Going Regional: How To Deepen ASEAN's Financial Markets

ADB Economics Working Paper Series
Going Regional: How to Deepen ASEANs Financial Markets

Maria Socorro Gochoco-Bautista and Eli M. Remolona No. 300 | January 2012
ADB Economics Working Paper Series No. 300
Going Regional: How to Deepen ASEANs Financial Markets
Maria Socorro Gochoco-Bautista and Eli M. Remolona January 2012
Maria Socorro Gochoco-Bautista is Senior Economic Advisor, Economics and Research Department, Asian 'HYHORSPHQW %DQN DQG (OL 0 5HPRORQD LV &KLHI 5HSUHVHQWDWLYH $VLD DQG 3DFLF 2IFH %DQN IRU ,QWHUQDWLRQDO 6HWWOHPHQWV 7KH YLHZV H[SUHVVHG KHUHLQ GR QRW UHSUHVHQW WKH YLHZV RI HLWKHU WKH $'% RU %,6 7KH DXWKRUV thank Noli R. Sotocinal for excellent research assistance. The authors accept responsibility for any errors in the paper.
Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics 2012 by Asian Development Bank January 2012 ,661 Publication Stock No. WPS124542 The views expressed in this paper are those of the author(s) and do not QHFHVVDULO\ UHHFW WKH YLHZV RU SROLFLHV of the Asian Development Bank.
The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly WKRVH IDFLQJ WKH $VLD DQG 3DFLF UHJLRQ DV ZHOO DV FRQFHSWXDO DQDO\WLFDO RU methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asias development and policy challenges; strengthen analytical rigor and quality of ADBs country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness. The ADB Economics Working Paper Series is a quick-disseminating, informal publication whose titles could subsequently be revised for publication as articles in professional journals or chapters in books. The series is maintained by the Economics and Research Department.
Contents Abstract , ,, ,,, ,9 9 ,QWURGXFWLRQ 7KH 5HF\FOLQJ RI 6DYLQJV 7KH 'RZQVLGH RI &DSLWDO 0RELOLW\ 7KH 5ROH RI &DSLWDO &RQWUROV )LQDQFLDO 0DUNHW 'HYHORSPHQW LQ $6($1 &RXQWULHV $ % C. D. 9, 7KH $VLDQ )LQDQFLDO &ULVLV DQG 'HYHORSPHQWV LQ $6($1 'HSRVLWRU\ ,QVWLWXWLRQV 'HHSHQLQJ $6($1 )LQDQFLDO 6\VWHPV Market Making in the Emerging ASEAN Bond Markets Why Size Matters for Deep and Liquid Markets v
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References
ABSTRACT 7KLV VWXG\ LGHQWLHV WKH NH\ LVVXHV LQYROYHG LQ WKH IXUWKHU GHYHORSPHQW DQG GHHSHQLQJ RI QDQFLDO PDUNHWV LQ WKH $VVRFLDWLRQ RI 6RXWKHDVW $VLDQ 1DWLRQV $6($1 )RU WKH VPDOOHU $6($1 FRXQWULHV WKH UVW SULRULW\ LV WKH GHYHORSPHQW RI WKH EDQNLQJ V\VWHP ,Q WKH ODUJHU $6($1 HFRQRPLHV banking systems are already reasonably well-developed, while stock markets and government bond markets have evidently achieved critical mass even while remaining purely domestic markets. The tug-of-war between the geography of information in the direction of more localized markets versus the critical mass required by network externalities makes the case for regional integration stronger for corporate bond markets than for other QDQFLDO PDUNHWV 7KH VWXG\ SURSRVHV WKUHH EROG LQLWLDWLYHV WR GHYHORS D deep and liquid regional corporate bond market.
I. INTRODUCTION Countries in the Association of Southeast Asian Nations (ASEAN) aspire to belong to a region of high and inclusive growth and high productivity, one tied together by bonds of HFRQRPLF FRRSHUDWLRQ DQG QDQFLDO LQWHJUDWLRQ 7KH H[SHULHQFH RI WKH $VLDQ QDQFLDO FULVLV GHPRQVWUDWHG WKH LPSRUWDQFH RI D UHVLOLHQW QDQFLDO VHFWRU ,Q WKH DIWHUPDWK RI WKH crisis, ASEAN countries strengthened their banking systems, improved regulatory oversight, DQG ZRUNHG WR IXUWKHU GHYHORS WKHLU FDSLWDO PDUNHWV 7KLV LV RQH UHDVRQ WKH QDQFLDO VHFWRUV LQ WKH UHJLRQ HVFDSHG WKH PRVW UHFHQW JOREDO QDQFLDO FULVLV UHODWLYHO\ XQVFDWKHG DQG ZK\ recovery from this crisis was quicker and more robust than that in other regions. Yet it also cannot be denied that the underdevelopment of the regions capital markets ZDV DQRWKHU UHDVRQ IRU WKH UHVLOLHQFH RI WKH QDQFLDO VHFWRU 7KLV XQGHUGHYHORSPHQW PHDQW that exposures in the region to the subprime mortgages and other toxic assets in the United 6WDWHV 86 UHPDLQHG QHJOLJLEOH ,Q WKH DEVHQFH RI GHHSHU FDSLWDO PDUNHWV WKH HDUOLHU UHJLRQDO crisis had led to high savings and the build-up of foreign exchange reserves, which served to protect the region during the more recent global crisis.1 But the cost of such protection, along with the underdevelopment of capital markets, has been high. This cost has manifested itself in persistently low investment in the region. Low investment, in turn, has adverse implications on the regions ability to foster inclusive growth, primarily through employment generation that normally comes with investment. The underdevelopment of capital markets and the dependence on banks as a primary source of QDQFH LQ PDQ\ FRXQWULHV LQ WKH $6($1 PHDQV WKDW PDQ\ RI WKH SRRU KDYH OLWWOH RU QR DFFHVV WR QDQFH HYHQ XQGHU QRQFULVLV FRQGLWLRQV )RU ODFN RI EHWWHU GHYHORSHG FDSLWDO PDUNHWV WKH region has been sending its savings abroad to be intermediated by the capital markets of GLVWDQW QDQFLDO FHQWHUV 7KH UHJLRQ KDV DOVR EHHQ KROGLQJ LWV VDYLQJV LQ WKH IRUP RI VDIH low-yielding reserve assets, while the markets abroad turned the savings into risky, higherreturn investments. Some of these investments found their way back into the region, while some of them ended up in toxic assets outside the region. 7KH $6($1 FRXQWULHV IDFH WZR GLIIHUHQW FKDOOHQJHV )RU &DPERGLD WKH /DR 3HRSOHV 'HPRFUDWLF 5HSXEOLF /DR 3'5 0\DQPDU DQG 9LHW 1DP WKH FKDOOHQJH LV WR IXUWKHU GHYHORS WKHLU LQVWLWXWLRQV DQG EDQNLQJ V\VWHPV )RU ,QGRQHVLD 0DOD\VLD WKH 3KLOLSSLQHV 6LQJDSRUH and Thailand, it is to further deepen their capital markets without unduly exposing these PDUNHWV WR VHYHUH QDQFLDO VKRFNV DEURDG 7R WKHLU FUHGLW WKH VHFRQG JURXS RI FRXQWULHV
1
Nijathaworn (2011) points out that one lesson of the 1997 Asian crisis was the importance of self-insurance in the form of stockpiling foreign exchange reserves.
2 | ADB Economics Working Paper Series No. 300
has made great strides in this regard. Their equity markets and government bond markets already exhibit remarkable depth and liquidity. This would seem to imply a two-speed track of market development, with some countries individually making their banking systems their UVW SULRULW\ ZKLOH WKH RWKHUV FRQWLQXH WR GHHSHQ WKHLU FDSLWDO PDUNHWV ,Q WLPH WKH UVW JURXS can try to catch up by emulating the more developed ones. But for the second group, their task is not so straightforward. The market that has remained conspicuously shallow and illiquid throughout the region is the corporate bond market. To develop this market, doing LW LQGLYLGXDOO\ LV XQOLNHO\ WR ZRUN ,W LV KHUH WKDW UHJLRQDO FRRSHUDWLRQ DSSHDUV PRVW FUXFLDO 2QH OHVVRQ RI WKH $VLDQ FULVLV LV WKDW EDQN QDQFH FDQ VXGGHQO\ GU\ XS 7KRVH in ASEAN that do have banking systems have come to rely excessively on their banks. They KDYH HQGHG XS ZLWK EDQNFHQWULF QDQFLDO V\VWHPV :KHQ WKHLU EDQNV VWRS OHQGLQJ WKHVH $6($1 FRXQWULHV ODFN D VSDUH WLUH )LUPV KDYH QR RWKHU PDUNHW WR ZKLFK WR WXUQ IRU UDLVLQJ GHEW QDQFH 7KH WUDGLWLRQDO VSDUH WLUH LQ FDSLWDO PDUNHWV LV WKH FRUSRUDWH ERQG PDUNHW ,QGHHG ZKHQ WKH JOREDO QDQFLDO FULVLV EURXJKW WKH LQWHUQDWLRQDO FRUSRUDWH ERQG PDUNHW WR D KDOW WKH GRPHVWLF FRUSRUDWH ERQG PDUNHWV VWHSSHG LQ WR SURYLGH QDQFLQJ WR D IHZ of the larger ASEAN companies, albeit in a very limited way. A deeper market would have welcomed many more companies that were starved for funds, including ones that never did have access to the international credit markets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harbor such networks, thus they attract the worlds savings and decide the worlds investments. 7KH KLVWRULFDO ORFNLQ HIIHFWV RI VXFK QHWZRUNV DUH GLIFXOW WR RYHUFRPH 1RQHWKHOHVV WKH geography of information suggests that there are fundamental disadvantages in networks that are based in distant centers. A well-developed network based in Asia could very well UHVKDSH WKH UHJLRQV SDWWHUQ RI FDSLWDO RZV DQG UHQGHU WKH /XFDV 3DUDGR[ D WKLQJ RI WKH SDVW This study aims to identify the key issues involved in the further development and GHHSHQLQJ RI $6($1 QDQFLDO PDUNHWV ,W DUJXHV WKDW IRU WKH VPDOOHU $6($1 HFRQRPLHV WKH UVW SULRULW\ LV WKH GHYHORSPHQW RI WKH EDQNLQJ V\VWHP )RU WKH ODUJHU $6($1 FRXQWULHV WKH banking systems and the capital markets are already reasonably well developed. The one important market that is still missing is a deep and liquid corporate bond market. Because the required critical mass for this market is so large, only a regionwide market would succeed. ,W LV IRU WKLV WKDW UHJLRQDO FRRSHUDWLRQ ZRXOG EH HVVHQWLDO 6HFWLRQ ,, GLVFXVVHG WKH LQWHUPHGLDWLRQ RI $6($1 VDYLQJV LQ QDQFLDO FHQWHUV RXWVLGH RI WKH $VLD DQG 3DFLF UHJLRQ DQG KRZ WKHVH VDYLQJV HYHQWXDOO\ HQG XS DV FDSLWDO LQRZV WR WKH UHJLRQ 7KLV UHF\FOLQJ LV LQHIFLHQW VLQFH WKHVH GLVWDQW QDQFLDO FHQWHUV KDYH QR
Going Regional: How to Deepen ASEANs Financial Markets | 3
fundamental advantage in processing the necessary information for investment decisions. 6HFWLRQ ,,, GLVFXVVHV LVVXHV DULVLQJ RXW RI LPSHUIHFW PDUNHWV DQG WKH ULVNV RI IXOO FDSLWDO PRELOLW\ 7KH WDLO ULVNV RI XQKLQGHUHG FURVVERUGHU RZV LQYROYH VXGGHQ VWRSV DQG FXUUHQW DFFRXQW UHYHUVDOV DV ZHOO DV WKHLU WHQGHQF\ WR QDQFH DVVHW SULFH EXEEOHV WKDW HYHQWXDOO\ lead to disruptive and costly adjustments. These costs are especially high in economies ZLWKRXW ZHOOGHYHORSHG QDQFLDO PDUNHWV RI WKHLU RZQ 6HFWLRQ ,9 EULH\ GLVFXVVHV WKH UROH RI FDSLWDO FRQWUROV LQ PLWLJDWLQJ WKH WDLO ULVNV DVVRFLDWHG ZLWK FURVVERUGHU RZV 6HFWLRQ 9 GLVFXVVHV WKH OHYHO DQG SURFHVV RI QDQFLDO GHYHORSPHQW LQ WKH $6($1 UHJLRQ ,W VKRZV WKDW ZKLOH VLJQLFDQW JDLQV ZHUH DFKLHYHG DIWHU WKH QDQFLDO FULVLV WKH FRUSRUDWH ERQG markets need to develop further. These are the markets that would make the most difference LQ PRYLQJ WRZDUG D PRUH HIFLHQW UHF\FOLQJ RI $6($1 VDYLQJV DQG D PRUH GHVLUDEOH SDWWHUQ RI FDSLWDO RZV 6HFWLRQ 9, SUHVHQWV WKH UDWLRQDOH IRU UHJLRQDO FRRSHUDWLRQ DQG LQWHJUDWLRQ Given the prerequisites of liquidity and the scale economies that the development of bond markets entail, regional cooperation and coordination should provide the local network H[WHUQDOLWLHV WKDW VXSSRUW PDUNHW GHSWK /DVWO\ 6HFWLRQ 9,, OD\V RXW WKUHH EROG SURSRVDOV IRU regional cooperation which would facilitate the growth and development of corporate bond markets in the ASEAN.
II. THE RECYCLING OF SAVINGS 7KURXJKRXW WKH GHFDGH DIWHU WKH $VLDQ QDQFLDO FULVLV 0RKDQW\ DQG 7XUQHU VKRZ that there was a general increase in savings rates in Asia. Much of the growth in savings in Asia is attributable to the Peoples Republic of China (PRC), which together with Japan, accounts for the bulk of savings in the region. The PRCs average savings rate increased WR LQ IURP D GHFDGH HDUOLHU $Q DFFHOHUDWLRQ RI VDYLQJV ZDV DOVR H[SHULHQFHG LQ ,QGLD IURP DQ DYHUDJH UDWH RI LQ WR LQ 2WKHU HPHUJLQJ HFRQRPLHV LQ $VLD KDG D PDUJLQDOO\ ORZHU DYHUDJH VDYLQJ UDWH RI LQ IURP LQ $V $VLDQ VDYLQJV LQFUHDVHG RU UHPDLQHG EXR\DQW from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shows the evolution of savings and investment ratios in the ASEAN, the ASEAN together with the PRC, Japan, and the Republic of Korea, as well in advanced economies. ASEAN FRXQWULHV JHQHUDOO\ KDG KLJKHU VDYLQJV UHODWLYH WR LQYHVWPHQW UDWHV DIWHU RQZDUG (DVW $VLD DV D ZKROH KDG KLJKHU SRVLWLYH VDYLQJVLQYHVWPHQW JDSV VLQFH WKH HDUO\ V ,Q contrast, the savingsinvestment gaps in advanced economies was consistently negative, DOEHLW E\ D PDUJLQDO DPRXQW IURP WR
Figure 1: Savings and Investment (% of GDP)

