets:
  - diversify funding of governments, households, and corporations;
  - attract financing for infrastructure needs;
  - broaden assets for local institutional and retail investors;
  - provide an additional channel for financial intermediation if banks are stressed (Gyntelberg, Ma, and Remolona (2006); Gyntelberg (2007); Jiang, Tang, and Law (2002)).
- Crisis impact and recovery:
  - severe retrenchment of capital inflows during the global financial crisis; domestic bond markets saw high volatility and substantially lower liquidity in Q4 2008 (Figures 2 and 3).
  - drop in domestic bond issuance in 2008; recovery in 2009 due to fiscal stimuli and renewed capital inflows.
- Paper scope:
  - Section II: state of local currency debt markets;
  - Section III: main obstacles;
  - Section IV: policy responses;
  - concluding remarks.

### II. The State of Development

A. Borrowers and Lenders
- Pre-crisis external issuance rose due to lower costs of foreign currency-denominated issuance in G3 currencies (U.S. dollar, euro, and yen) and favorable credit ratings and diversification in currency denomination.
- Determinants of borrowing mode:
  - cost of borrowing remains primary determinant; maturity and diversification gaining importance.
  - domestic bond issuance often more costly and cumbersome than bank lending; corporate finance remains bank-dominated and relationship-based.
  - preference for private placements to save on regulatory costs (registration, prospectus, disclosure).
- Corporate bond market development (relative positions):
  - relatively more developed: Hong Kong SAR, Korea, Malaysia, Singapore.
  - lagging: India, Indonesia, the Philippines, Thailand (Figure 5).
  - China: corporate bond market represents only 8–9 percent of GDP despite rapid capitalization growth since 2005.
- Institutional investor growth and profiles:
  - pension fund assets: Korea grew at 47 percent per annum during 2002–2007; National Pension Fund >21 percent of GDP in 2007 (mostly in fixed-income securities).
  - mutual funds: India mutual fund industry grew from about $30 billion in 2004 to more than $150 billion as of end-May 2010; China mutual funds AUM CAGR = 67% (Figure 6).
  - Hong Kong SAR and Singapore mutual fund industries derive more than 50 percent of their assets from abroad (Figure 6[b]).
- Foreign investor participation:
  - rising despite crisis-related setbacks; much participation via institutional investors and derivatives (non-deliverable forwards, structured notes, total return swaps).
  - assets under management for dedicated emerging market bond funds rose significantly (Emerging Markets Portfolio Funds Research).
- Regional initiatives:
  - Asian Bond Fund-2 (ABF-2) launched March 2005 introduced Pan Asia Bond Index Fund and a Fund of Bond Funds.
  - Asian Bond Market Initiative (ABMI) under ASEAN+3 catalyzed market infrastructure, securitized debt issuance, regional settlement, and rating agency strengthening.
  - Credit Guarantee and Investment Facility (ADB trust fund) expected to support corporate bond issuance.
- International financial institutions:
  - ADB, IFC, World Bank issued local currency bonds to provide high quality local instruments and build yield curves.
- Research finding:
  - Mizen and Tsoukas (2010): firm-specific characteristics (prior issuance) more important for public bond issuance than local market size/liquidity; coordinated government policies had little effect on probability of issuance at firm level.

B. Liquidity
- Liquidity dimensions:
  - micro: depth (turnover ratios), tightness (bid–ask spreads), ability to absorb random shocks (price volatility).
  - macro: resilience to macro shocks (e.g., diversified investor base).
- Market liquidity variation across Asia: Hong Kong SAR, Korea, Malaysia, Singapore most liquid.
- Examples of reforms improving liquidity: constant two-way quotes by primary dealers in Korea; development of KTB futures; Singapore interest rate swap market high average daily turnover.
- Selected indicators from Table 1 (as presented; units preserved as in source):
  - China: Value Traded Government $5,368 billion; Corporate $1,812 billion; Government Turnover Ratio 0.68; Corporate Turnover Ratio 1.29; Government Bid-Ask Spread 5.1 bps.
  - Hong Kong SAR: Government Value Traded 5,527 1/ Includes Exchange Bills; Government Turnover Ratio 32.48; Government Bid-Ask Spread 0.04 bps; Corporate Turnover Ratio 13.
  - Indonesia: Government Value Traded $40 billion; Corporate $2 billion; Government Turnover Ratio 0.18; Corporate 0.06; Government Bid-Ask Spread 26.6 bps.
  - Japan: Government Value Traded $44,907 billion; Corporate $277 billion; Government Turnover Ratio 1.36; Corporate 0.08; Government Bid-Ask Spread n.a.
  - Korea: Government Value Traded $1,347 billion; Corporate $363 billion; Government Turnover Ratio 0.81; Corporate 0.19; Government Bid-Ask Spread 1.1 bps.
  - Malaysia: Government Value Traded $221 billion; Corporate $18 billion; Government Turnover Ratio 0.59; Corporate 0.06; Government Bid-Ask Spread 2.3 bps.
  - Philippines: Government Value Traded $76 billion; Corporate n.a.; Government Turnover Ratio 0.38; Corporate n.a.; Government Bid-Ask Spread 6.6 bps.
  - Singapore: Government Value Traded $204 billion; Corporate n.a.; Government Turnover Ratio 0.65; Corporate n.a.; Government Bid-Ask Spread 2.9 bps.
  - Thailand: Government Value Traded $368 billion; Corporate $5 billion; Government Turnover Ratio 0.83; Corporate 0.04; Government Bid-Ask Spread 3.4 bps.
  - Note: bps = basis points; Source: AsianBondsOnline [accessed September 2010].
- Liquidity constraints linked to narrow investor base, insufficient infrastructure, low transparency, and pricing information gaps.
- Reforms implemented in some countries: market-makers, modern trading platforms, upgraded payment and settlement systems.
- Secondary market liquidity dependent on foreign investors; access via offshore derivatives can both enhance liquidity and create sudden withdrawals during risk aversion.