40 35 30 25 20 15 10
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ASEAN Savings ASEAN+3 Savings Advanced Economies Savings
ASEAN Investment ASEAN+3 Investment Advanced Economies Investment
ASEAN = Association of Southeast Asian Nations, GDP = gross domestic product. Note: ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam; ASEAN+3 includes the PRC, Japan, and the Republic of Korea. Source: Staff calculations using data from the World Economic Outlook (IMF 2011b) and the World Development Indicators (World Bank 2011).
Emerging Asias average investment rates did not grow as fast as its marginal propensity to save. The average rate of investment as a percentage of GDP increased by RQO\ WR LQ IURP LQ 7KLV LPSOLHV WKDW WKHUH LV D KXJH JDS EHWZHHQ VDYLQJV DQG LQYHVWPHQW UDWHV IRU 7KHUH ZDV D VLJQLFDQW UHGXFWLRQ LQ $6($1 LQYHVWPHQW UDWLRV DIWHU IROORZLQJ WKH $VLDQ QDQFLDO FULVLV 9DULRXV SRVVLEOH H[SODQDWLRQV KDYH EHHQ DGYDQFHG 6RPH KDYH FLWHG the lack of animal spirits after accounting for other possible factors; risk aversion increased DIWHU WKH $VLDQ QDQFLDO FULVLV 2WKHUV KDYH VDLG WKDW LQYHVWPHQW ZDV VXERSWLPDOO\ KLJK SULRU WR WKH $VLDQ QDQFLDO FULVLV DQG WKXV WKH IDOO LQ LQYHVWPHQW DV D VKDUH RI JURVV GRPHVWLF SURGXFW *'3 LQ WKH SRVWFULVLV \HDUV ZDV WR EH H[SHFWHG DQG ZHOFRPHG $'% 2QH SRVVLEOH explanation that has been neglected in the literature is simply that the cost of investment has EHFRPH H[RUELWDQW EHFDXVH RI VXERSWLPDO LQWHUPHGLDWLRQ WKURXJK GLVWDQW QDQFLDO FHQWHUV Global investors now demand rather high rates of return for investments in Asia. ,QGLD DQG WKH 35& DFFRXQW IRU WKH EXON RI LQYHVWPHQW JURZWK LQ $VLD $V D SHUFHQWDJH RI RXWSXW WKH 35&V DQG ,QGLDV LQYHVWPHQW WR RXWSXW UDWLRV DUH DSSUR[LPDWHO\ DQG UHVSHFWLYHO\ IRU 2WKHU FRXQWULHV LQ HPHUJLQJ $VLD H[KLELWHG D ORZHU DYHUDJH LQYHVWPHQW UDWLR RI LQ FRPSDUHG WR LWV DYHUDJH RI 7DEOH VKRZV FRPSDUDWLYH JXUHV IRU WKH $6($1
Table 1: Savings and Investments as a Percentage of GDP

Savings Rates Indonesia Malaysia Philippines Singapore Thailand Brunei Darussalam Cambodia Lao PDR Myanmar Viet Nam 19901997 32.3 33.2 18.8 46.9 34.1 37.9 10.4 n.a. 10.7 18.4 20002007 26.7 35.0 18.0 41.7 29.1 49.9 16.7 19.2 16.2 33.1 Investment Rates 19901997 39.2 39.3 23.1 34.6 40.2 29.3 12.1 n.a. 13.9 19.4 20002007 23.9 23.0 17.0 23.0 26.1 14.0 19.0 30.7 12.4 35.1 Surplus Savings 19901997 7.0 6.1 4.2 12.4 6.2 8.6 1.7 n.a. 3.3 1.0 20002007 2.8 12.1 1.0 18.7 3.0 35.9 2.4 11.5 3.9 2.0
GDP = gross domestic product. Source: IMF International Financial Statistics, available: (http://elibrary-data.imf.org), downloaded 14 September 2011.
1RWH WKDW DOO FRXQWULHV LQ WKH $6($1 H[FHSW &DPERGLD WKH /DR 3'5 DQG 9LHW 1DP UHHFWHG KLJKHU DYHUDJH VDYLQJV UDWHV UHODWLYH WR LQYHVWPHQW UDWHV DIWHU WKH $VLDQ QDQFLDO crisis. Hence, the PRC and most of the economies in the ASEAN accumulated surplus VDYLQJV LQ 7KH VHFXODU WUHQG LQ VDYLQJV DQG LQYHVWPHQW UDWLRV LQ WKH $6($1 DQG $6($1 FRPSRVHG RI WKH $6($1 PHPEHU FRXQWULHV DQG WKH 35& -DSDQ DQG WKH 5HSXEOLF RI .RUHD LV VKRZQ LQ )LJXUH 7KH ULVH LQ WKH VDYLQJVLQYHVWPHQW JDS LQ $VLD LV UHHFWHG LQ WKH SHUVLVWHQW WUHQG RI ODUJH FXUUHQW DFFRXQW VXUSOXVHV LQ $VLD DV VHHQ LQ )LJXUH 7KH 35& DQG -DSDQ GRPLQDWH WKH QXPEHUV RQ WKH VXUSOXV VLGH ZKLOH WKH 86 GRPLQDWHV RQ WKH GHFLW VLGH Figure 2: Current Account Balances ($ million)
800,000 600,000 400,000 200,000 0 200,000 400,000 600,000 800,000 1,000,000 Europe India Japan ASEAN United States Republic of Korea Peoples Republic of China 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ASEAN = Association of Southeast Asian Nations. Note: ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. Source: IMF International Financial Statistics, available: (http://elibrary-data.imf.org), downloaded 14 September 2011.
Bernanke (2005) attributes the trend in global current account imbalances to the JOREDO VDYLQJV JOXW DOWKRXJK *UXEHU DQG .DPLQ DQG &KLQQ DQG ,WR DUJXH WKDW RWKHU IDFWRUV LQ FRQXHQFH ZLWK WKH DGYHQW RI $VLDQ VDYLQJV H[SODLQ WKH SHUVLVWHQFH of the imbalance. Cheung and Rustecilli (2010) extend the analysis of current account imbalances by dichotomizing the various factors as either structural or cyclical, and conclude that structural factors2 generally drive the persistence of the imbalance. Gruber and Kamin QRWH WKDW WKH FXUUHQW SDWWHUQ RI SHUVLVWHQW FXUUHQW DFFRXQW VXUSOXVHV LQ $VLD FRXOG EH H[SODLQHG E\ WKH LQWHUDFWLRQ RI QDQFLDO FULVHV DQG VWDQGDUG PDFURHFRQRPLF GHWHUPLQDQWV of the current account, which effectively imply some form of heightened risk aversion and LQVXUDQFHVHHNLQJ EHKDYLRU &KLQQ DQG ,WR H[DPLQH PDFURHFRQRPLF GHWHUPLQDQWV RI the current account controlling for institutional factors, the legal environment, and degree of QDQFLDO RSHQQHVV DQG QG WKDW VFDO EDODQFH LV DQ LPSRUWDQW GHWHUPLQDQW RI FXUUHQW DFFRXQW outcomes in industrialized countries. They argue that the scarcity of savings in the US, underinvestment in Asia presumably due to increased risk aversion, and the well-developed QDQFLDO PDUNHWV LQ WKH 86 FRXOG H[SODLQ WKH SHUVLVWHQFH RI WKH LPEDODQFH The regions surplus savings were channeled to bank deposits given an increase in ULVN DYHUVLRQ DIWHU WKH $VLDQ QDQFLDO FULVLV 7KLV JDYH EDQNV D VXEVWDQWLDO VRXUFH RI GHSRVLWV that it could tap as the regions largely export-led growth led to an increase in the demand for credit. Export-led growth and the surplus savings in the region translated to persistent current account surpluses beginning at the turn of the century. The corresponding net capital LQRZV LQWR WKH UHJLRQ PRVW RI ZKLFK ZHUH VWHULOL]HG WUDQVODWHG LQWR D EXLOGXS RI UHVHUYHV The increase in Asian surplus savings, the sterilized interventions by the Asian monetary authorities, and the institution of micro-prudential regulation through strict imposition of Basel , DQG ,, SURYLGHG EDQNV ZLWK DQ HQYLURQPHQW WKDW DOORZHG IRU VWURQJHU EDODQFH VKHHW SRVLWLRQV (Mohanty and Turner 2010). The availability of local currency government bonds also gave VRPH HOERZ URRP IRU OLTXLG LQYHVWPHQWV ZLWK UHODWLYHO\ KLJK UHWXUQV DQG DPSOH OLTXLGLW\ ,Q FRQWUDVW DGYDQFHG QDQFLDO V\VWHPV RXWVLGH RI $VLD VDZ DQ LQFUHDVH LQ LQWHUGHSHQGHQFLHV EHWZHHQ EDQNV DQG QRQEDQN QDQFLDO LQVWLWXWLRQV ZLWK EDQNV EHFRPLQJ PRUH GHSHQGHQW on wholesale fund providers, typically of short-term capital, in lieu of retail deposits. The reduced reliance on retail deposits did not occur in developing Asia, where bank deposits as D SHUFHQWDJH RI FXPXODWLYH QRPLQDO *'3 LQFUHDVHG E\ IRU 7KH GHSRVLW LQWDNH ZDV DSSUR[LPDWHO\ KLJKHU WKDQ WKH EDQN FUHGLW WR QRPLQDO *'3 UDWLR RI ,Q FRQWUDVW WKH LQFUHDVH LQ WKH UDWLR RI QRPLQDO GHSRVLWV WR FXPXODWLYH QRPLQDO *'3 IRU LQGXVWULDOL]HG FRXQWULHV ZDV RQO\ GXULQJ WKH VDPH SHULRG ZLWK DQ HTXLYDOHQW QRPLQDO EDQN FUHGLW UDWLR RI VHH 0RKDQW\ DQG 7XUQHU
These are cross-country differences in demographics, fiscal deficits, oil dependency and intensity, stage of economic development, financial market development, and quality of institutions.
7KH RZ RI $VLDQ VDYLQJV LQWR DGYDQFHG HFRQRPLHV LV DQ H[WUHPH IRUP RI WKH /XFDV 3DUDGR[ 1RW RQO\ GRHV FDSLWDO QRW RZ IURP ULFK FRXQWULHV WR SRRUHU FRXQWULHV WR UHHFW WKH ODFN RI FDSLWDO LQ WKH ODWWHU LQ WKH FDVH RI $VLD LW HYHQ RZV LQ WKH RSSRVLWH GLUHFWLRQIURP the poorer countries to the rich countries. Studies such as Kim, Kim, and Park (2011) show WKDW DOWKRXJK LQYHVWPHQW LQ HPHUJLQJ $VLD LV XOWLPDWHO\ QDQFHG E\ VDYLQJV LQ WKH UHJLRQ WKLV KDSSHQV LQ D URXQGDERXW PDQQHU $V LQGLFDWHG LQ )LJXUH $VLDQ VDYLQJV JR DEURDG LQ the form of low-yielding reserve assets and come back largely in the form of foreign direct LQYHVWPHQW DQG RWKHU LQYHVWPHQWV ,Q RWKHU ZRUGV WKH\ DUH ODUJHO\ UVW VHQW WR JOREDO QDQFLDO FHQWHUV OLNH 1HZ <RUN DQG /RQGRQ DQG RQO\ VRPH UHWXUQ WR WKH UHJLRQ ,Q WKH SURFHVV RI intermediation abroad, they come back as expensive, high-return investments. Figure 3: Net Capital Flows ($ billion)
ASEAN 100 50 0 50 400 100 150 200 600 800
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
PRC, Japan, and Republic of Korea 400 200 0 200
1,000
Errors and omissions Other investment Portfolio investment Foreign direct investment Reserve assets
ASEAN = Association of Southeast Asian Nations, PRC = People's Republic of China. Notes: A positive number indicates capital inflow. Aggregate of the listed countries. ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. For 2010, aggregate of the listed economies except Brunei Darussalam, Cambodia, and the Lao PDR. Sources: IMF International Financial Statistics, available: (http://elibrary-data.imf.org), downloaded 14 September 2011.
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borrowers turned largely to domestic banks, which in turn borrowed heavily overseas in foreign currencies with short maturities. This double mismatch in exposures rendered the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presence of alternative intermediation channels, such as bond markets, could have provided DQ DOWHUQDWLYH VRXUFH RI H[WHUQDO QDQFLQJ WR WKH FRUSRUDWH VHFWRU ZKHQ WKH EDQNV EHJDQ WR have problems with currency and maturity mismatches in their balance sheets. Had this been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bubbles, a phenomenon that is repeatedly observed, is driven by seemingly rational behavior RI H[SHFWHG SURW PD[LPL]DWLRQ under conditions of asymmetric information. This is unstable DQG HYHQWXDOO\ OHDGV WR FRVWO\ GLVUXSWLRQV DQG QDQFLDO LQVWDELOLW\ 7KH SDWWHUQ RI FDSLWDO LQRZV DQG RXWRZV LQWR DQG RXW RI WKH $6($14 by type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
Several behavioral theories attempt to explain the formation of asset price bubbles. Interested readers may refer to Shiller (2003) and Lansing (2007). 4 The ASEAN-5 is comprised of Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
Figure 4: ASEAN-5 Capital Inflows and Outflows by Category ($ million)