C. Regulation
- Post-crisis policy and regulatory reforms supported market development: enhanced regulatory/supervisory capacity; improved corporate governance; active government reforms.
- Country examples of reforms and measures:
  - China: pilot allowing locally-listed banks to buy/sell bonds on stock exchanges since January 2009; corporations including foreign firms allowed to issue in interbank bond market; renminbi liberalized for trading/settlement in Hong Kong SAR.
  - Hong Kong SAR: electronic trading platform for government and corporate bonds launched December 2007.
  - India: January 2009 increase in FII limit for rupee-denominated corporate bonds from $6 billion to $15 billion; Reserve Bank of India Act amended January 2009 to develop and regulate corporate bond market; foreign exchange swap facility for banks with foreign branches/subsidiaries; liberalized limits on Indian mutual funds for overseas investments.
  - Indonesia: July 2008 bond pricing agency; eased reserve requirements on foreign currency deposits from 3 to 1 percent in October 2008.
  - Korea: December 2008 Won 10 trillion bond market stabilization fund; amended supervision regulation to facilitate exchange/off-exchange securities trading; real-time reporting of standardized bids/offers; tax changes to reduce taxes on high-yield funds; removal of withholding taxes on interest income and capital gains in May 2009 (parliament considering reinstatement).
  - Malaysia: Bursa Malaysia waived listing fees for debt securities denominated in ringgit and foreign currencies (waived until 2010); phased liberalization of foreign exchange limits and financial liberalization measures to facilitate foreign participation.
  - Singapore: despite fiscal surpluses, issues debt to develop yield curve; July 2009 MAS measures: accept AAA SGD debt from sovereigns/supranationals/sovereign-backed corporations as collateral for MAS Standing Facility; zero percent haircut for such securities; extended eligibility in July 2010 to public entities rated AAA with Basel zero risk weight.
  - Thailand: allowed foreign governments/financial institutions to issue baht bonds onshore; policies to reduce after-tax interest costs and simplify registration for corporations; amended regulations on securities borrowing/lending and short selling; securities law revised in 2010; relaxation of exchange controls on capital flows.
- Corporate governance:
  - post-crisis reforms: higher disclosure standards, minority shareholder protection, bankruptcy law reforms; enforcement remains uneven.
  - 2006 survey: Hong Kong SAR and Singapore scored high; Korea, Malaysia, Taiwan POC, Thailand lower; China, Indonesia, Philippines among lowest in East Asia.

### III. Obstacles to Further Development
- Major impediments:
  - (i) bank dominance;
  - (ii) lack of critical size in issuance;
  - (iii) lack of a diverse investor base and preponderance of buy-and-hold investors;
  - (iv) embryonic legal and regulatory framework for nonbank financial institutions;
  - (v) tax and capital controls on foreign investors;
  - (vi) weak corporate governance;
  - (vii) inadequate information provision, pricing transparency, and infrastructure;
  - (viii) high issuance and transaction costs;
  - (ix) lack of pricing benchmarks and hedging instruments;
  - (x) lack of a robust framework for asset-backed securitization.
- Investor base concentration:
  - buy-and-hold investors (banks, pension funds, insurance companies) dominate; inhibits secondary market liquidity and profitable market intermediation.
  - bank dominance reduces average maturity of issuance (Figure 8).
  - pension funds’ asset allocation often regulated and concentrated in government securities.
- Foreign participation constraints:
  - capital controls, taxation (withholding taxes, capital gains tax), lack of funding and hedging markets, lack of benchmarks.
  - examples: China and India restrict holdings/trading to licensed FIIs; most Asian markets impose withholding taxes on nonresidents with exceptions (Malaysia, Singapore); repo markets often not available to foreigners.
- Structural causes:
  - small average firm size relative to advanced economies makes public bond issuance costly; private placements and external bond markets preferred.
- Legal and enforcement weaknesses:
  - bankruptcy, creditor rights, and enforceability issues hamper market development; many countries still lack robust bankruptcy frameworks—exceptions include Korea, Hong Kong SAR, Malaysia, Singapore (Figure 9).
  - China: legal framework inhibits close-out netting for OTC derivatives.
- Market microstructure issues:
  - fragmentation, high transaction costs, lack of government yield curves as benchmarks, private placement prevalence, and low turnover inhibit arbitrage and active positions.
- Investability and benchmarks:
  - availability of indices (JP Morgan GBI-EM family, iBoxx Pan Asia Index, Citibank World Government Bond Index) helps, but indices may be difficult to replicate cost-effectively by most fund managers.
- Repo and derivatives market constraints:
  - repo markets restricted or unavailable, reducing funding and two-way trading.
  - derivatives largely OTC and underdeveloped except in India, Korea, Malaysia, Singapore; sizable NDF markets for China, India, Korea.
  - exchange-traded interest rate futures present mainly in Hong Kong SAR, Korea, Malaysia, Singapore.
- Asset-backed securitization (ABS) subdued:
  - low incentives to securitize in bank-dominated systems; post-crisis confidence damage to ABS; hurdles include poor legal frameworks, small investor base, high costs, taxes, lack of transparency and borrower default data.
  - India amended Securities Contracts Regulation Act in 2007 but impediments remain (no securitization act, tax/legal uncertainties, weak foreclosure laws, stamp duties).