Direct Investment 80,000 60,000 40,000 20,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FDI outflow FDI inflow Equity 40,000 20,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Equity outflow Equity inflow Debt 30,000 20,000 10,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0 20,000 40,000 60,000
FDI net
0 20,000 40,000 60,000
Equity net
0 10,000 20,000 30,000
Debt outflow
Debt inflow
Debt net
FDI = foreign direct investment, ASEAN-5 = Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Source: Authors' estimates.
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IV. THE ROLE OF CAPITAL CONTROLS $W WKH WKHRUHWLFDO OHYHO WKH )HOGVWHLQHorioka puzzle5 and the Home Bias Puzzle6 have withstood innumerable efforts to overturn them. The high correlations between domestic VDYLQJ DQG LQYHVWPHQW UDWHV LQ RWKHUZLVH UHODWLYHO\ RSHQ HFRQRPLHV LQ WKH 2UJDQLVDWLRQ IRU (FRQRPLF &RRSHUDWLRQ DQG 'HYHORSPHQW 2(&' LPSO\ WKDW FDSLWDO LV UHODWLYHO\ LPPRELOH even in the advanced economies. This empirical regularity is inconsistent with the notion WKDW VDYLQJV RZ IURP DGYDQFHG HFRQRPLHV LQ WKH IRUP RI LQYHVWPHQWV LQ OHVV GHYHORSHG economies, resulting in global welfare gains. This also implies that consumption smoothing DQG ULVN GLYHUVLFDWLRQ DUH EHQHWV WKDW FDQQRW EH DXWRPDWLFDOO\ H[SHFWHG ZLWK FURVVERUGHU FDSLWDO OLEHUDOL]DWLRQ 7KH PRVW LPSRUWDQW EHQHW IURP WKH VWDQGSRLQW RI HFRQRPLF GHYHORSPHQW is the potential for foreign direct investments into the real sector. The Lucas Paradox suggests that this would not be a likely outcome. (YHQ LI WKH JDLQV IURP FDSLWDO DFFRXQW RU QDQFLDO OLEHUDOL]DWLRQ ZHUH UHDOL]HG KRZHYHU such gains may not be particularly large. Gourinchas and Jeanne (2006) conduct a policy H[SHULPHQW RQ WZR FDOLEUDWHG PRGHOV RI HFRQRPLF GHYHORSPHQW DQG QG WKDW WKH SRWHQWLDO JDLQV IURP FDSLWDO OLEHUDOL]DWLRQ DUH OLNHO\ WR EH VPDOO QRW H[FHHGLQJ D LQFUHDVH LQ UHDO consumption given estimated parameter values in production and intertemporal elasticities of substitution. Employing a neoclassical model akin to A. RamseyCassKoopmans Model, and a Macro-Mincer model with human capital and distortions, they conclude that any substantial gains arising from capital liberalization could not come from channels arising out of the standard neoclassical model of economic development. The implication is that QDQFLDO OLEHUDOL]DWLRQ ZRXOG KDYH WR LQGXFH LPSURYHPHQWV LQ IDFWRU SURGXFWLYLW\ LQ RUGHU WR produce substantial improvements in economic growth. Their research results imply that it LV EHWWHU WR LQWURGXFH SROLFLHV WKDW UHGXFH GRPHVWLF GLVWRUWLRQV SULRU WR QDQFLDO OLEHUDOL]DWLRQ in order to realize substantial gains from liberalization. While lacking in empirical content, the results of their study are consistent with the observation that countries with relatively undeveloped internal markets fail to gain from cross-border capital account liberalization. The economic performance of emerging market economies (EMEs) and patterns in RZV RI FDSLWDO GXULQJ WKH $VLDQ QDQFLDO FULVLV DQG WKH JOREDO QDQFLDO FULVLV KDYH OHG WR WKH UHQHZHG LQWHUHVW LQ WKH XVHIXOQHVV RI FDSLWDO FRQWUROV 7KH GRJPD RI QDQFLDO OLEHUDOL]DWLRQ KDG SULPDF\ LQ WKH V DQG V RQ WKH JURXQGV RI VXSSRVHG ZHOIDUH JDLQV arising from consumption smoothing and risk sharing, but the lack of empirical evidence on actual gains coupled with real costs of vulnerability to crises arising from sudden stops and reversals increasingly cast doubt on its validity. There is mounting evidence that the path
5
Under the intertemporal theory of the current account and capital mobility, savings and investment should have a low correlation, since investors could borrow or lend abroad without being constrained by the amount of domestic savings. Feldstein and Horioka (1980) found high correlations between savings and investments in OECD countries, contrary to the prediction of theory. 6 The Home Bias Puzzle is attributable to French and Poterba (1991), and reflects the finding that equity investors tend to invest locally despite the presence of higher yielding investments and benefits from overseas investments, contrary to the prediction of finance theory.
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6XUJHV LQ FDSLWDO LQRZV WHQG WR QDQFH DVVHW SULFH EXEEOHV HVSHFLDOO\ LQ WKH SURSHUW\ VHFWRU ,QDWLRQ WDUJHWLQJ FHQWUDO EDQNV LQ WKH UHJLRQ ,QGRQHVLD WKH 3KLOLSSLQHV DQG 7KDLODQG have remained reluctant to use monetary policy as a tool against asset price bubbles and primarily use macroprudential measures such as ceilings on loan-to-value ratios, property cooling measures, and reserve requirements. 2VWU\ HW DO SURSRVH D IUDPHZRUN LQ ZKLFK FDSLWDO FRQWUROV PD\ EH XVHG LQ conjunction with macroeconomic and prudential policies in order to address potential problems DVVRFLDWHG ZLWK VXUJHV LQ FDSLWDO RZV 7KLV SUHOLPLQDU\ IUDPHZRUN LV VXJJHVWHG DV D XVHIXO starting point in harmonizing any effort to arrive at a regional framework for a multilateral DJUHHPHQW RQ WKH XVH RI FDSLWDO RZV WR JXDUG DJDLQVW QDQFLDO YXOQHUDELOLW\ HYHQ DV HIIRUWV to undertake regionwide liberalization is being implemented. However, this framework is seen E\ PDQ\ HPHUJLQJ HFRQRPLHV DV DZHG LQ WKDW LW DOORZV WKH XVH RI FDSLWDO FRQWURO PHDVXUHV only as a last resort when every other measure has failed. However, at that point, capital controls are less likely to work. ,Q WKHLU VXUYH\ RI WKH OLWHUDWXUH RQ PDQDJLQJ FDSLWDO LQIORZV .DZDL DQG 7DNDJL DUJXH WKDW WKHUH DUH QR VLPSOH UXOHV RQ WKH SDFH DQG VHTXHQFLQJ RI FDSLWDO DFFRXQW liberalization and that certain preconditions must exist in order to address macroeconomic DQG QDQFLDO VWDELOLW\ ULVNV DVVRFLDWHG ZLWK FURVV ERUGHU RZV 7KH\ DUJXH WKDW HOHPHQWV RI VRXQG PDFURHFRQRPLF SROLF\ LQFOXGLQJ VFDO GLVFLSOLQH SUXGHQW H[WHUQDO GHEW PDQDJHPHQW D H[LEOH H[FKDQJH UDWH DQG WKH WUDQVSDUHQW FRQGXFW RI PRQHWDU\ DQG H[FKDQJH SROLFLHV must be put in place. These preconditions are consistent with the framework proposed by 2VWU\ HW DO $ PXOWLODWHUDO DSSURDFK LV KRZHYHU UHLWHUDWHG VLQFH HDFK PHPEHU VWDWH KDV D GLIIHUHQW VWDWH RI GRPHVWLF QDQFLDO PDUNHW GHYHORSPHQW DQG LV FRQVHTXHQWO\ H[SRVHG WR YDU\LQJ OHYHOV RI QDQFLDO IUDJLOLW\
V. FINANCIAL MARKET DEVELOPMENT IN ASEAN COUNTRIES 7KH LQHIFLHQW LQWHUPHGLDWLRQ RI $VLDQ VDYLQJV DULVLQJ IURP WKH UHJLRQV UHODWLYHO\ XQGHUGHYHORSHG QDQFLDO V\VWHPV DQG WKH ULVNV DVVRFLDWHG ZLWK YRODWLOH FDSLWDO RZV UHTXLUHV D SURDFWLYH GHYHORSPHQW DSSURDFK 7KH EHQHWV IURP LQFUHDVLQJ WKH GHSWK RI QDQFLDO PDUNHWV LQ $VLD in terms of reduced exposure to the tail risks of capital mobility as well as in providing a PRUH HIFLHQW SODWIRUP IRU LQWHUPHGLDWLQJ $6($1 VDYLQJV VKRXOG SURYLGH WKHVH HFRQRPLHV enough incentives to push such an initiative. A. The Asian Financial Crisis and Developments in ASEAN Depository Institutions
7KH EDQN FHQWULF QDWXUH RI $VLDQ QDQFLDO V\VWHPV LQ WKH UXQXS WR WKH $VLDQ QDQFLDO crisis was exacerbated by the fact that banks were generally badly managed and poorly supervised (Mohanty and Turner 2010). The relatively high regional (and global) growth
UDWHV IURP WR WRJHWKHU ZLWK OLEHUDOL]HG FURVV ERUGHU FDSLWDO RZV HQFRXUDJHG banks to incur foreign currency debt with relatively short maturities to take advantage of the LQFUHDVHG ORFDO GHPDQG IRU FUHGLW (DVH RI DFFHVV WR IRUHLJQ FXUUHQF\GHQRPLQDWHG QDQFLQJ encouraged banks to take unhedged positions and engage in excessive risk taking. This SUDFWLFH OHIW WKHP YXOQHUDEOH WR WKH VXGGHQ VWRS RI GHEW LQRZV DQG VXEVHTXHQW UHYHUVDOV LQ 6LQFH QRQEDQN UPV DUH KHDYLO\ GHSHQGHQW RQ WKH ORFDO EDQNLQJ V\VWHP IRU GHEW QDQFLQJ WKLV VHW WKH VWDJH IRU WKH WUDQVPLVVLRQ RI WKH HQVXLQJ QDQFLDO FULVLV LQWR WKH UHDO side of the economy, resulting in severe economic contractions in most ASEAN economies. Retail deposit growth in the ASEAN, except for Cambodia, exceeded gross loans in DQG DOWKRXJK WKH ORDQ WR GHSRVLW UDWLRV IRU ,QGRQHVLD WKH /DR 3'5 DQG 7KDLODQG ZHQW XS GXULQJ WKH JOREDO QDQFLDO FULVLV 5HH 7KLV LV UHHFWLYH RI EDQNV LQFUHDVHG ULVN DYHUVLRQ DIWHU WKH QDQFLDO FULVLV ZLWK WKH FRQVHTXHQFH RI UHGXFHG UHOLDQFH RQ wholesale funding. ,Q DGGLWLRQ ORFDO EDQNV LQWHUQDWLRQDO OHQGLQJ LQFUHDVHG VLJQLFDQWO\ beginning in 2006, hand in hand with the increase in deposits in international banks. This LPSOLHV WKDW FODLPV LQ %DQN RI ,QWHUQDWLRQDO 6HWWOHPHQWV %,6 UHSRUWLQJ EDQNV H[FHHGHG WKHLU OLDELOLWLHV LQ PRVW \HDUV ,QWHUQDWLRQDO EDQNV DOVR WHQGHG WR OHQG WR $VLDQ EDQNV LQ ORFDO FXUUHQF\ VXFK WKDW D FXUUHQF\ PLVPDWFK ZDV DYRLGHG ,Q JHQHUDO WKH OLTXLGLW\ RI $VLDQ banks, including those in the ASEAN, dramatically improved at the turn of the century. ,Q DGGLWLRQ WR LQFUHDVHG ULVN DYHUVLRQ LQ WKH DIWHUPDWK RI WKH $VLDQ QDQFLDO FULVLV favorable macroeconomic conditions and micro-prudential regulations resulted in strong EDODQFH VKHHW SRVLWLRQV ZLWK VLJQLFDQWO\ OHVV UHOLDQFH RQ FDSLWDO RZV RXWVLGH RI WKH UHJLRQ 0RKDQW\ DQG 7XUQHU ,PSURYHG DFFHVV WR LQWHUQDWLRQDO FDSLWDO PDUNHWV DOVR DOORZHG QRQEDQN UPV WR GLUHFWO\ REWDLQ FURVVERUGHU ORDQV WKHUHE\ VXEVWDQWLDOO\ UHGXFLQJ WKH UROH RI EDQNV LQ LQWHUPHGLDWLQJ FDSLWDO RZV $V D UHVXOW WKH $6($1 EDQNLQJ V\VWHPV EHFDPH even more resilient against external shocks. 1RQEDQN UPV DUH OLNHZLVH EHJLQQLQJ WR WDS RYHUVHDV PDUNHWV IRU H[WHUQDO QDQFLQJ implying a potential for corporate bond market development within the region. The combined effect of faster growth in deposits relative to the demand for bank credit, the availability of local currency loans from foreign banks, and the available revenue alternatives in the form RI VRYHUHLJQ ERQGV JDYH EDQNV LQ WKH $6($1 (0(V D VXIFLHQW OLTXLGLW\ FXVKLRQ WR HPSOR\ countercyclical lending. Bank lending in the region has also become more inclusive, with retail consumer GHEW ULVLQJ VXEVWDQWLDOO\ LQ ,QGRQHVLD DQG 0DOD\VLD 3ULRU WR WKH $VLDQ QDQFLDO FULVLV $6($1 banks generally engaged in a one-way intermediation process where household savings were transformed into bank deposits and eventually converted into corporate credit. Upon UHFRYHU\ IURP WKH FULVLV WKHUH ZDV DQ LQFUHDVH LQ WZRZD\ LQWHUPHGLDWLRQ DQG WKHUH ZDV rapid development in consumer banking (Mohanty and Turner 2010). This rise in mortgage
8
These prudential measures include single and group borrower limits as well as tighter provisions on the dispensation of credit to shareholders, officers, and related interests. Basel I and II ensured that capital adequacy is sufficient and that risks are carefully monitored and controlled.
and consumer lending is indicative of improved avenues for consumption smoothing on the part of households, as well as reduced exposures to trade shocks on the part of banks. B. Deepening ASEAN Financial Systems
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that it is imperative that bond markets are developed in the ASEAN (Gyntelberg, Ma, and 5HPRORQD *DUFLD+HUUHUR :RROGULGJH DQG <DQJ QG WKDW WKH ODFN RI OLTXLGLW\ LQ $VLDQ QDQFLDO PDUNHWV LV WKH PDMRU UHDVRQ ZK\ $VLDQ VDYLQJV DUH SUHGRPLQDQWO\ LQYHVWHG outside of the region. The underlying problems of bank-centric financial systems under government regulation were increasingly viewed as a source of risk to the region. The subsequent LQWHUHVW LQ GHYHORSLQJ FDSLWDO PDUNHWV DQG FRQYHUWLQJ WKH QDQFH VHFWRU WR EH DQ LQVWUXPHQW for economic growth rather than an independent industry was a consequence of this belief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markets, a further deepening of the banking sectors in these two economies is likely to be QHFHVVDU\ EHIRUH WKH RWKHU QDQFLDO PDUNHWV FDQ EH GHYHORSHG
Table 2: Financial Depth of ASEAN+3 Countries Market Size as a Percentage of GDP (as of end 2010)
Brunei Darussalamb Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Namb China, People's Rep. of Japan Korea, Rep. of Memo: United States Euro areac Domestic Bank Credit 32.0 23.3 35.6 132.2 52.1 85.7 109.0 123.0 147.6 237.6 103.2 104.4 156.5 Stock Market 51.0 171.7 83.4 290.6 87.1 37.0 46.2 70.1 108.4 117.9 55.2 Debt Securities Market 13.2 100.8 33.9 57.8 70.7 24.8 251.6 110.3 172.9 111.5
... = Data not available, GDP = gross domestic product, PPP = purchasing power parity. aFor domestic bank credit, end-2009. bWeighted averages based on 2005 GDP and PPP exchanges rates. Sources: Staff calculations using data from International Financial Statistics (IMF 2011a), World Economic Outlook (IMF 2011b), and World Federation of Exchanges (2011).
:KHQ LW FRPHV WR QDQFLDO PDUNHWV LW LV VDLG WKDW LQ $VLD HTXLW\ LV NLQJ ,QGHHG WKH VWRFN PDUNHWV LQ PRVW RI WKH $6($1 HFRQRPLHV DUH WKULYLQJ $V VKRZQ LQ 7DEOH in the Republic of Korea, Malaysia, and Singapore, the ratio of stock market capitalization WR *'3 H[FHHGV ,Q FRQWUDVW %UXQHL 'DUXVVDODP &DPERGLD DQG 0\DQPDU KDYH QR stock markets to speak of. Trading in the Lao Securities Exchange started only in January 2011, with two listed companies. Because of its wealth and its easy access to the Singapore PDUNHW %UXQHL 'DUXVVDODP SUREDEO\ KDV QR QHHG IRU LWV RZQ VWRFN PDUNHW )RU &DPERGLD DQG 0\DQPDU KRZHYHU D VWRFN PDUNHW FDQ EH FRQVLGHUHG WR EH ORZKDQJLQJ IUXLW IRU QDQFLDO market development. :KLOH JHQHUDOO\ QRW DV ZHOO GHYHORSHG DV WKH VWRFN PDUNHWV VLJQLFDQW GRPHVWLF GHEW PDUNHWV DOVR H[LVW LQ PRVW RI WKH $6($1 HFRQRPLHV $V VKRZQ LQ 7DEOH RQO\ YH RI WKH economies lack such markets, namely Brunei Darussalam, Cambodia, Lao PDR, Myanmar, DQG 9LHW 1DP 1RQHWKHOHVV HYHQ IRU WKH RWKHU HFRQRPLHV LW LV RQO\ WKH JRYHUQPHQW GHEW markets that are well developed. As discussed further below, the corporate debt markets remain much less well developed.
Table 3: Outstanding Bonds by Category ($ billion)