### IV. Policy Recommendations
- Overarching aim: create deep local currency bond markets as part of a diversified financial system to finance infrastructure and broaden funding channels (Sheng (2010)).
- Strengthen regulation and supervision:
  - build confidence in regulatory, supervisory, and enforcement frameworks for capital markets and nonbank financial institutions.
  - improve information availability: credible rating systems, reporting requirements, adoption of international accounting standards.
  - consider rationalizing/consolidating oversight of nonbank financial institutions; build agency capacity and cross-border cooperation.
  - example: Korea’s Financial Investment Services and Capital Market (Consolidation) Act adopting a functional regulatory approach.
- Build reliable benchmark yield curves:
  - governments can consolidate issuance along chosen segments; timely and regular information provision; reopening longer-dated benchmark issues.
  - Singapore example: lengthened government securities maturities to 15 years, then 20 years; swaps extended up to 30 years—stimulated long-term bond issuance.
- Diversify domestic investor base:
  - attract pensions, insurance, mutual, and hedge funds to shift intermediation from banks to capital markets; diversify banks’ income sources; strengthen governance and risk management.
- Revamp investment regulation for domestic institutional investors:
  - widen eligible local instruments; loosen foreign asset holding limits; ensure reforms accompanied by governance and risk management strengthening.
  - mutual fund regulation: secure legal basis, define manager/custodian roles, disclosure, transparency in issuance/valuation/pricing/redemption.
- Enhance foreign investor participation:
  - lower cost of access; address taxation and capital control issues; improve market access to qualify for investability indices (e.g., JP Morgan GBI-EM).
  - regional hubs (Hong Kong SAR, Singapore) illustrate benefits of foreign access and local repo funding.
- Improve issuance ease and reduce costs:
  - streamline disclosure documents; standardize bond terms; follow International Capital Market Association guidelines; Singapore cited as low-impediment example.
- Increase pricing transparency and market infrastructure:
  - centralize indicative price information (Hong Kong Monetary Authority Central Money Markets Unit Bond Price Bulletin launched January 2006).
  - require standardized reporting of debt trades (India now requires reporting of all debt trades including private placements).
  - allow local currency debt trading via international clearing/settlement (Euroclear, Clearstream).
  - market-makers identify key liquidity enhancers: investor base diversity, hedging products, functioning repo markets, price transparency, tax incentives, efficient clearing/settlement.
- Strengthen sovereign debt management:
  - consolidate issuance, reopen benchmarks, and adopt liability management to enhance liquidity.
  - consider interest rate swap market development as a pricing benchmark where appropriate (e.g., Singapore).
- Market micro-structure reforms for government bond liquidity:
  - measures include auction schedules, bond reopening schemes, repo/securities lending regulations, STRIPS programs, exchange programs, buyback programs (OECD–World Bank–IMF Global Bond Market Forum 2008).
- Develop local bond market indices:
  - indices facilitate trading and attract active asset managers; inclusion criteria (accessibility, regulatory/tax environment) can incentivize reforms.
- Develop derivatives markets in parallel:
  - build simple derivatives after basic liquidity exists; prefer exchange-based trading (examples: Brazil; regional centers Hong Kong SAR and Singapore).
  - benefits: liquidity, price discovery, efficient netting and collateral use, transparency, market surveillance, lower counterparty risks.
- Foster swap markets:
  - permit offshore banks to engage in local currency swap activities; phase out statutory liquidity constraints on swap transactions; allow securities dealers with risk controls to participate.
- Promote covered bonds and ABS cautiously:
  - covered bonds easier to introduce than ABS; require specific rules for covered bonds; ABS development requires rebuilding investor confidence, transparency, disclosure, ratings, incentive alignment, securitization laws, tax/regulatory clarity, foreclosure norms.
  - Korea example: introduced laws post-Asian crisis enabling SPVs and “true sale”.
- Improve data collection and reporting:
  - centralized databases on corporate bonds issued/outstanding, primary and secondary market size, maturity structure, liquidity.
  - adopt methodological standards from the BIS–ECB–IMF Handbook on Securities Statistics (Deutsche Bundesbank, IMF, World Bank (2009)).

### V. Concluding Remarks
- Key challenge: generate financial assets aligned with economic growth to provide collateral for expanding fixed-income markets and domestic/regional investment opportunities.
- Constraints:
  - shortage of good quality financial assets can lead to speculative valuations and global imbalances (Caballero 2006).
  - significant proportion of Asian corporations rated below investment grade, inhibiting issuance and excluding certain investors.
- Potential:
  - growth in residential mortgages and household debt instruments can broaden the collateral pool for fixed-income markets.
  - integrated regional market for local currency bonds could address critical size issues—regional cooperation through ASEAN+3, ABMI, ABFs to harmonize market infrastructure and standards.
  - need to examine firm-level incentives for bond finance uptake—historical bank dependence, issuance costs, and unfamiliarity with bond processes.
- Cultural and structural shifts:
  - develop a credit culture; equity culture and comfortable liquidity positions of banks/corporations may hinder bond market expansion.
  - signs in China and India of a shift toward broader capital market development as corporate credit demand rises.
  - during the global crisis, Asian corporations turned to local corporate bond markets when banks reduced lending—positive indicator for market development (IMF (2010)).
- Outlook:
  - difficult to define critical market size, but expansion in local debt markets in Asia could be rapid given expected growth trajectory.