2000 Corporate Government Total 2.4 51.2 53.6 31.4 28.4 59.8 0.2 20.7 20.9 17.0 25.0 42.0 14.1 16.7 30.8 65.1 142 207.1 2010 Corporate Government Total 11.6 81.9 93.5 111.9 128 239.9 2.3 61.7 64.0 26.0 102.8 128.8 59.5 166.1 225.6 211.3 540.5 751.8 Average Growth per Annum Corporate Government Total 38 6 7 26 35 30 105 20 21 5 31 21 32 89 63 22 28 26
Indonesia Malaysia Philippines Singapore Thailand Total
Source: Staff calculations using Bloomberg and World Federation of Exchanges data.
7KH YDOXH RI FRUSRUDWH GHEW VHFXULWLHV LQ WKH $6($1 LQ ZDV RQO\ ELOOLRQ ZKHUHDV WKH WRWDO YDOXH RI GRPHVWLF EDQN FUHGLW VXUSDVVHG WULOOLRQ 2I WKH RXWVWDQGLQJ ELOOLRQ RI ERQG LVVXDQFHV DV RI DSSUR[LPDWHO\ ZHUH VRYHUHLJQ ERQGV Malaysia has the biggest outstanding value of corporate bonds at close to $112 billion in 7KDLODQGV RXWVWDQGLQJ YDOXH RI ELOOLRQ LV D IDU VHFRQG 7KH 3KLOLSSLQHV KDV WKH VPDOOHVW YROXPH RI LVVXDQFHV DW ELOOLRQ 7KH FRPSDUDWLYH VL]H RI JRYHUQPHQW DQG FRUSRUDWH ERQG PDUNHWV LQ WKH $6($1 LV VKRZQ LQ )LJXUH Figure 5: Outstanding Government versus Corporate Bonds, year-end 2010 ($ billion)
180 160 140 120 100 80 60 40 20 0
Indonesia
Malaysia
Philippines Singapore Corporate
Thailand
Government
Source: Staff calculations using Bloomberg and World Federation of Exchanges data.
$ FXUVRU\ H[DPLQDWLRQ RI KLVWRULFDO ERQG PDUNHW YROXPHV IRU WKH $6($1 DQG $6($1 LQ )LJXUH UHYHDOV WKDW ZKLOH FRUSRUDWH ERQGV DUH JURZLQJ WKH JURZWK DQG DEVRUSWLRQ RI sovereign issuances outstripped the growth of corporate bonds. The growth differentials resulted in a gradual decline in the composition of corporate bonds relative to the total from DSSUR[LPDWHO\ LQ WR LQ 7KH DYHUDJH JURZWK UDWHV RI FRUSRUDWH ERQG LVVXDQFH LQ ,QGRQHVLD DQG WKH 3KLOLSSLQHV DUH VLJQLILFDQWO\ KLJKHU SRVWLQJ DYHUDJH SHU DQQXP JURZWK UDWHV RI DQG UHVSHFWLYHO\ IRU 7KH FDYHDW LV WKDW WKHVH FRXQWULHV KDG VXEVWDQWLDOO\ VPDOOHU volumes of outstanding bonds in 2000. This is particularly true for the Philippines, which only had $200 million of outstanding corporate bonds in 2000. The continued dominance of EDQNV LV LOOXVWUDWHG E\ WKH IROORZLQJ FKDUWV LQ )LJXUH
Figure 6: Domestic Bank Credits and Outstanding Local Currency Bonds ($ billion)
Domestic Bank Credit 30,000 25,000 20,000 15,000 1,500 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ASEAN+3 ASEAN (rhs) Outstanding Asian Local Currency Bonds 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ASEAN+3 Corporate ASEAN Corp (rhs)
Notes:
3,500 3,000 2,500 2,000
1,000 500 0
700 600 500 400 300 200 100 0
ASEAN+3 Government ASEAN Govt (rhs)
ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam; ASEAN+3 includes the PRC, Japan, and the Republic of Korea. Sources: Data on domestic bank credit from International Financial Statistics (IMF 2012a); data on outstanding Asian local currency bonds from Asian Bonds Online, available: asianbondsonline.adb.org/
A quick examination of the right hand side axes reveals the disparity in the relative volumes of domestic credit and outstanding bond issuances in the ASEAN. Note further that WKH OHIW KDQG VLGH D[HV GHQRWLQJ WKH $6($1 SRLQWV WR D VPDOOHU JDS EHWZHHQ EDQN FUHGLW and bond issuances, implying that the ratio of bank credit to outstanding bonds is smaller for the PRC, Japan, and the Republic of Korea. The extent of bank dominance is likewise seen in Table 4. Note that the share of EDQN DVVHWV WR WKH WRWDO VL]H RI WKH QDQFH VHFWRU LV VLJQLFDQWO\ KLJKHU WKDQ WKH VKDUH RI GHEW VHFXULWLHV ,Q FRPSDULVRQ WKH VKDUH RI GHEW VHFXULWLHV LQ -DSDQ LV PXFK ELJJHU UHODWLYH to the share of debt securities. The gap between the two debt classes is also smaller for WKH 5HSXEOLF RI .RUHD 7KH FRPSDUDWLYH JXUHV IRU WKH 86 EDQN DVVHW DQG GHEW VHFXULWLHV indicate that debt securities are twice as large as bank debt (Sheng 2011). There is no bank sector information for Brunei Darussalam and Myanmar, and WKH\ KDYH QR VWRFN H[FKDQJHV DV RI 2FWREHU 7KH VWRFN PDUNHWV RI &DPERGLD DQG the Lao PDR only opened in January 2010 and July 2011 respectively; and stock market FDSLWDOL]DWLRQ DQG ERQG PDUNHW SULFLQJ GDWD DUH QRW \HW DYDLODEOH 2I WKH SHULSKHUDO $6($1 FRXQWULHV 9LHW 1DP VHHPV WR KDYH WKH PRVW DGYDQFHG QDQFLDO PDUNHW 1HYHUWKHOHVV LWV EDQN DVVHWV DQG VWRFN PDUNHW FDSLWDOL]DWLRQ DV D SHUFHQWDJH RI *'3 DUH VLJQLFDQWO\ ORZHU than those in the ASEAN-5. Table 4: Global Finance Sector Indicators, 2010 (% of assets)
Bank Asset, Stock Market Capitalization, and Debt Securities ($ billion) 1,060 1151 415 1408 1054 -6 2 -69 5165 19746 27263 4150 56325 Share of Bank Assets (%) 54 40 37 41 51 -100 100 -18 45 71 34 43 49 Share of Stock Market Capitalization (%) 34 36 38 46 26 ----55 37 14 14 26 17 Share of Debt Securities (%) 12 24 25 13 22 ----27 18 16 52 30 35
Indonesia Malaysia Philippines Singapore Thailand Brunei Darussalam Cambodia Lao PDR Myanmar Viet Nam ASEAN China, People's Rep. of Japan Korea, Rep. of ASEAN+3
-- = Data not available, ASEAN = Association of Southeast Asian Nations, ASEAN+3 includes the ASEAN members and the PRC, Japan, and the Republic of Korea. Notes: Debt securities includes all issuers of domestic and international securities Cambodia and the Lao PDR have data on bank assets only; for the Lao PDR, bank assets are as of June 2010. Sources: Staff calculations using data from Bank for International Settlements, available: www.bis.org/statistics/bankstats.htm; World Bank's World Development Indicators, available: data.worldbank.org/data-catalog/world-development-indicators; IMF World Economic Outlook, available: www.imf.org/external/pubs/ft/weo/2011/02/weodata/download.aspx; CEIC Database, available: www.ceicdata.com/; World Federation of Exchanges, available: www.world-exchanges.org/statistics; Bank scope, available: www.library.hbs.edu/go/bankscope.html; and country central bank websites; all downloaded 14 September 2011.
,Q WHUPV RI DVVHW GLVWULEXWLRQV IRXQG LQ 7DEOH QRWH WKDW WKH $6($1 LV DOVR PXFK PRUH GHSHQGHQW RQ WKH HTXLWLHV PDUNHW FRPSDUHG WR WKH 35& DQG -DSDQ DV RI ,QGRQHVLD and Thailand had the highest degree of dependence on banks whereas the Philippines was the least dependent. Among the peripheral ASEAN countries, Cambodia and the Lao PDR DUH WRWDOO\ GHSHQGHQW RQ EDQNV IRU QDQFLDO LQWHUPHGLDWLRQ 9LHW 1DP RQ WKH RWKHU KDQG has a higher level of dependence on the equities market. While it has the most developed GRPHVWLF FDSLWDO PDUNHW LQ WKH $6($1 SHULSKHUDO FRXQWULHV LWV QDQFLDO VHFWRU VWLOO QHHGV IXUWKHU GHYHORSPHQW WR EULQJ LW XS WR SDU ZLWK WKH $6($1 /HXQJ QRWHV WKDW 9LHW Nams banking system is still dominated by state-owned commercial banks, and that banking VXSHUYLVLRQ DQG JRYHUQDQFH QHHG WR EH VLJQLFDQWO\ XSJUDGHG 7KHUH LV D QHHG IRU IXUWKHU institutional development and capability building in key macroeconomic institutions. ,Q FRQWUDVW 6KHQJ QRWHV WKDW WKH SURSRUWLRQ RI GHEW VHFXULWLHV UHODWLYH WR LWV VXP ZLWK EDQN DVVHWV DQG HTXLWLHV PDUNHW FDSLWDOL]DWLRQ LQ WKH 86 DQG (XURSH IRU LV DQG UHVSHFWLYHO\ 7KH VKDUH RI EDQN DVVHWV LQ WKH 86 DQG (XURSH ZDV DQG UHVSHFWLYHO\ VXFK WKDW (XURSH KDV D VLJQLFDQWO\ ORZ OHYHO RI GHSHQGHQFH RI WKH equities markets as a source of capital. The persistence of demand for bank credit may have been due to the increased SUHIHUHQFH IRU LQWHUQDO DQG H[WHUQDO HTXLW\ QDQFLQJ JLYHQ WKH LQFUHDVHG ULVN DYHUVLRQ DIWHU WKH QDQFLDO FULVLV 0RKDQW\ DQG 7XUQHU EXW DOVR H[DFHUEDWHG E\ WKH SHUFHLYHG high transactions costs of corporate bond issuance (Goswami and Sharma 2011). :LWK WKH SHUVLVWHQW GRPLQDQFH RI EDQNV LQ ORFDO QDQFLDO PDUNHWV DQG WKH GHYHORSPHQW of sovereign bond markets, the former began to hold on to an increasing share of government bonds in their asset portfolios, effectively raising the share of liquid assets and improving WKHLU EDODQFH VKHHWV 0RKDQW\ DQG 7XUQHU ,Q D VHQVH WKHUHIRUH WKH GHYHORSPHQW RI the regions bond markets contributed to the improvement of local banks balance sheets DQG UHVLOLHQF\ GXULQJ WKH JOREDO QDQFLDO FULVLV )HOPDQ HW DO QRWH WKDW PRVW FRXQWULHV LQ WKH $6($1 DUH DW YDULRXV VWDJHV RI GHYHORSLQJ WKH LQIUDVWUXFWXUH QHFHVVDU\ WR GHHSHQ WKH ORFDO ERQG PDUNHWV ,QGRQHVLD DQG Thailand have undertaken reforms to their market microstructures by establishing market makers, introducing modern platforms, and upgrading payment and settlement systems. 2WKHU $6($1 FRXQWULHV DUH OLNHZLVH LPSURYLQJ WKHLU ORFDO LQIUDVWUXFWXUH WR VXSSRUW WKH development of local bond markets. The Philippines introduced a new Securities Regulation Code, institutionalized delivery and payment through a Real Time Gross Settlement System, DQG ODXQFKHG DQ LQWHUGHDOHU SODWIRUP WR HQFRXUDJH WUDGLQJ RI [HG LQFRPH LQVWUXPHQWV The recent development of deep and liquid local currency government bond markets in the ASEAN emerging economies now provide dependable yield curves for the pricing of local currency corporate bonds. As shown by Chan et al. (2011), among the factors that account for much of the improvement in the local currency sovereign bond markets are the consolidation of issuances into a few benchmark maturities, and the development of critical market making structures, including the rise of interdealer markets and the entry
of international interdealer brokers. The nature of these market-making structures provide lessons for the further development of corporate bond markets in the region. C. Market Making in the Emerging ASEAN Bond Markets
The experience of deep and liquid government bond markets in the US and Europe shows that the provision of liquidity in these markets requires an active role for market makers. These market makers do not just arise by themselves. They are often designated by the government and are obliged to make markets by providing two-way quotes on benchmark issues. They perform this role in exchange for certain privileges, such as being able to trade with the central bank. To be effective, these market makers often trade among themselves LQ DQ LQWHUGHDOHU PDUNHW ZLWK WKH KHOS RI LQWHUGHDOHU EURNHUV ,QGHHG WKH LQWHUGHDOHU PDUNHW is often the most active part of the government bond market, and it is often where much of price discovery takes place. Market making structures are a strong suit of government bond markets in the $6($1 HFRQRPLHV 7KH QDWXUH RI PDUNHW PDNLQJ LQ WKHVH PDUNHWV KDV WHQGHG WR IROORZ the example of the US Treasury market and the United Kingdoms gilts market. As shown LQ 7DEOH HDFK RI WKH HPHUJLQJ $6($1 PDUNHWV WKH $6($1 PDUNHWV H[FOXGLQJ WKDW of Japan) has between 1050 designated market makers. Each market has at least a few interdealer voice brokers, strongly indicative of the existence of a fairly active interdealer market. Table 5: Market Making in Emerging Asian Government Bond Markets
Jurisdiction China, People's Rep. of Market Makers 50 primary dealers for the People's Bank of China Open Market Operations (two foreign banks); 23 market dealers in the interbank bond market (three foreign banks); and three companies providing brokering services for the interbank bond market 18 primary dealers (five foreign banks) Interdealer Voice Brokers Shanghai CFETS-ICAP, Tullet Prebon SITICO Ltd., Pingan Tradition International Money Broking Co. Ltd.
Indonesia
BNI Securities, Danareksa Sekuritas, Mega Capital Indonesia, OSK Nusadana Securities, Reliance Securities, Trimegah Securities Tbk Korea Interdealer Broker Corporation (KIDB), Korea Money Brokerage Corporation (KMB) Affin (Tullett Prebon), Amanah Butler Malaysia Sdn Bhd, First TAZ Tradition Sdn Bhd, Harlows & MGI Sdn Bhd, Forex Enterprise Sdn Bhd, KAF-Astley & Pearce Sdn Bhd AFS Philippines Inc., ICAP Philippines Inc., Tradition Financial Services, Tullett Prebon Philippines Inc. ICAP, Tullett Prebon, Tradition ICAP, Wallstreet Tullett Prebon
Korea, Rep. of Malaysia
20 primary dealers (two foreign banks) 12 principal dealers (six locally incorporated foreign banks)
Philippines
42 government securities dealers (nine foreign banks and financial institutions) 13 principal dealers (10 foreign banks) 9 primary dealers (four foreign banks)
Singapore Thailand
Note: Seven markets as of February 2011. Sources: BIS, Chan et al. (2011).
0DUNHW OLTXLGLW\ GRHV QRW VHHP WR UHTXLUH PDQ\ GHVLJQDWHG PDUNHW PDNHUV ,Q WKH PRUH OLTXLG RI WKH HPHUJLQJ $6($1 PDUNHWV WKHUH WHQG WR EH RQO\ 20 designated PDUNHW PDNHUV ,QGRQHVLD KDV SULPDU\ GHDOHUV WKH 5HSXEOLF RI .RUHD SULPDU\ GHDOHUV 0DOD\VLD SULQFLSDO GHDOHUV 6LQJDSRUH SULQFLSDO GHDOHUV DQG 7KDLODQG primary dealers. The PRC and the Philippines rely on the most number of market makers. 7KH 3HRSOHV %DQN RI &KLQD 3%2& KDV GHVLJQDWHG SULPDU\ GHDOHUV DV FRXQWHUSDUWLHV IRU LWV RSHQ PDUNHW RSHUDWLRQV DQG PDUNHW GHDOHUV LQ WKH LQWHUEDQN ERQG PDUNHW 7KH Bureau of Treasury of the Philippines has designated 42 government securities dealers. ,QWHUGHDOHU YRLFH EURNHUV QRZ RSHUDWH LQ WKH ODUJHU $6($1 PDUNHWV 7KH HQWU\ RI WKHVH EURNHUV HQWDLOV ODUJH [HG FRVWV DQG WKH\ ZRXOG QRW KDYH FRPH LI WKH PDUNHWV GLG not have serious potential for depth and liquidity. Such brokers have played critical roles in WKH [HGLQFRPH PDUNHWV RI WKH 86 DQG WKH 8QLWHG .LQJGRP E\ HQVXULQJ H[ DQWH DQRQ\PLW\ and ex post transparency in bringing counterparties together. The leading global interdealer EURNHUV LQFOXGH %*& ,&$3 7XOOHWW 3UHERQ *), DQG 7UDGLWLRQ $W OHDVW RQH RU WZR RI WKHP RSHUDWH LQ WKH PRUH OLTXLG RI WKH $6($1 PDUNHWV 6RPH RI WKH PDUNHWV UHO\ ODUJHO\ RQ ORFDO LQWHUGHDOHU EURNHUV 7KLV LV HVSHFLDOO\ WKH FDVH LQ ,QGRQHVLD DQG 0DOD\VLD The entry of interdealer brokers is key to the development of corporate bond markets LQ WKH $6($1 DQG LQ HPHUJLQJ $VLDQ FRXQWULHV DV D ZKROH )LJXUH VKRZV WKH DFFHOHUDWLRQ RI FRUSRUDWH ERQG LVVXDQFH LQ $VLDQ HPHUJLQJ PDUNHWV LQ DQG Figure 7: Corporate Bond Issuance in Asian Emerging Markets (52 issuers, in $ billion)
125 100 75 50 25 0 2005 2006 2007 2008 2009 20102
Local currency Foreign currency