*Source: _wp11132 - References (IMF PDF content provided).*

### References .............................................................................................................

### _wp11132 - References

### I. Introduction
- Post-1997–1998 regional crisis policy focus: develop domestic debt markets to reduce foreign exchange mismatches and concentration of credit and maturity risks in banks (Committee on the Global Financial System [CGFS] 2007b; Turner 2009).
- Local currency bonds were emphasized as they constitute a significant share of emerging bond markets, especially in Asia (Figure 1).
- Purposes of liquid and deep domestic debt markets:
  - diversify funding of governments, households, and corporations;
  - attract financing for infrastructure needs;
  - broaden assets for local institutional and retail investors;
  - provide an additional channel for financial intermediation if banks are stressed (Gyntelberg, Ma, and Remolona (2006); Gyntelberg (2007); Jiang, Tang, and Law (2002)).
- Crisis impact and recovery:
  - severe retrenchment of capital inflows during the global financial crisis; domestic bond markets saw high volatility and substantially lower liquidity in Q4 2008 (Figures 2 and 3).
  - drop in domestic bond issuance in 2008; recovery in 2009 due to fiscal stimuli and renewed capital inflows.
- Paper scope:
  - Section II: state of local currency debt markets;
  - Section III: main obstacles;
  - Section IV: policy responses;
  - concluding remarks.

### II. The State of Development
- Assessment framework: three key dimensions—(i) hurdles confronting borrowers and lenders; (ii) issues faced by liquidity providers; (iii) presence/absence of supportive government policies and regulations (Chami, Fullenkamp, and Sharma (2010)).

A. Borrowers and Lenders
- Pre-crisis external issuance rose due to:
  - lower costs of foreign currency-denominated issuance in G3 currencies (U.S. dollar, euro, and yen);
  - favorable credit ratings and diversification in currency denomination.
- Borrowing mode determinants:
  - cost of borrowing remains primary determinant; maturity and diversification gaining importance.
  - domestic bond issuance often more costly and cumbersome than bank lending; corporate finance remains bank-dominated and relationship-based.
  - preference for private placements to save on regulatory costs (registration, prospectus, disclosure).
- Corporate bond markets: uneven development
  - relatively more developed: Hong Kong SAR, Korea, Malaysia, Singapore.
  - lagging: India, Indonesia, the Philippines, Thailand (Figure 5).
  - China: corporate bond market represents only 8–9 percent of GDP despite rapid capitalization growth since 2005.
- Institutional investor growth and profiles:
  - pension fund assets: Korea grew at 47 percent per annum during 2002–2007; National Pension Fund >21 percent of GDP in 2007 (mostly in fixed-income securities).
  - mutual funds: India mutual fund industry grew from about $30 billion in 2004 to more than $150 billion as of end-May 2010; China mutual funds AUM CAGR = 67% (Figure 6).
  - Hong Kong SAR and Singapore mutual fund industries derive more than 50 percent of their assets from abroad (Figure 6[b]).
- Foreign investor participation:
  - rising despite crisis-related setbacks; much participation via institutional investors and derivatives (non-deliverable forwards, structured notes, total return swaps).
  - assets under management for dedicated emerging market bond funds rose significantly (Emerging Markets Portfolio Funds Research).
- Regional initiatives:
  - Asian Bond Fund-2 (ABF-2) launched March 2005 introduced Pan Asia Bond Index Fund and a Fund of Bond Funds.
  - Asian Bond Market Initiative (ABMI) under ASEAN+3 catalyzed market infrastructure, securitized debt issuance, regional settlement, and rating agency strengthening.
  - Credit Guarantee and Investment Facility (ADB trust fund) expected to support corporate bond issuance.
- International financial institutions:
  - ADB, IFC, World Bank issued local currency bonds to provide high quality local instruments and build yield curves.
- Finding from research:
  - Mizen and Tsoukas (2010): firm-specific characteristics (prior issuance) more important for public bond issuance than local market size/liquidity; coordinated government policies had little effect on probability of issuance at firm level.