Source: Staff calculations using data from International Financing Review (Thomson Reuters 20052010).
:KLOH WKH DJJUHJDWH YROXPHV DUH VWLOO VLJQLFDQWO\ VPDOOHU WKDQ WKRVH LQ DGYDQFHG economies, the rapid growth of local currency bond issuances in the past 2 years is indicative WKDW QDQFH PDUNHW GHYHORSPHQW LQLWLDWLYHV DUH \LHOGLQJ VRPH SRVLWLYH UHVXOWV
D.
Why Size Matters for Deep and Liquid Markets
The regional imperative for market development recognizes that size is important. McCauley and Remolona (2000) and Gyntelberg, Ma, and Remolona (2005) have emphasized the LPSRUWDQFH RI PDUNHW VL]H LQ GHYHORSLQJ GHHS DQG OLTXLG QDQFLDO PDUNHWV 7KH SRWHQWLDO QXPEHU RI LVVXHUV DQG EX\HUV LQ VRPH FRXQWULHV PD\ EH D VLJQLFDQW EDUULHU WRZDUG IDVWHU development of local currency corporate bonds for some countries in the region. The authors observe that markets with smaller liquidity are often characterized by a small investor base, lacking in market transparency and with a poor information infrastructure. Eichengreen and Luengnaruemitchai (2006) also point out that structural factors like the lack of critical size in capital market issuance and the historical dependence on the banking sector also explain the weak growth of corporate bond markets in Asia. Goswami and Sharma (2011) point out that secondary liquidity in the ASEAN has a high degree of dependence on foreign investors who access the regional markets through access products distributed by foreign intermediaries. :KLOH WKH GHJUHH RI QDQFLDO GHHSHQLQJ LQGLFDWHV WKH LPSRUWDQFH RI D QDQFLDO VHFWRU to the economy, the absolute size of the sector is often an indicator of how effective the VHFWRU LV LQ SHUIRUPLQJ LWV UROH RI LQWHUPHGLDWLQJ VDYLQJV DQG LQYHVWPHQW /DUJHU QDQFLDO PDUNHWV DUH PRUH OLNHO\ WR EH GHHSHU DQG PRUH OLTXLG WKDQ VPDOOHU PDUNHWV ,I DV GLVFXVVHG LQ WKH QH[W VHFWLRQ QHWZRUN H[WHUQDOLWLHV DUH WKH VRXUFH RI GHSWK DQG OLTXLGLW\ LQ QDQFLDO markets, then there will be a size threshold beyond which a critical mass will allow a market to develop viable depth and liquidity. Nonetheless, exceeding the size threshold seems to EH D QHFHVVDU\ EXW QRW VXIFLHQW FRQGLWLRQ IRU QDQFLDO PDUNHW GHYHORSPHQW )DFWRUV RWKHU WKDQ VL]H DUH FOHDUO\ DOVR LPSRUWDQW 7DEOH VKRZV WKH DEVROXWH VL]H RI WKH YDULRXV QDQFLDO VHFWRUV IRU WKH $6($1 Table 6: Size of Capital Markets in ASEAN+3 Countries, end-2010 ($ billion)
Brunei Darussalam Cambodia China, People's Rep. of Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Japan Korea, Rep. of Memo: United States Euro area Stock Market 2,716 360 409 157 647 278 38 3,828 1,092 17,283 5,638 Government Bond Market 1,623 82 128 62 103 166 11,632 475 11,152 7,205 Corporate Bond Market 674 12 112 2 26 59 2,102 636 14,197 5,915
... = Data not available, ASEAN+3 = composed of ASEAN member countries and the PRC, Japan, and the Republic of Korea. Sources: Staff calculations using data from Bloomberg, available: www.bloomberg.com/; Bank for International Settlements, available: www.bis.org/statistics/bankstats.htm; and World Federation of Exchanges, available: www.world-exchanges.org/statistics, all downloaded 14 September 2011.
Experience suggests that the size threshold for stock markets is not very high. As VKRZQ LQ 7DEOH DPRQJ WKH $6($1 VWRFN PDUNHWV WKH PDUNHWV LQ WKH 3KLOLSSLQHV DQG 9LHW 1DP DUH WKH VPDOOHVW :LWK D FDSLWDOL]DWLRQ RI ELOOLRQ DV RI WKH HQG RI WKH Philippine stock market appears to be already well developed and has apparently been so IRU PDQ\ \HDUV :LWK D FDSLWDOL]DWLRQ RI ELOOLRQ WKH 9LHW 1DP VWRFN PDUNHW LV QRW \HW considered to be well developed. The size threshold for a critical mass in stock markets would appear to be somewhere between the sizes of those two markets, probably closer to WKDW RI 9LHW 1DP WKDQ WKDW RI WKH 3KLOLSSLQHV 7KH 9LHW 1DP PDUNHW PD\ QHHG WR OLVW MXVW D few more companies to exceed the size threshold. Beyond this, the government can focus on other important aspects of market reform. Such aspects are beyond the scope of this study. The other small ASEAN economies have a longer way to go. The size threshold for government bond markets does not appear to be very high HLWKHU ,Q UHFHQW \HDUV WKH ODUJHU $6($1 FRXQWULHV KDYH VXFFHHGHG LQ GHYHORSLQJ GHHS DQG liquid local-currency government bond markets. These markets now provide dependable yield curves for the pricing of local-currency corporate bonds. As shown in Table 6, the smallest among these markets is that of the Philippines, with an outstanding amount of government ERQGV RI ELOOLRQ DV RI WKH HQG RI $ %,6 UHSRUW LQ E\ &KDQ HW DO SURYLGHV DQ DVVHVVPHQW WKDW FRQVLGHUV HYHQ WKLV PDUNHW WR EH GHHS DQG OLTXLG ,Q WKH 3KLOLSSLQHV WKLV was achieved in part through the consolidation of issuance in a few benchmark maturities. Some evidence for the markets liquidity is found in the market making structures, which was discussed earlier in this section. The size threshold for corporate bond markets appears to be much higher than that IRU JRYHUQPHQW ERQG PDUNHWV $V VKRZQ LQ 7DEOH DPRQJ WKH $6($1 HFRQRPLHV WKH largest corporate bond markets are those of the PRC, Japan, and the Republic of Korea. :LWK DPRXQWV RXWVWDQGLQJ DV RI WKH HQG RI RI ELOOLRQ WULOOLRQ DQG ELOOLRQ respectively, not one is considered deep and liquid. Nonetheless, it is possible that with the right market microstructure, these markets are big enough to become deep and liquid. Such a microstructure would likely include interdealer markets that ensure ex ante anonymity and ex post transparency. 7KHUH DUH WZR FRUSRUDWH ERQG PDUNHWV WKDW DUH ZHOO NQRZQ WR EH GHHS DQG OLTXLGWKRVH of the US and the Euro area. But these markets are far larger than those in Asia. The US PDUNHW LV WULOOLRQ LQ VL]H DQG WKH (XURSHDQ PDUNHW WULOOLRQ ,W LV OLNHO\ WKDW WKH VL]H threshold needed for a critical mass is much smaller than these. Nonetheless, in Asia, it also seems likely that reaching such a threshold will require a market that is regional in scope. ,I FRUSRUDWH ERQG PDUNHWV LQ $VLD DUH WR SHUIRUP WKHLU UROHV DV D VSDUH WLUH IRU WKH capital markets and as a mechanism for rectifying the perverse way in which the regions savings are recycled into costly investments, it is important to recognize that only a regional effort will allow these markets to reach the required size threshold.
VI. WHY REGIONAL INSTEAD OF GLOBAL? THE TUG-OF-WAR BETWEEN THE GEOGRAPHY OF INFORMATION AND NETWORK EXTERNALITIES 0DQ\ RI WKH XVXDO DUJXPHQWV IRU WKH UHJLRQDO LQWHJUDWLRQ RI QDQFLDO PDUNHWV ZRXOG DSSO\ with even more force for the global integration of such markets. Two such arguments are HFRQRPLHV RI VFDOH DQG WKH GLYHUVLFDWLRQ RI ULVNV (FRQRPLHV RI VFDOH VXSSRVHGO\ EULQJ GHSWK DQG OLTXLGLW\ WR PDUNHWV 'LYHUVLFDWLRQ DOORZV LQYHVWRUV WR VHHN FHUWDLQ OHYHOV RI investment returns without taking on greater risk. Global integration would take greater DGYDQWDJH RI VXFK HFRQRPLHV RI VFDOH DQG DOORZ ZLGHU GLYHUVLFDWLRQ RI ULVNV WKDQ ZRXOG regional integration. Nonetheless there is a case for regional integration rather than global integration. This case rests on the trade-off between the geography of information and the critical mass required by network externalities. The geography of information pulls in the direction of more localized markets, while network externalities pull toward more regional and global markets. 7KH WHUPV RI WKLV WXJRIZDU YDULHV IURP RQH QDQFLDO PDUNHW WR DQRWKHU ,Q HPHUJLQJ $VLD this tug-of-war makes the case for regional integration stronger for corporate bond markets WKDQ IRU RWKHU QDQFLDO PDUNHWV $W LWV URRW WKH UROH RI QDQFLDO PDUNHWV LV WR SURFHVV DQG DJJUHJDWH UHOHYDQW LQIRUPDWLRQ obtained by market participants. The actual allocation of capital to various investments is the outcome of decisions made on the basis of this informational role of markets. Such an LQIRUPDWLRQDO UROH LQYROYHV WZR GLVWLQFW GLPHQVLRQV (i) The geography of information. Depending on the type of asset, the cost of obtaining that information would often be lower for investors whose geographic proximity to sources of information are closer. Such geographic proximity is HVSHFLDOO\ LPSRUWDQW IRU PDUNHWV WKDW GHSHQG RQ UPVSHFLF LQIRUPDWLRQ SDUWLFXODUO\ HTXLW\ PDUNHWVDQG OHVV LPSRUWDQW IRU PDUNHWV WKDW GHSHQG RQ macroeconomic information such as government bond markets. Network externalities. The processing of information requires market participants to interact in various ways, including through trading. This interaction gives rise to the network externalities in information that is the fundamental source of market depth and liquidity. To take effective advantage of such externalities, markets require a certain size. But once a critical mass is reached, the advantages become less compelling.
(ii)
The 2008 ADB report on the emerging Asian regionalism, for example, states there are potentially more opportunities for diversificationand thus higher risk-adjusted returnsfrom investing globally. Global financial markets tend to be deeper, more liquid, and more diversified (ADB 2008, 109).
A.
The Geography of Information for Different Markets
7KH HYLGHQFH IRU WKH JHRJUDSK\ RI LQIRUPDWLRQ LV FLUFXPVWDQWLDO EXW SHUVXDVLYH ,W FRPHV IURP WZR ERGLHV RI OLWHUDWXUH 2QH ERG\ LV RQ JUDYLW\ PRGHOV RI QDQFLDO RZV WKH RWKHU RQ the home bias of portfolio investments. Gravity models provide evidence for the geography of information for both equity markets and international bank lending. The home bias of portfolio investments is largely seen to be a puzzle, but there is now some evidence that it UHHFWV WKH JHRJUDSK\ RI LQIRUPDWLRQ ,Q WKH FDVH RI HTXLW\ PDUNHWV 3RUWHV DQG 5H\ H[SORUH SDQHO GDWD RQ FURVV ERUGHU HTXLW\ RZV EHWZHHQ FRXQWULHV 7KH\ QG WKDW D JUDYLW\ PRGHO H[SODLQV LQWHUQDWLRQDO transactions in these assets at least, as well as goods trade transactions. These transactions depend on market size as well as trading costs. With distance between countries as a proxy IRU LQIRUPDWLRQ FRVWV WKH\ QG WKH JHRJUDSK\ RI LQIRUPDWLRQ WR EH WKH PDLQ GHWHUPLQDQW RI the pattern of international transactions. ,Q WKH FDVH RI LQWHUQDWLRQDO EDQN OHQGLQJ (LFKHQJUHHQ DQG 3DUN W D JUDYLW\ PRGHO WR %,6 GDWD RQ FURVVERUGHU EDQN FODLPV 7KH\ QG WKDW LQWHUQDWLRQDO OHQGLQJ IDOOV ZLWK distance and rises with common language. A common land border has little effect. These results lead Eichengreen and Park to conclude that information costs are more important than transportation costs. 7KHUH LV YROXPLQRXV OLWHUDWXUH RQ WKH KRPH ELDV RI HTXLW\ SRUWIROLRV ,Q )UHQFK DQG 3RWHUED IRXQG WKDW 86 HTXLW\ LQYHVWRUV DOORFDWHG QHDUO\ RI WKHLU IXQGV WR GRPHVWLF securities, although the US market comprised less than half of the global market. Such a home bias is apparently even stronger for European equity investors. Twenty years after )UHQFK DQG 3RWHUED SXEOLVKHG WKHLU UHVXOWV WKH KRPH ELDV RI HTXLW\ LQYHVWRUV UHPDLQV DV pronounced as ever. This is a gross violation of modern portfolio theory that it is called the home-bias puzzle. <HW WKHUH LV JURZLQJ HYLGHQFH WKDW WKH VRFDOOHG KRPHELDV SX]]OH VLPSO\ UHHFWV the geography of information. A familiarity with domestic securities may breed not contempt EXW XQGHUVWDQGLQJ ,QGHHG WKHUH LV HYLGHQFH RI DQ LQIRUPDWLRQDO DGYDQWDJH LQ WKH KRPH ELDV RI HTXLW\ SRUWIROLRV &RYDO DQG 0RVNRZLW] QG WKDW KRPH ELDV KROGV HYHQ IRU ORFDOLWLHV ZLWKLQ FRXQWULHV 0DQDJHUV RI HTXLW\ PXWXDO IXQGV VKRZ D VLJQLFDQW SUHIHUHQFH for stocks in their own geographic vicinity. This is not irrational behavior, however, because the performance of these mutual funds does tend to be enhanced by such geographically preferred investments. This geographic phenomenon seems to be even more striking in cases where investors exercise some control over the companies whose shares they acquired. Kang and .LP ORRN DW D ODUJH VDPSOH RI SDUWLDO EORFN DFTXLVLWLRQV LQ ZKLFK LQYHVWRUV SXUFKDVH ODUJH DPRXQWV RI VWRFN LQ D JLYHQ FRPSDQ\ .DQJ DQG .LP QG WKDW JHRJUDSKLF SUR[LPLW\
is important in these acquisitions. Not only do block investors show a strong preference for nearby companies but these investors are also more likely to involve themselves in postacquisition governance efforts in such companies. These governance efforts tend to succeed. The geographically proximate target companies realize higher announcement returns and better post-acquisition performance than do other target companies. To provide an insight on the geographic distribution of investors in international bond issues by large Asian borrowers, data were collated by gleaning information from reports on bond issues in the weekly International Financing Review (Thomson Reuters, various \HDUV $V VKRZQ LQ 7DEOH ZH KDYH EHHQ DEOH WR REWDLQ LQIRUPDWLRQ RQ ERQG LVVXHV RYHU PRQWKV EHWZHHQ -DQXDU\ DQG $XJXVW LQ IRU D WRWDO RI ELOOLRQ 7KH LVVXHUV FRPH IURP HLJKW $6($1 FRXQWULHV QDPHO\ WKH 35& ,QGRQHVLD -DSDQ WKH 5HSXEOLF of Korea, Malaysia, the Philippines, Singapore, and Thailand. While the issuers include WZR VRYHUHLJQV0DOD\VLD DQG WKH 3KLOLSSLQHVPRVW RI WKH UHVW DUH FRUSRUDWH ERUURZHUV LQFOXGLQJ QDQFLDO LQVWLWXWLRQV 7KH FXUUHQFLHV LQ ZKLFK WKH ERQG LVVXHV DUH GHQRPLQDWHG are dominated by the US dollar, but there are also nine issues in the Chinese renminbi and one each in the Japanese yen and the Singapore dollar. Table 7: International Bond Issuance by Asian Borrowers: Geographic Distribution of Investors, JanuaryAugust 2011 (millions)
Month of issuance Aug 2011 Issue Description Residence of Issuer name Issuer Size Currency National Agricultural Cooperative Federation Korea, Rep. of 500 USD Posco Korea, Rep. of 24,526 JPY Hangzhou ZhongCe Rubber PRC 900 RMB [The People's Rep. of ] China Shanshui Cement PRC 1,500 RMB Korea Housing Finance Korea, Rep. of 500 USD Korea Hydro & Nuclear Power Korea, Rep. of 500 USD Japan Bank for International Cooperation Japan 2,000 USD Beijing Enterprises Water Group PRC 1,000 RMB Beijing Enterprises Water Group PRC 450 RMB Zijin Mining Group PRC 280 USD Malaysia Malaysia 1,200 USD Malaysia Malaysia 800 USD Lonking Holdings PRC 350 USD Pertamina Indonesia 1,000 USD Pertamina Indonesia 500 USD Sino-Ocean Land PRC 400 USD ENN Energy Holdings PRC 750 USD Beijing Enterprises PRC 600 USD Beijing Enterprises PRC 400 USD Guangzhou R&F Properties PRC 150 USD Guangzhou R&F Properties PRC 2,612 RMB BYD PRC 1,000 RMB Zhongsheng Group PRC 1,250 RMB Export-Import Bank of Korea Korea, Rep. of 700 USD Investors by Region (%) Size in US Dollars 500 316 140 232 500 500 2,000 155 70 280 1,200 800 350 1,000 500 400 750 600 400 150 399 153 191 700 Asia 58 41 99 99 48 31 36 99 89 87 44 57 47 36 40 84 31 51 66 95 97 99 98 50 US 27 0 0 0 41 47 11 0 0 0 4 15 33 42 37 16 50 38 26 0 0 0 0 43 Europe 15 36 0 1 11 22 38 0 8 13 9 21 20 22 23 0 19 11 8 5 3 1 2 7 continued
Jul 2011
Jun 2011
May 2011
Apr 2011
Table 7. continued
Month of issuance Issue Description Residence of Issuer name Issuer [The People's Rep. of ] China Automation Group PRC Fufeng Group PRC SPG Land PRC PTT Exploration and Production Thailand Malayan Banking Malaysia [The People's Rep. of ] China Wind Power Group PRC Republic of the Philippines Philippines Singapore Telecommunications Singapore PCD Stores PRC Texhong Textile Group PRC Total Investors by Region (%) Size 200 300 200 700 1,000 750 1,500 600 750 200 Currency USD USD USD USD SGD RMB USD USD RMB USD Size in US Dollars 200 300 200 700 794 114 1,500 600 113 200 17,005 Asia 67 46 100 30 100 97 40 37 97 62 53 US 0 21 0 56 0 0 30 27 0 10 23 Europe 33 33 0 14 0 3 30 36 3 28 18
Mar 2011
Jan 2011
JPY = Japanese yen, PRC = People's Republic of China, RMB = renminbi, SGD = Singapore dollars, USD = United States dollars. Note: Thirty-one issues. Source: International Financing Review (Thomson Reuters, various issues).
2XU GDWD RQ $VLDQ ERQG LVVXHV VKRZ VRPH HYLGHQFH RI D KRPH ELDV LQ WKH LQWHUQDWLRQDO FRUSRUDWH ERQG PDUNHW $V VKRZQ LQ 7DEOH RI WKH WRWDO DPRXQW RI LVVXDQFH ZDV by investors from the Asian region. The next largest group of investors was from the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region from January to August 2011 was locally subscribed. Figure 8: International Bond Issues by Asian Corporate Borrowers, JanuaryAugust 2011 (%)
Others 6.0
Europe 18.0 Asia 53.0 United States 23.0
Note: 31 issues for a total of $17 billion. Source: Staff calculations using JanuaryAugust 2011 data from International Financing Review (Thomson Reuters 2011).
A recent study by Coeurdacier and Rey (2011) looks for evidence of home bias beyond the equity home bias. As far as home bias in bonds (an aggregate of both government and private sector) across emerging markets is concerned, their measure shows that emerging Asia has the highest level of home bias in bonds compared with developed countries and relative to other regions such as Central and South America, South Africa, and Central and Eastern Europe. B. Two Phenomena of Network Externalities in Finance
'HSWK DQG OLTXLGLW\ LQ QDQFLDO PDUNHWV DULVH IURP QHWZRUN H[WHUQDOLWLHV (FRQRPLGHV suggests that in a given market, the interaction of market participants within a network produces gains for the market as a whole that add up to more than the gains of the LQGLYLGXDO SDUWLFLSDQWV 6XFK LQWHUDFWLRQ DOORZV PDUNHW PDNHUV WR SURYLGH OLTXLGLW\ ,W DOVR HDVHV SULFH GLVFRYHU\ VR WKDW SULFH VLJQDOV PD\ JXLGH WKH RZ RI VDYLQJV WR LQYHVWPHQWV 7KHVH H[WHUQDOLWLHV DULVH LQ WZR ZD\V )LUVW WKH\ DULVH IURP WKH LQWHUDFWLRQ RI PDUNHW PDNHUV ZKLFK H[SODLQ WKH SKHQRPHQRQ RI QDQFLDO FHQWHUV 6HFRQG WKH\ DULVH IURP WKH LQWHUDFWLRQ of savers and investors within a network, which explain the phenomenon of investment banking and syndicated lending. %DEXV DQG $OOHQ DUJXH WKDW QHWZRUN H[WHUQDOLWLHV RIIVHW WKH LPSDFW RI JHRJUDSKLF GLVWDQFH DQG LQIRUPDWLRQ DV\PPHWULHV LQ WK FHQWXU\ (XURSHV PHUFKDQW EDQNLQJ V\VWHP WKHUHE\ DOORZLQJ IRU D PRUH HIFLHQW RZ RI FDSLWDO &KULVWRIIHUVHQ DQG 6DUNLVVLDQ on the other hand, argue that there are network externalities even at the local level. These stem from access to local information relevant in the assessment of idiosyncratic risk as well as externalities arising from learning effects associated with interaction and learning among PDUNHW SOD\HUV 7KH\ QG WKDW FLW\ VL]H DQG WKH DJJORPHUDWLRQ RI QDQFLDO LQWHUPHGLDULHV ZLWKLQ D ORFDOLW\ PDWWHUV IRU PRUH HIFLHQW LQWHUPHGLDWLRQ DQG H[SODLQV WKH SUHYDOHQFH RI QDQFLDO FHQWHUV 7KH SKHQRPHQRQ RI QDQFLDO FHQWHUV FDQ EH IRXQG DW YDULRXV JHRJUDSKLF OHYHOV $W WKH ORFDO OHYHO WKH H[LVWHQFH RI D SUHGRPLQDQW QDQFLDO FHQWHU LQ WKH ODUJHU $6($1 FLWLHV attests to the importance of network externalities. These centers include the Jalan Sudirman area in Jakarta, Ayala Avenue in Makati City, Shenton Way in Singapore, and Sathorn and 6LORP 5RDGV LQ %DQJNRN ,Q WKHVH FHQWHUV QDQFLDO UPV ZLOOLQJO\ SD\ WKH KLJKHVW RIFH rents in the city just to be located close to each other. At the regional level, Hong Kong, &KLQD 6LQJDSRUH DQG 7RN\R VHUYH DV LPSRUWDQW UHJLRQDO QDQFLDO FHQWHUV DQG WKHVH FLWLHV FRPPDQG WKH KLJKHVW RIFH UHQWV LQ WKH UHJLRQ 6LQJDSRUH WHQGV WR VSHFLDOL]H LQ FXUUHQF\ DQG [HGLQFRPH WUDGLQJ DFWLYLW\ DQG LQ SULYDWH EDQNLQJ +RQJ .RQJ &KLQD WHQGV WR VSHFLDOL]H in equity trading, initial public offerings and mergers and acquisitions. 7KH ULVH RI QDQFLDO FHQWHUV VHHPV WR EH GULYHQ E\ D SDUWLFXODU IRUP RI QHWZRUN H[WHUQDOLWLHVWKRVH WKDW VWHP IURP WKH LQWHUDFWLRQ RI PDUNHW PDNHUV LQ LQWHUGHDOHU PDUNHWV Such interdealer markets are especially important in fixed-income markets, such as JRYHUQPHQW ERQG PDUNHWV DQG FXUUHQF\ PDUNHWV 7KH GHDOHUV LQ WKHVH PDUNHWV QG LW WR
their advantage to be located close to each other, because of the importance of face-toIDFH FRPPXQLFDWLRQWR EH DEOH WR KHDU WKH VRFDOOHG EX]] RI WKH PDUNHW +RQJ .XELN DQG 6WHLQ IRU H[DPSOH QG HYLGHQFH LQ WKH VLJQLFDQFH RI WKLV EX]] LQ WKH KROGLQJV and trades of money managers. There seems to be something special in the hobnobbing by market participants, in being able to observe body language, something that is just not available in internet communication. The other phenomenon of network externalities is about the information network of borrowers and investors. This phenomenon has more to do with the geographic reach of QDQFLDO PDUNHWV WKDQ ZLWK WKH LQWHUDFWLRQ RI PDUNHW PDNHUV DPRQJ WKHPVHOYHV 0RUULVRQ DQG :LOKHOP VXJJHVW WKDW LQYHVWPHQW EDQNV GHULYH D FULWLFDO LQIRUPDWLRQDO DGYDQWDJH in underwriting securities from their access to a network of investors located in a wide geographic area. This informational advantage seems to have been exploited even by PHUFKDQW EDQNV LQ WKH WK FHQWXU\ 6FKQDEHO DQG 6KLQ SURYLGH HYLGHQFH WKDW merchant banks in Amsterdam in that century were part of a network that included merchant banks in Hamburg and Berlin. This network allowed funds to be raised in Amsterdam and invested all over Prussia. C. The Tug-of-War in Different Financial Markets
7KH YLDELOLW\ RI D QDQFLDO PDUNHW RI D JLYHQ VL]H GHSHQGV RQ WKH WXJRIZDU EHWZHHQ WKH JHRJUDSK\ RI LQIRUPDWLRQ DQG QHWZRUN H[WHUQDOLWLHV $V LOOXVWUDWHG LQ )LJXUH LQ PDUNHWV WKDW are too small, the total geographic costs of information would dominate the total economic gains from network externalities. As the markets get larger, the total costs of information rise because the average distance between investors and investments lengthens. An important FKDUDFWHULVWLF RI QHWZRUNV KRZHYHU LV WKH H[LVWHQFH RI D FULWLFDO PDVV 2QFH WKH PDUNHW expands to reach this critical size, the externalities become important and the total gains from the network rise rather sharply. These gains begin to overcome the geographic costs RI LQIRUPDWLRQ ,W LV RQO\ DW WKLV VWDJH WKDW D QDQFLDO PDUNHW EHFRPHV YLDEOH DV DQ LPSRUWDQW source of value to the economy. Figure 9: Tug of War between Geography of Information and Network Externalities
Gains and Costs
Critical Mass
Regional Market
Global Market
Size of Market
Gains from networks Information costs

Source: Authors' representation.
,Q WKH ODUJHU $6($1 HFRQRPLHV WKH VWRFN PDUNHWV DQG JRYHUQPHQW ERQG PDUNHWV have evidently achieved the critical mass even while remaining purely domestic markets. :LWK WKH ULJKW PLFURVWUXFWXUHV LQ SODFH WKHVH PDUNHWV KDYH EHFRPH YLDEOH QDQFLDO PDUNHWV This is clearly not the case for the domestic corporate bond markets. These markets have remained illiquid, and they raise funds for only the highest rated issuers, usually utilities DQG TXDVLJRYHUQPHQW FRPSDQLHV 7KH ORZHUUDWHG ERUURZHUV LQ WKH 35& ,QGRQHVLD WKH Republic of Korea, Malaysia, and the Philippines often go abroad to issue in the global US dollar corporate bond market rather than in the domestic markets. The issues listed on Table DUH H[DPSOHV RI VXFK ERUURZLQJ DFWLYLW\ :KLOH PRVW RI WKH ORFDO FRUSRUDWH ERQG PDUNHWV LQ WKH $6($1 FRXQWULHV KDYH QRW DWWDLQHG WKH FULWLFDO PDVV WR EH YLDEOH WKH JOREDO 86 dollar market certainly has. There are good reasons to believe that a regional corporate bond market in Asia could be large enough to reach the critical mass required by network externalities, especially if that PDUNHW LQFOXGHV WKH 35& DQG WKH 5HSXEOLF RI .RUHD ,Q WKH JOREDO FUHGLW PDUNHWV RQH RI WKH most actively traded instruments is an Asian regional index, the iTraxx Asia ex-Japan index, ZKLFK LV D FRQWUDFW EDVHG RQ FUHGLW GHIDXOW VZDSV &'6 IRU RI WKH ODUJHVW ERUURZHUV LQ HPHUJLQJ $VLD 'XULQJ WKH UVW ZHHN RI 6HSWHPEHU DORQH WKH WUDGLQJ YROXPH IRU WKLV FRQWUDFW ZDV ELOOLRQ LQ QRWLRQDO DPRXQWV ,W LV QRWDEOH WKDW WKH RWKHU FRPSDUDEO\ DFWLYHO\ traded credit instruments are also regional CDS indices rather than global ones. The two most DFWLYHO\ WUDGHG FUHGLW LQVWUXPHQWV LQ WKH ZRUOG DUH WKH '- &'; 1RUWK $PHULFDQ ,QYHVWPHQW *UDGH ,QGH[ EDVHG RQ &'6 FRQWUDFWV RQ 1RUWK $PHULFDQ ERUURZHUV DQG WKH L7UD[[ (XURSH ,QGH[ VLPLODUO\ EDVHG RQ &'6 FRQWUDFWV RQ (XURSHDQ ERUURZHUV 7KHUH LV QR actively traded global CDS index. ,Q WKH FRUSRUDWH ERQG PDUNHWV LQFOXGLQJ D ERUURZHU QDPH LQ DQ DFWLYHO\ WUDGHG &'6 LQGH[ LV FULWLFDO IRU OLTXLGLW\ ,W LV DQDORJRXV WR OLVWLQJ D FRPSDQ\ LQ D PDMRU HTXLW\ H[FKDQJH Using a comprehensive dataset of all US investment in foreign equities, Ammer et al. (2011) QG WKDW WKH VLQJOH PRVW LPSRUWDQW GHWHUPLQDQW RI WKH DPRXQW RI 86 LQYHVWPHQW D IRUHLJQ UP UHFHLYHV LV ZKHWKHU WKH UP FURVVOLVWV RQ D 86 H[FKDQJH $Q HIIRUW WR GHYHORS D UHJLRQDO bond market should lead to the expansion of the existing iTraxx Asia ex-Japan index so that LW LQFOXGHG PRUH $VLDQ QDPHV LQVWHDG RI MXVW WKH H[LVWLQJ QDPHV 2QH FKDOOHQJH D UHJLRQDO FRUSRUDWH ERQG PDUNHW ZRXOG IDFH LV ZKHWKHU LW FRXOG overcome the lock-in effect of existing networks, namely that of the global US dollar and HXUR PDUNHWV 7KLV ORFNLQ HIIHFW LV VLPLODU WR WKDW RI WKH 4:(57< NH\ERDUG $V 'DYLG LOOXVWUDWHV WKH DOWHUQDWLYH 'YRUDN 6LPSOLHG .H\ERDUG '6. SDWHQWHG LQ OHWV RQH W\SH IDVWHU <HW HYHQ LQ WKH DJH RI FRPSXWHUV WKDW DOORZ RQH WR VZLWFK NH\ERDUGV instantly, DSK has failed to displace the QWERTY keyboard because of the latters wellestablished network.
,Q WKH FDVH RI WKH JOREDO FRUSRUDWH ERQG PDUNHWV LW LV FRQFHLYDEOH WKDW WKHVH PDUNHWV have already grown so large that the gains from network externalities no longer exceed E\ PXFK WKH JHRJUDSKLF LQIRUPDWLRQ FRVWV IRU $VLDQ ERUURZHUV ,I D UHJLRQDO PDUNHW FRXOG JHW JRLQJ LQ HDUQHVW LW PD\ QRW RQO\ UHDFK WKH FULWLFDO PDVV EXW DOVR QG LWVHOI LQ D UHJLRQ where the gains from localized network externalities are much larger relative to geographic LQIRUPDWLRQ FRVWV 7KLV LV LOOXVWUDWHG LQ )LJXUH ZKHUH WKH VL]H RI WKH UHJLRQDO PDUNHW KLWV WKH sweet spot in the contest between the geography of information and network externalities. Note that the geometry of the curves implies that gains from a regional network, relative to information costs, is larger than that of a global network. Without more rigorous empirical evidence, however, the question remains whether even such advantages of a regional PDUNHW ZRXOG EH VXIFLHQW WR RYHUFRPH WKH JDLQV IURP WKH KLVWRULFDO ORFNLQ HIIHFWV HQMR\HG by the global markets. The existence of such a regional sweet spot for an ASEAN corporate bond market must be considered no more than a hypothesis at this time. Nonetheless, the ASEANs Asia %RQG 0DUNHW ,QLWLDWLYH DOUHDG\ KDV DV RQH RI LWV REMHFWLYHV WKH GHYHORSPHQW RI VXFK D UHJLRQDO ERQG PDUNHW 7KHUH KDV VR IDU EHHQ QR HPSLULFDO MXVWLFDWLRQ IRU WKLV DQG D K\SRWKHVLV LV DW OHDVW D VWHS WRZDUG VXFK D MXVWLFDWLRQ ,W ZLOO RI FRXUVH EH XVHIXO LI VXFK D K\SRWKHVLV could be tested in subsequent studies.
VII. THE WAY FORWARD A. Regional Initiatives Thus Far: The ABMI, ABF, and the ASEAN Infrastructure Fund
7KH $VLDQ QDQFLDO FULVLV RI KDV DOUHDG\ OHG WR D QXPEHU RI UHJLRQDO LQLWLDWLYHV WR GHYHORS WKH GRPHVWLF GHEW PDUNHWV LQ $6($1 FRXQWULHV HVSHFLDOO\ LQ ,QGRQHVLD 0DOD\VLD the Philippines, and Thailand. The two most important initiatives have been the Asian Bond 0DUNHWV ,QLWLDWLYH $%0, DQG WKH $VLDQ %RQG )XQGV $%) 7KH $%0, ZDV ODXQFKHG LQ E\ WKH $6($1 DORQJ ZLWK WKH 35& -DSDQ DQG WKH 5HSXEOLF RI .RUHD 7KH UVW $%) ZDV HVWDEOLVKHG LQ WKDW VDPH \HDU E\ WKH ([HFXWLYHV 0HHWLQJ RI (DVW $VLD 3DFLF &HQWUDO %DQNV (0($3 D JURXS RI FHQWUDO EDQNV LQ WKH UHJLRQ LQFOXGLQJ YH WKDW DUH SDUW RI $6($1 7KH VDPH JURXS RI FHQWUDO EDQNV HVWDEOLVKHG D VHFRQG IXQG LQ )RU LWV SDUW WKH $'% VWDUWHG D VWXG\ SURJUDP WKDW LQFOXGHG WKH FUHDWLRQ RI $VLD %RQGV 2QOLQH D GDWD UHVRXUFH for researchers, analysts, and market participants. 7KH $%0, KDV WZR JRDOV L WR GHYHORS ORFDO FXUUHQF\GHQRPLQDWHG ERQG PDUNHWV LQ $6($1 DQG LL WR GHYHORS ZHOOIXQFWLRQLQJ UHJLRQDO ERQG PDUNHWV ,Q SXUVXLW RI WKHVH REMHFWLYHV WKH $6($1 QDQFH PLQLVWHUV PHW LQ 0DGULG LQ 0D\ DQG DJUHHG RQ D QHZ URDGPDS IRU PRQHWDU\ DQG QDQFLDO LQWHJUDWLRQ RI $6($1 7KH URDGPDS HVWDEOLVKHG priorities and streamlined the initiatives work programs through the creation of four task IRUFHV (DFK WDVN IRUFH ZRXOG IRFXV RQ RQH RI IRXU DUHDV
7DVN )RUFH 3URPRWLQJ WKH LVVXDQFH RI ORFDO FXUUHQF\GHQRPLQDWHG ERQGV 7DVN )RUFH ([SDQGLQJ WKH GHPDQG IRU VXFK ORFDO FXUUHQF\GHQRPLQDWHG ERQGV 7DVN )RUFH ,PSURYLQJ WKH UHJXODWRU\ IUDPHZRUN 7DVN )RUFH ,PSURYLQJ UHODWHG LQIUDVWUXFWXUH IRU WKH ERQG PDUNHWV ,Q $SULO WKH $6($1 QDQFH PLQLVWHUV WRRN WKUHH PRUH VWHSV )LUVW WKH\ DJUHHG WR VHW XS WKH &UHGLW *XDUDQWHH DQG ,QYHVWPHQW )DFLOLW\ ZLWK D FDSLWDO RI PLOOLRQ LQYROYLQJ contributions from the PRC, Japan, and the Republic of Korea. Second, they launched a PLOOLRQ LQIUDVWUXFWXUH IXQG ODWHU LQ WKH \HDU WR QDQFH PDMRU LQIUDVWUXFWXUH SURMHFWV across the ASEAN and provide a way to mobilize the regions large dollar reserves to QDQFH LWV LQIUDVWUXFWXUH QHHGV WKH $6($1 ,QIUDVWUXFWXUH )XQG ZDV VHW XS ZLWK DQ LQLWLDO HTXLW\ FRQWULEXWLRQ RI PLOOLRQ $'% 7KH IXQG LV EDVHG LQ 0DOD\VLD DV D OLPLWHG liability company. The ADB is providing $150 million of the fund, while nine ASEAN member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reserves from 11 central banks and invested in US-dollar denominated bonds issued by sovereign and quasi-sovereign borrowers in eight of the EMEAP countries. These countries FRQVLVWHG RI WKH 35& +RQJ .RQJ &KLQD ,QGRQHVLD WKH 5HSXEOLF RI .RUHD 0DOD\VLD WKH 3KLOLSSLQHV 6LQJDSRUH DQG 7KDLODQG )ROORZLQJ WKH VXFFHVV RI WKH UVW IXQG (0($3 ODXQFKHG WKH $VLDQ %RQG )XQG $%) LQ 0DUFK 1RW RQO\ ZDV WKH VHFRQG IXQG GRXEOH LQ size, it also focused on local-currency denominated bonds and would thus complement the HIIRUWV RI $%0, 7KH $%) DFWXDOO\ FRPSULVHG QLQH VHSDUDWHO\ PDQDJHG IXQGV D ELOOLRQ 3DQ $VLD %RQG ,QGH[ )XQG DQG HLJKW VLQJOHPDUNHW IXQGV DPRXQWLQJ WR DQRWKHU ELOOLRQ 7KH PDUNHWV LQFOXGHG ZHUH WKH VDPH DV WKRVH LQ $%) These funds have turned out to be an important exercise in learning-by-doing, which helped policy makers identify a number of critical impediments to the growth of the local markets as well as the regional capital market. As explained by Ma and Remolona (2005), the mere process of setting up the funds required, overcoming the myriad of domestic market UHVWULFWLRQV DV ZHOO DV FDSLWDO FRQWUROV EHWZHHQ WKH (0($3 HFRQRPLHV 2QH XQH[SHFWHG impediment, for example, was the lack of mutual recognition agreements among jurisdictions, VR WKDW IXQGV HVWDEOLVKHG LQ RQH FRXOG QRW EH VROG LQ DQRWKHU ,QFRQVLVWHQFLHV LQ WKH ZD\ valuations were calculated and in the accounting of withholding taxes were also seen as SUREOHPV WR EH DGGUHVVHG ,Q WKH SURFHVV RI VHWWLQJ XS $%) DQG $%) VHYHUDO LPSHGLPHQWV
10
A useful initiative by the Asian Bond Market Forum is the setting up of a registry of legal entity identifiers.
were overcome, and this served to catalyze the development of the local currency bond PDUNHWV 0RUHRYHU WKH \HDUO\ UHDOORFDWLRQ RI LQYHVWPHQWV E\ WKH UHJLRQDO 3DQ $VLD )XQG across the eight local markets was based in part on assessments of how well the local markets functioned. This provided additional incentives for central banks to support reforms in the local markets. While these regional initiatives have contributed in some degree to market development in general, they suffer from the lack of a distinction between government bonds and corporate bonds. This distinction is critical because for government bond markets the work is largely DOUHDG\ GRQH ,W LV IRU WKH FRUSRUDWH ERQG PDUNHWV WKDW LQLWLDWLYHV DUH WUXO\ QHHGHG 8QGHU WKH $%0, IRU H[DPSOH RQH RI WKH PDQGDWHV RI 7DVN )RUFH LV WR LQFUHDVH OLTXLGLW\ RI ERQG PDUNHWV by enhancing a primary dealer system for government bonds, developing a benchmark yield curve, and improving trading platforms. As argued in this report, these objectives have in fact DOUHDG\ EHHQ DFKLHYHG LQ ,QGRQHVLD 0DOD\VLD WKH 3KLOLSSLQHV 6LQJDSRUH DQG 7KDLODQG ,Q WKH FDVH RI &DPERGLD WKH /DR 3'5 0\DQPDU DQG 9LHW 1DP WKH\ DUH QRW UHDG\ EHFDXVH WKH\ VWLOO QHHG WR GHYHORS WKHLU EDQNLQJ V\VWHPV 8QGHU WKH $%0, QR WDVN IRUFH KDV EHHQ DVVLJQHG WR DGGUHVV LPSRUWDQW LVVXHV WKDW DUH VSHFLF WR FRUSRUDWH ERQG PDUNHWV B. Three Bold Proposals for Regional Cooperation