B. Liquidity
- Liquidity dimensions:
  - micro: depth (turnover ratios), tightness (bid–ask spreads), ability to absorb random shocks (price volatility).
  - macro: resilience to macro shocks (e.g., diversified investor base).
- Market liquidity variation across Asia (Table 1):
  - Hong Kong SAR, Korea, Malaysia, Singapore most liquid.
  - Examples of reforms improving liquidity: constant two-way quotes by primary dealers in Korea; development of KTB futures; Singapore interest rate swap market high average daily turnover.
- Table 1 selected indicators (as presented):
  - China: Value Traded Government $5,368 billion; Corporate $1,812 billion; Government Turnover Ratio 0.68; Corporate Turnover Ratio 1.29; Government Bid-Ask Spread 5.1 bps.
  - Hong Kong SAR: Government Value Traded 5,527 ($ billion?) 1/ Includes Exchange Bills; Government Turnover Ratio 32.48; Government Bid-Ask Spread 0.04 bps; Corporate Turnover Ratio 13.
  - Indonesia: Government Value Traded $40 billion; Corporate $2 billion; Government Turnover Ratio 0.18; Corporate 0.06; Government Bid-Ask Spread 26.6 bps.
  - Japan: Government Value Traded $44,907 billion; Corporate $277 billion; Government Turnover Ratio 1.36; Corporate 0.08; Government Bid-Ask Spread n.a.
  - Korea: Government Value Traded $1,347 billion; Corporate $363 billion; Government Turnover Ratio 0.81; Corporate 0.19; Government Bid-Ask Spread 1.1 bps.
  - Malaysia: Government Value Traded $221 billion; Corporate $18 billion; Government Turnover Ratio 0.59; Corporate 0.06; Government Bid-Ask Spread 2.3 bps.
  - Philippines: Government Value Traded $76 billion; Corporate n.a.; Government Turnover Ratio 0.38; Corporate n.a.; Government Bid-Ask Spread 6.6 bps.
  - Singapore: Government Value Traded $204 billion; Corporate n.a.; Government Turnover Ratio 0.65; Corporate n.a.; Government Bid-Ask Spread 2.9 bps.
  - Thailand: Government Value Traded $368 billion; Corporate $5 billion; Government Turnover Ratio 0.83; Corporate 0.04; Government Bid-Ask Spread 3.4 bps.
  - Note: bps = basis points; Source: AsianBondsOnline [accessed September 2010].
- Liquidity constraints linked to narrow investor base, insufficient infrastructure, low transparency, and pricing information gaps.
- Reforms implemented in some countries: market-makers, modern trading platforms, upgraded payment and settlement systems.
- Secondary market liquidity dependent on foreign investors; access via offshore derivatives can both enhance liquidity and create sudden withdrawals during risk aversion.

C. Regulation
- Post-crisis policy and regulatory reforms supported market development: enhanced regulatory/supervisory capacity; improved corporate governance; active government reforms.
- Country examples of reforms and measures:
  - China: pilot allowing locally-listed banks to buy/sell bonds on stock exchanges since January 2009; corporations including foreign firms allowed to issue in interbank bond market; renminbi liberalized for trading/settlement in Hong Kong SAR.
  - Hong Kong SAR: electronic trading platform for government and corporate bonds launched December 2007.
  - India: January 2009 increase in FII limit for rupee-denominated corporate bonds from $6 billion to $15 billion; Reserve Bank of India Act amended January 2009 to develop and regulate corporate bond market; foreign exchange swap facility for banks with foreign branches/subsidiaries; liberalized limits on Indian mutual funds for overseas investments.
  - Indonesia: July 2008 bond pricing agency; eased reserve requirements on foreign currency deposits from 3 to 1 percent in October 2008.
  - Korea: December 2008 Won 10 trillion bond market stabilization fund; amended supervision regulation to facilitate exchange/off-exchange securities trading; real-time reporting of standardized bids/offers; tax changes to reduce taxes on high-yield funds; removal of withholding taxes on interest income and capital gains in May 2009 (parliament considering reinstatement).
  - Malaysia: Bursa Malaysia waived listing fees for debt securities denominated in ringgit and foreign currencies (waived until 2010); phased liberalization of foreign exchange limits and financial liberalization measures to facilitate foreign participation.
  - Singapore: despite fiscal surpluses, issues debt to develop yield curve; July 2009 MAS measures: accept AAA SGD debt from sovereigns/supranationals/sovereign-backed corporations as collateral for MAS Standing Facility; zero percent haircut for such securities; extended eligibility in July 2010 to public entities rated AAA with Basel zero risk weight.
  - Thailand: allowed foreign governments/financial institutions to issue baht bonds onshore; policies to reduce after-tax interest costs and simplify registration for corporations; amended regulations on securities borrowing/lending and short selling; securities law revised in 2010; relaxation of exchange controls on capital flows.
- Corporate governance:
  - post-crisis reforms: higher disclosure standards, minority shareholder protection, bankruptcy law reforms; enforcement remains uneven.
  - 2006 survey: Hong Kong SAR and Singapore scored high; Korea, Malaysia, Taiwan POC, Thailand lower; China, Indonesia, Philippines among lowest in East Asia.

### III. Obstacles to Further Development
- Major impediments listed:
  - (i) bank dominance;
  - (ii) lack of critical size in issuance;
  - (iii) lack of a diverse investor base and preponderance of buy-and-hold investors;
  - (iv) embryonic legal and regulatory framework for nonbank financial institutions;
  - (v) tax and capital controls on foreign investors;
  - (vi) weak corporate governance;
  - (vii) inadequate information provision, pricing transparency, and infrastructure;
  - (viii) high issuance and transaction costs;
  - (ix) lack of pricing benchmarks and hedging instruments;
  - (x) lack of a robust framework for asset-backed securitization.
- Investor base concentration:
  - buy-and-hold investors (banks, pension funds, insurance companies) dominate; inhibits secondary market liquidity and profitable market intermediation.
  - bank dominance reduces average maturity of issuance (Figure 8).
  - pension funds’ asset allocation often regulated and concentrated in government securities.
- Foreign participation constraints (Table 2 highlights):
  - capital controls, taxation (withholding taxes, capital gains tax), lack of funding and hedging markets, lack of benchmarks.
  - examples: China and India restrict holdings/trading to licensed FIIs; most Asian markets impose withholding taxes on nonresidents with exceptions (Malaysia, Singapore); repo markets often not available to foreigners.
- Structural causes:
  - small average firm size relative to advanced economies makes public bond issuance costly; private placements and external bond markets preferred.
- Legal and enforcement weaknesses:
  - bankruptcy, creditor rights, and enforceability issues hamper market development; many countries still lack robust bankruptcy frameworks—exceptions include Korea, Hong Kong SAR, Malaysia, Singapore (Figure 9).
  - China: legal framework inhibits close-out netting for OTC derivatives.
- Market microstructure issues:
  - fragmentation, high transaction costs, lack of government yield curves as benchmarks, private placement prevalence, and low turnover inhibit arbitrage and active positions.
- Investability and benchmarks:
  - availability of indices (JP Morgan GBI-EM family, iBoxx Pan Asia Index, Citibank World Government Bond Index) helps, but indices may be difficult to replicate cost-effectively by most fund managers.
- Repo and derivatives market constraints:
  - repo markets restricted or unavailable, reducing funding and two-way trading.
  - derivatives largely OTC and underdeveloped except in India, Korea, Malaysia, Singapore; sizable NDF markets for China, India, Korea.
  - exchange-traded interest rate futures present mainly in Hong Kong SAR, Korea, Malaysia, Singapore.
- Asset-backed securitization (ABS) subdued:
  - low incentives to securitize in bank-dominated systems; post-crisis confidence damage to ABS; hurdles include poor legal frameworks, small investor base, high costs, taxes, lack of transparency and borrower default data.
  - India amended Securities Contracts Regulation Act in 2007 but impediments remain (no securitization act, tax/legal uncertainties, weak foreclosure laws, stamp duties).