,I WKH $6($1 FRXQWULHV ZRXOG OLNH QDQFLDO PDUNHWV WR SOD\ D VLJQLFDQW UROH LQ WKH UHDOL]DWLRQ RI D ULFK LQFOXVLYH DQG KDUPRQLRXV UHJLRQ LQ WKH IXWXUH WKH UVW SULRULW\ LQ PDUNHW GHYHORSPHQW should be a regional corporate bond market. A deep and liquid corporate bond market would require something on a regional scale. The development of such a market would make more HIFLHQW WKH ZD\ WKH UHJLRQV VDYLQJV DUH UHF\FOHG DQG DW WKH VDPH WLPH SURYLGH D VSDUH tire for capital markets. To develop a deep and liquid regional corporate bond market, we propose three EROG LQLWLDWLYHV )RUP DQ $%0, WDVN IRUFH ZLWK WKH VSHFLF PDQGDWH RI FUHDWLQJ D UHJLRQDO FRUSRUDWH ERQG PDUNHW 7KLV PDQGDWH ZRXOG LQFOXGH WKUHH FRPSRQHQWV (i) Common standards for issuance. At present there are two global standards IRU FRUSRUDWH ERQG LVVXDQFH 5HJXODWLRQ 6 LQ (XURSH DQG 5XOH $ LQ the US. The task force would assess which standard would be more appropriate for ASEAN and possibly even develop a new standard for ASEAN. These standards would set with an eye for potential liquidity, including minimum issue size and standardized maturities and covenants. An interdealer regional trading platform. This will have designated corporate bond market makers from each jurisdiction who will agree to provide liquidity in exchange for certain privileges such as special access to a regional repo market.
(ii)
(iii) A regional centralized counterparty (CCP) for credit default swaps (CDS) on ASEAN names. The PRC has already drawn up rules for its own domestic CDS market, while Singapore and Hong Kong, China are already in the process of organizing their own CCPs. 7R VXSSRUW WKH JURZWK RI D UHJLRQDO FRUSRUDWH ERQG PDUNHW HVWDEOLVK DQ $6($1 zone of free capital mobility. This would include mutual recognition of funds and instruments of the different MXULVGLFWLRQV WKH UHPRYDO RI ZLWKKROGLQJ WD[HV IRU RZV ZLWKLQ WKH UHJLRQ DQG a timetable of implementation appropriate for the circumstances of subsets of countries in the region. This will also require a harmonization of macroprudential UXOHV IRU PDQDJLQJ FDSLWDO RZV IURP RXWVLGH WKH UHJLRQ 7KLV SURSRVDO PD\ EH UHJDUGHG DV DQ $VLDQ )UHH 7UDGH $UHD IRU FDSLWDO RZV ,Q DQ LQWHULP SHULRG DFWLRQV UHJDUGLQJ WKH XVH RI FDSLWDO FRQWUROV ERWK IURP within ASEAN and from outside ASEAN may be coordinated to account for WKH DEVHQFH RI GHHS DQG ZHOOGHYHORSHG QDQFLDO PDUNHWV LQ VRPH FRXQWULHV in the region. While the PRC and the Republic of Korea need not be included at the outset, a regional market with a critical mass may eventually require that they be included. 7R SURYLGH DGGLWLRQDO GHDOHU OLTXLGLW\ H[WHQG WKH &0,0 LQWR D UHJLRQDO UHSR market, in which central banks agree to accept cross-border collateral in the IRUP RI JRYHUQPHQW DQG FRUSRUDWH ERQGV IURP ZLWKLQ $6($1 This might best be done through tripartite contracts and a few clearing banks, ZLWK SHUKDSV RQH FOHDULQJ EDQN HDFK LQ WKH 35& %DQN RI >WKH 3HRSOH
V Republic of] China already plays a similar role for offshore renminbi), Japan, WKH 5HSXEOLF RI .RUHD DQG 6LQJDSRUH ,I FRUSRUDWH ERQGV DUH LQFOXGHG HLWKHU $052 RU WKH FOHDULQJ EDQNV ZRXOG SUHTXDOLI\ WKHVH ERQGV RU DVVHVV UHSR haircuts on them. The Swiss National Bank is one central bank that already accepts cross-border collateral. The designated corporate bond market makers mentioned above may be given preferential or exclusive access to such a regional repo market. 7KLV SURSRVDO ZRXOG PDNH WKH &0,0 D IDFLOLW\ WKDW RSHUDWHV DV D GDLO\ source of liquidity rather than one that only operates during a crisis. Such an H[WHQVLRQ RI &0,0 ZRXOG OLNHO\ DOVR UHPRYH DQ\ SRVVLEOH VWLJPD DWWDFKHG WR XVLQJ &0,0 IXQGV DQG ZLOO WKXV PDNH FRXQWULHV LQ QHHG RI HPHUJHQF\ liquidity more willing to access it. As a repo market, it will also increase the DPRXQW RI LQIRUPDWLRQ DYDLODEOH LQ QDQFLDO PDUNHWV ZLWKRXW KDYLQJ WR UHO\ RQ VXUYHLOODQFH DQG UHSRUWRULDO UHTXLUHPHQWV RI FRXQWULHV XQGHU WKH FXUUHQW ,0) OLQNDJH RI &0,0 (YHQWXDOO\ WKLV OLQNDJH WR WKH ,0) ZLOO EH XQQHFHVVDU\ DV more market-based regulation comes into effect.
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&KDUL $ DQG 3 % +HQU\ &DSLWDO $FFRXQW /LEHUDOL]DWLRQ $OORFDWLYH (IFLHQF\ RU $QLPDO 6SLULWV" NBER Working Paper 0DVVDFKXVHWWV 1DWLRQDO %XUHDX RI (FRQRPLF Research. &KHXQJ & DQG ( 5XVWHFLOOL 6WUXFWXUDO DQG &\FOLFDO )DFWRUV EHKLQG &XUUHQW $FFRXQW Balances. OECD Economics Working Paper 1R 3DULV 2UJDQLVDWLRQ IRU (FRQRPLF Co-operation and Development. &KLQQ 0 DQG + ,WR *OREDO &XUUHQW $FFRXQW ,PEDODQFHG $PHULFDQ )LVFDO 3ROLF\ YV East Asian Savings. Review of International Economics &KULVWRIIHUVHQ 6 DQG 6 6DUNLVVLDQ &LW\ 6L]H DQG )XQG 3HUIRUPDQFH Journal of Financial Economics &KXL 0 ) 3DFNHU DQG ( 5HPRORQD /RFDO &XUUHQF\ %RQG 0DUNHWV DQG WKH $VLDQ %RQG )XQG ,QLWLDWLYH 5HSRUW SUHSDUHG IRU $NLQDUL +RUL IRUPHU $VVLVWDQW *RYHUQRU RI WKH %DQN RI -DSDQ DQG &KDLU RI WKH (0($3 :RUNLQJ *URXS RQ )LQDQFLDO 0DUNHWV $YDLODEOH ZZZHPHDSRUJHPHDSGEXSORDG &:*0HHWLQJ &-XO\B/RFDOB FXUUHQF\BDQGB$%)B,QLWLDWLYHSGI Cochrane, J. 2001. Asset Pricing. 1HZ -HUVH\ 3ULQFHWRQ 8QLYHUVLW\ 3UHVV &RKHQ % DQG ( 5HPRORQD ,QIRUPDWLRQ )ORZV GXULQJ WKH $VLDQ &ULVLV (YLGHQFH IURP &ORVHGHQG )XQGV Journal of International Money and Finance &RPPLWWHH RQ WKH *OREDO )LQDQFLDO 6\VWHP )LQDQFLDO 6WDELOLW\ DQG /RFDO &XUUHQF\ Bond Markets. CGFS Papers 1R %DQN IRU ,QWHUQDWLRQDO 6HWWOHPHQWV %DVHO $YDLODEOH ZZZELVRUJSXEOFJIVSGI &RRSHU 5 6KRXOG &DSLWDO &RQWUROV EH %DQLVKHG" Brookings Papers on Economic Activity &RHXUGDFLHU 1 DQG + 5H\ +RPH %LDV LQ 2SHQ (FRQRP\ )LQDQFLDO 0DFURHFRQRPLFV NBER Working Paper 1R 0DVVDFKXVHWWV 1DWLRQDO %XUHDX RI (FRQRPLF 5HVHDUFK &RYDO - ' DQG 7 - 0RVNRZLW] 7KH *HRJUDSK\ RI ,QYHVWPHQW ,QIRUPHG 7UDGLQJ and Asset Prices. Journal of Political Economy 'DYLG 3 $ &OLR DQG WKH (FRQRPLFV RI 4:(57< American Economic Review (FRQRPLGHV 1 1HWZRUN (FRQRPLFV ZLWK $SSOLFDWLRQV WR )LQDQFH Financial Markets, Institutions and Instruments 'HFHPEHU (GZDUGV 6 5 9DOGH] DQG - 'H *UHJRULR &RQWUROV RQ &DSLWDO ,QRZV 'R 7KH\ :RUN" NBER Working Paper No. 0DVVDFKXVHWWV 1DWLRQDO %XUHDX RI (FRQRPLF Research.
Eichengreen, B., and P. Luengnaruemitchai. 2006. Why Doesnt Asia Have Bigger Bond 0DUNHWV" Asian Bond Markets: Issues and Prospects (LFKHQJUHHQ % DQG & < 3DUN :K\ KDV WKHUH EHHQ /HVV )LQDQFLDO ,QWHJUDWLRQ LQ $VLD WKDQ LQ (XURSH" 3ROLWLFDO (FRQRP\ RI ,QWHUQDWLRQDO )LQDQFH ,QVWLWXWH RI (XURSHDQ Studies, UC Berkeley. Processed. )HOGVWHLQ 0 DQG &< +RULRND 'RPHVWLF 6DYLQJV DQG ,QWHUQDWLRQDO &DSLWDO )ORZV Economic Journal )HOPDQ - 6 *UD\ 0 *RVZDPL $ -REVW 0 3UDGKDQ 6 3HLULV DQG ' 6HQHYLUDWQH $6($1 %RQG 0DUNHW 'HYHORSPHQW :KHUH 'RHV ,W 6WDQG" :KHUH LV LW *RLQJ" IMF Working Paper :DVKLQJWRQ '&,QWHUQDWLRQDO 0RQHWDU\ )XQG )UHQFK . 5 DQG - 0 3RWHUED ,QYHVWRU 'LYHUVLFDWLRQ DQG ,QWHUQDWLRQDO (TXLW\ Markets. American Economic Review )XQJ / . & 7DP DQG , <X $VVHVVLQJ LQ WKH ,QWHJUDWLRQ RI $VLDV (TXLW\ DQG %RQG Markets. BIS Papers 1R 5HJLRQDO )LQDQFLDO ,QWHJUDWLRQ LQ $VLD 3UHVHQW DQG )XWXUH %DVHO %DQN IRU ,QWHUQDWLRQDO 6HWWOHPHQWV *DUFLD+HUUHUR $ DQG 3 :RROGULGJH *OREDO DQG 5HJLRQDO )LQDQFLDO ,QWHJUDWLRQ Progress in Emerging Markets. BIS Quarterly Review 6HSWHPEHU *DUFLD+HUUHUR $ 3 :RROGULGJH DQG '< <DQJ :K\ 'RQW $VLDQV ,QYHVW LQ $VLD" The Determinants of Cross-Border Portfolio Holdings. Asian Economic Papers *HKULJ 7 &LWLHV DQG WKH *HRJUDSK\ RI )LQDQFLDO &HQWUHV CEPR DP /RQGRQ Center for Economic Policy Research. *RFKRFR%DXWLVWD 0 6 7R :KDW ([WHQW 6KRXOG &DSLWDO )ORZV %H 5HJXODWHG" $VLDQ 'HYHORSPHQW %DQN 0DQLOD $YDLODEOH aric.adb.org/grs/papers/Bautista.pdf *RFKRFR%DXWLVWD 0 6 DQG 5 )UDQFLVFR (IIHFWLYHQHVV RI &DSLWDO 5HVWULFWLRQV 'R 5HJLRQDO DQG ,QFRPH 'LIIHUHQFHV 0DWWHU" ADB Economics Working Paper Series No. (FRQRPLFV DQG 5HVHDUFK 'HSDUWPHQW 0DQLOD $VLDQ 'HYHORSPHQW %DQN Gochoco-Bautista, M. S., J. Jongwanich, and J. W. Lee. 2010. How Effective are Capital &RQWUROV LQ $VLD" ADB Economics Working Paper Series No. 224, Economics and 5HVHDUFK 'HSDUWPHQW 0DQLOD $VLDQ 'HYHORSPHQW %DQN 0DQLOD Goswami, M., and S. Sharma. 2011. The Development of Local Debt Markets in Asia. IMF Working Paper 1R :DVKLQJWRQ '& ,QWHUQDWLRQDO 0RQHWDU\ )XQG *RXULQFKDV 3 2 DQG 2 -HDQQH 7KH (OXVLYH *DLQV IURP ,QWHUQDWLRQDO )LQDQFLDO ,QWHJUDWLRQ Review of Economic Studies
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.DQJ -. DQG -0 .LP 7KH *HRJUDSK\ RI %ORFN $FTXLVLWLRQV Journal of Finance /;,,, .DZDL 0 DQG 6 7DNDJL $ 6XUYH\ RI WKH /LWHUDWXUH RQ 0DQDJLQJ &DSLWDO )ORZV ADBI Working Paper 1R 7RN\R $VLDQ 'HYHORSPHQW %DQN ,QVWLWXWH .LP 6 - /HH DQG . 6KLQ 5HJLRQDO DQG *OREDO )LQDQFLDO ,QWHJUDWLRQ LQ (DVW $VLD MPRA Paper 1R $YDLODEOH HFRQNRUHDDFNUaUL:RUNLQJ3DSHUVZSGI .LP 6 6 .LP DQG &< 3DUN ,QWHUQDWLRQDO &DSLWDO 0RELOLW\ RI (DVW $VLDQ (FRQRPLHV ,V 'RPHVWLF ,QYHVWPHQW )LQDQFHG E\ 5HJLRQDO RU *OREDO 6DYLQJ" ,Q 0 % 'HYHUHX[ P. R. Lane, C-Y Park, and S-J Wei, eds. The Dynamics of Asian Financial Integration. 2[IRUG 5RXWOHGJH IRU WKH $VLDQ 'HYHORSPHQW %DQN .LP 6 DQG '< <DQJ $UH &DSLWDO &RQWUROV (IIHFWLYH" 7KH &DVH RI WKH 5HSXEOLF RI Korea. Asian Development Review. )RUWKFRPLQJ .OHLQ 0 DQG * 2OLYHL &DSLWDO $FFRXQW /LEHUDOL]DWLRQ )LQDQFLDO 'HSWK DQG (FRQRPLF Growth. NBER Working Paper 0DVVDFKXVHWWV 1DWLRQDO %XUHDX RI (FRQRPLF Research. .RVH 0 ( 3UDVDG DQG 0 7HUURQHV +RZ GR 7UDGH DQG )LQDQFLDO ,QWHJUDWLRQ $IIHFW WKH 5HODWLRQVKLS EHWZHHQ *URZWK DQG 9RODWLOLW\" Journal of International Economics /DQVLQJ . - 5DWLRQDO DQG 1HDU5DWLRQDO %XEEOHV ZLWKRXW 'ULIW FRBSF Working Paper &DOLIRUQLD )HGHUDO 5HVHUYH %DQN RI 6DQ )UDQFLVFR /HXQJ 6 %DQNLQJ DQG )LQDQFLDO 6HFWRU 5HIRUPV LQ 9LHWQDP $6($1 (FRQRPLF %XOOHWLQ /XFDV 5 ( -U :K\ 'RHVQW &DSLWDO )ORZ IURP 5LFK WR 3RRU &RXQWULHV" American Economic Review 0D * DQG ( 5HPRORQD 2SHQLQJ 0DUNHWV WKURXJK D 5HJLRQDO %RQG )XQG /HVVRQV IURP $%) BIS Quarterly Review -XQH McCauley, R., and E. Remolona. 2000. Size and Liquidity of Government Bond Markets. BIS Quarterly Review -XQH 0HQGR]D ( 7KH 5REXVWQHVV RI 0DFURHFRQRPLF ,QGLFDWRUV RI &DSLWDO 0RELOLW\ ,Q / Leiderman and A. Razin, eds., Capital Mobility: The Impact on Consumption, Investment and Growth &DPEULGJH &DPEULGJH 8QLYHUVLW\ 3UHVV
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About the Paper Maria Socorro G. Bautista and Eli M. Remolona examine key issues in the further development of financial markets in the Association of Southeast Asian Nations (ASEAN) and ASEAN+3 countries. The trade-off between the geography of information and its access and cost implications, versus the effects of externalities of wider financial market networks makes the case for regional integration of corporate bond markets more compelling. The authors propose three bold proposals in support of regional corporate bond market development and financial deepening.
About the Asian Development Bank ADBs vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the regions many successes, it remains home to two-thirds of the worlds poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.
Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. WPS124542
January 2012
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ADB Economics Working Paper Series