### IV. Policy Recommendations
- Overarching aim: create deep local currency bond markets as part of a diversified financial system to finance infrastructure and broaden funding channels (Sheng (2010)).
- Strengthen regulation and supervision:
  - build confidence in regulatory, supervisory, and enforcement frameworks for capital markets and nonbank financial institutions.
  - improve information availability: credible rating systems, reporting requirements, adoption of international accounting standards.
  - consider rationalizing/consolidating oversight of nonbank financial institutions; build agency capacity and cross-border cooperation.
  - example: Korea’s Financial Investment Services and Capital Market (Consolidation) Act adopting a functional regulatory approach.
- Build reliable benchmark yield curves:
  - governments can consolidate issuance along chosen segments; timely and regular information provision; reopening longer-dated benchmark issues.
  - Singapore example: lengthened government securities maturities to 15 years, then 20 years; swaps extended up to 30 years—stimulated long-term bond issuance.
- Diversify domestic investor base:
  - attract pensions, insurance, mutual, and hedge funds to shift intermediation from banks to capital markets; diversify banks’ income sources; strengthen governance and risk management.
- Revamp investment regulation for domestic institutional investors:
  - widen eligible local instruments; loosen foreign asset holding limits; ensure reforms accompanied by governance and risk management strengthening.
  - mutual fund regulation: secure legal basis, define manager/custodian roles, disclosure, transparency in issuance/valuation/pricing/redemption.
- Enhance foreign investor participation:
  - lower cost of access; address taxation and capital control issues; improve market access to qualify for investability indices (e.g., JP Morgan GBI-EM).
  - regional hubs (Hong Kong SAR, Singapore) illustrate benefits of foreign access and local repo funding.
- Improve issuance ease and reduce costs:
  - streamline disclosure documents; standardize bond terms; follow International Capital Market Association guidelines; Singapore cited as low-impediment example.
- Increase pricing transparency and market infrastructure:
  - centralize indicative price information (Hong Kong Monetary Authority Central Money Markets Unit Bond Price Bulletin launched January 2006).
  - require standardized reporting of debt trades (India now requires reporting of all debt trades including private placements).
  - allow local currency debt trading via international clearing/settlement (Euroclear, Clearstream).
  - market-makers identify key liquidity enhancers: investor base diversity, hedging products, functioning repo markets, price transparency, tax incentives, efficient clearing/settlement.
- Strengthen sovereign debt management:
  - consolidate issuance, reopen benchmarks, and adopt liability management to enhance liquidity.
  - consider interest rate swap market development as a pricing benchmark where appropriate (e.g., Singapore).
- Market micro-structure reforms for government bond liquidity:
  - measures include auction schedules, bond reopening schemes, repo/securities lending regulations, STRIPS programs, exchange programs, buyback programs (OECD–World Bank–IMF Global Bond Market Forum 2008).
- Develop local bond market indices:
  - indices facilitate trading and attract active asset managers; inclusion criteria (accessibility, regulatory/tax environment) can incentivize reforms.
- Develop derivatives markets in parallel:
  - build simple derivatives after basic liquidity exists; prefer exchange-based trading (examples: Brazil; regional centers Hong Kong SAR and Singapore).
  - benefits: liquidity, price discovery, efficient netting and collateral use, transparency, market surveillance, lower counterparty risks.
- Foster swap markets:
  - permit offshore banks to engage in local currency swap activities; phase out statutory liquidity constraints on swap transactions; allow securities dealers with risk controls to participate.
- Promote covered bonds and ABS cautiously:
  - covered bonds easier to introduce than ABS; require specific rules for covered bonds; ABS development requires rebuilding investor confidence, transparency, disclosure, ratings, incentive alignment, securitization laws, tax/regulatory clarity, foreclosure norms.
  - Korea example: introduced laws post-Asian crisis enabling SPVs and “true sale”.
- Improve data collection and reporting:
  - centralized databases on corporate bonds issued/outstanding, primary and secondary market size, maturity structure, liquidity.
  - adopt methodological standards from the BIS–ECB–IMF Handbook on Securities Statistics (Deutsche Bundesbank, IMF, World Bank (2009)).

### V. Concluding Remarks
- Key challenge: generate financial assets aligned with economic growth to provide collateral for expanding fixed-income markets and domestic/regional investment opportunities.
- Constraints:
  - shortage of good quality financial assets can lead to speculative valuations and global imbalances (Caballero 2006).
  - significant proportion of Asian corporations rated below investment grade, inhibiting issuance and excluding certain investors.
- Potential:
  - growth in residential mortgages and household debt instruments can broaden the collateral pool for fixed-income markets.
  - integrated regional market for local currency bonds could address critical size issues—regional cooperation through ASEAN+3, ABMI, ABFs to harmonize market infrastructure and standards.
  - need to examine firm-level incentives for bond finance uptake—historical bank dependence, issuance costs, and unfamiliarity with bond processes.
- Cultural and structural shifts:
  - develop a credit culture; equity culture and comfortable liquidity positions of banks/corporations may hinder bond market expansion.
  - signs in China and India of a shift toward broader capital market development as corporate credit demand rises.
  - during the global crisis, Asian corporations turned to local corporate bond markets when banks reduced lending—positive indicator for market development (IMF (2010)).
- Outlook:
  - difficult to define critical market size, but expansion in local debt markets in Asia could be rapid given expected growth trajectory.

*Source: _wp11132 - References (IMF PDF content provided).*

### REFERENCES

### _wp11132 - REFERENCES

### References

- Arner, Douglas, Paul Lejot, and Lotte Schou-Zibell, 2008, “Securitization in East Asia,” ADB Working Paper Series on Regional Economic Integration, No. 12 (Manila: Asian Development Bank).  
  http://www.adb.org/documents/papers/regional-economic-integration/WP12-Securitization-East-Asia.pdf

- APEC (Asia-Pacific Economic Cooperation), 2008, Report prepared for the Second Public–Private Sector Forum on Bond Market Development, Cusco, 9 July.

- ASIFMA (Asia Securities Industry & Financial Markets Association), 2010, Asian Regulatory Review – Various Issues of Global Weekly Update.  
  http://www.sifma.org/blastemails/Global_Weekly_Update/Global_Weekly_Update-04-15-11.html

- Asian Development Bank, 2010a, Asia Bond Monitor, March.

- ———, 2010b, Asia Bond Monitor, Summer Edition.

- ———, 2010c, Appendix III: Market Assessments, In ABMI Group of Experts Report: Barriers to Cross-Border Investment and Settlement in ASEAN+3 Bond Markets, April.

- Burger, John D., and Francis E. Warnock, 2006, “Local Currency Bond Markets,” Staff Papers, International Monetary Fund, Vol. 53, pp. 133–146.  
  http://www.imf.org/External/Pubs/FT/staffp/2006/03/burger.htm

- Caballero, Ricardo J., 2006, “On the Macroeconomics of Asset Shortages,” MIT Department of Economics Working Paper, No. 06-30 (Cambridge, MA: Massachusetts Institute of Technology).

- Chami, Ralph, Connel Fullenkamp, and Sunil Sharma, 2010, “A Framework for Financial Market Development,” Journal of Economic Policy Reform, Vol. 13, No.2, pp. 107–135.

- Cheung, Stephen Y.L., and Hasung Jang, 2006, “Scoreboard on Corporate Governance in East Asia,” The Center for International Governance Innovation Working Paper No. 13, December.  
  http://www.cigionline.org/publications/2006/12/scorecard-corporate-governance-east-asia

- Committee on the Global Financial System (CGFS), 2007a, “Institutional Investors, Global Savings and Asset Allocation,” CGFS Papers, No. 27 (February).  
  http://www.bis.org/publ/cgfs27.pdf

- ———, 2007b, “Financial Stability and Local Currency Bond Markets,” CGFS Papers, No. 28 (June). http://www.bis.org/publ/cgfs28.htm

- ———, 2009, “Capital Flows and Emerging Market Economies,” CGFS Papers, No. 33 (January). http://www.bis.org/publ/cgfs33.htm

- Deutsche Bundesbank, International Monetary Fund, and The World Bank, 2009, Progress Report: Implementation of the G-8 Action Plan on Developing Local Bond Markets in Emerging Market Economies and Developing Countries.  
  http://www.bundesbank.de/download/vfz/konferenzen/20080922_frankfurt/report.pdf

- Eichengreen, Barry, and Pipat Luengnaruemitchai, 2004, “Why Doesn’t Asia Have Bigger Bond Markets?” NBER Working Paper, No. 10576 (Cambridge, MA: National Bureau of Economic Research).  
  http://www.nber.org/papers/w10576

- Eichengreen, Barry, Eduardo Borensztein, and Ugo Panizza, 2006, “A Tale of Two Markets: Bond Market Development in East Asia and Latin America,” Hong Kong Institute for Monetary Research Occasional Paper, No. 3 (October).  
  www.hkimr.org/view_attachment.asp?type=22&id=136

- Executives’ Meeting of East Asia and Pacific Central Banks, 2005, The Asian Bond Fund 2 has Moved into Implementation Phase, May.  
  http://aric.adb.org/initiativetable.php?iid=67&ssid=2&title=Executives%60%20Meeting%20of%20East%20Asia%20Pacific%20Central%20Banks%20(EMEAP)%20Asian%20Bond%20Fund%20(ABF)%20Initiative

- Ghosh, Swati, 2006, East Asian Finance: The Road to Robust Markets, The World Bank (Washington D.C.).  
  http://siteresources.worldbank.org/INTEAPREGTOPFINFINSECDEV/Resources/589748-1144293317827/full_report.pdf

- Glaessner, Tom, 2008, Citi Indexes for EME Debt Markets: WGBI, Presentation for the Bretton Woods Committee and the Fletcher School Center for Emerging Market Enterprises Meeting on Strengthening Capital Markets in Emerging Market Countries, Washington, DC. 25 January.