Going Regional: How to Deepen ASEANs Financial Markets

ADB Economics Working Paper Series No. 300

Going Regional: How to Deepen ASEANs Financial Markets

Maria Socorro Gochoco-Bautista and Eli M. Remolona January 2012

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Figure 1: Savings and Investment (% of GDP)

ASEAN Savings ASEAN+3 Savings Advanced Economies Savings

ASEAN Investment ASEAN+3 Investment Advanced Economies Investment

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Table 1: Savings and Investments as a Percentage of GDP

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PRC, Japan, and Republic of Korea 400 200 0 200

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Figure 4: ASEAN-5 Capital Inflows and Outflows by Category ($ million)

0 20,000 40,000 60,000

0 20,000 40,000 60,000

0 10,000 20,000 30,000

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Table 3: Outstanding Bonds by Category ($ billion)

Indonesia Malaysia Philippines Singapore Thailand Total

Philippines Singapore Corporate

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3,500 3,000 2,500 2,000

700 600 500 400 300 200 100 0

ASEAN+3 Government ASEAN Govt (rhs)

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Korea, Rep. of Malaysia

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Local currency Foreign currency

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Why Size Matters for Deep and Liquid Markets

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The Geography of Information for Different Markets

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Europe 18.0 Asia 53.0 United States 23.0

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Gains and Costs

Gains from networks Information costs

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