- Goldman Sachs, 2010, “EM Equity in Two Decades: A Changing Landscape,” Global Economics Paper, No. 204, New York: Goldman Sachs (September).

- Gyntelberg, Jacob 2007, “Developing Asia Pacific Non-government Fixed Income Markets,” SBP Research Bulletin, Vol. 3, No. 1, pp. 7–26.

- Gyntelberg, Jacob, Guonan Ma, and Eli M. Remolona, 2005, “Corporate Bond Markets in Asia,” BIS Quarterly Review (December), pp. 83–93.  
  http://www.bis.org/publ/qtrpdf/r_qt0512.pdf

- ———, 2006, “Developing Corporate Bond Markets in Asia,” BIS Papers, No. 26 (February). http://www.bis.org/publ/bppdf/bispap26.pdf

- International Finance Corporation, 2009, GEMLOC Investability Indicators – Phase 2 Extension, Second Quarterly Update (November).  
  http://indices.markit.com/download/products/guides/CRISIL_investibility_report.pdf

- International Monetary Fund, 2010, Global Financial Stability Report, Washington, DC: IMF (October).  
  http://www.imf.org/External/Pubs/FT/GFSR/2010/02/index.htm

- Jiang, Guorong, Nancy Tang, and Eve Law, 2002, “The Costs and Benefits of Developing Debt Markets: Hong Kong’s Experience,” BIS Papers, No. 11 (June).  
  http://www.bis.org/publ/bppdf/bispap11h.pdf

- J.P. Morgan Securities Inc., 2009, Emerging Markets Local Markets Overview, October.

- ———, 2009, Emerging Markets Outlook and Strategy, J.P. Morgan Emerging Markets Research, January.

- Kawai, Masahiro, 2007, “Bond Market Development in Emerging East Asia,” Paper presented at the Federal Ministry of Finance and Deutsche Bundesbank High-Level Workshop on Developing Bond Markets in Emerging Market Economies, Frankfurt, Germany, 9–10 May.  
  http://www.bundesbank.de/download/vfz/konferenzen/20070509_10_frankfurt/paper_kawai.pdf

- Ma, Guonan, and Eli M. Remolona, 2005, “Opening Markets through a Regional Bond Fund: Lessons from ABF2,” BIS Quarterly Review (June), pp. 81–92.  
  http://www.bis.org/publ/qtrpdf/r_qt0506.pdf

- Mieno, Fumiharu, and others, 2009, “Developing Bond Markets in Asia: Study Group on the Asian Financial System,” Center for Monetary Cooperation in Asia, Bank of Japan.  
  http://www.boj.or.jp/en/announcements/release_2009/data/cem0910.pdf

- Mizen, Paul, and Serafeim Tsoukas, 2010, “What Effect has Bond Market Development in Emerging Asia had on the Issuance of Corporate Bonds?” Hong Kong Institute for Monetary Research Working Paper, No. 18 (June).  
  http://asianbondsonline.adb.org/publications/external/2010/bond_market_development_effect_corporate_bonds.pdf

- Monetary Authority of Singapore, 2010, 2009 Singapore Asset Management Industry Survey (July). http://www.mas.gov.sg/resource/eco_research/surveys/AssetMgmt09.pdf

- OECD–World Bank Group–IMF Global Bond Market Forum, 2008, Secondary Market Liquidity in Domestic Debt Markets, Washington, DC (April).  
  http://www.imf.org/external/np/seminars/eng/2008/bondmkt/pdf/key.pdf

- Parreñas, J.C., and Ken Waller, 2006, “Developing Bond Markets in APEC: Moving Forward Through Public-Private Sector Partnership,” ABA Journal XXI (2).  
  http://www.pecc.org/resources/doc_view/584-moving-forward-through-public-private-sector-partnership-annex-b

- Securities and Futures Commission, 2010, Fund Management Activities Survey 2009, Hong Kong, China, July.  
  http://www.sfc.hk/sfc/doc/EN/speeches/public/surveys/10/fmas_201007.pdf

- Sheng, Andrew, 2010, “The Regulatory Reform of Global Financial Markets: An Asian Regulator’s Perspective,” Global Policy Vol. 1, No. 2, May.

- Turner, Philip, 2007, “Local Currency Bond Markets in Emerging Market Economies: Notes on Trends, Measurement and Policy Challenges,” Paper prepared for the G7 Workshop on Developing Bond Markets in Emerging Market Economies, Frankfurt, Germany, 9–10 May.

- ———, 2008, “The Investor Base and the Liquidity of EME Local Bond Markets: Leverage and Diversification,” Paper presented at the 10th Annual OECD–World Bank–IMF Global Bond Market Forum, Washington, DC, 29–30 April.

- ———, 2009, “How have Local Currency Bond Markets in EMEs Weathered the Financial Crisis?” Presentation prepared for the 2nd International Workshop on Implementing G8 Action Plan, Frankfurt, Germany, 12–13 November.

*Source: _wp11132 - REFERENCES*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11132.pdf_