Asia's Bond Market: Reforms to Promote Activity and Lessen Financial Contagion

Abstract

Liquid markets for debt securities exist comprehensively in no East Asian economy other than Japan, even though short or medium-term bonds are issued in most and Asian borrowers are established (though generally not prolific) international issuers. Today’s markets provide a borrowing medium (not always effectively) for Asian governments, financial institutions and some companies, but investor activity is closely correlated with bank credit creation. Above all, the region’s markets provide no real guard against crisis or contagion, nor act as a balance to banking systems susceptible to distortion and event risk. Asia’s economies may not suffer general capital shortages but poor resource allocation is pervasive and would be greatly improved by efficient national and regional financial markets. This paper is concerned with markets for tradable debt securities, with the impediments to their proper functioning and with the value of structured finance techniques to expand general usage in Asia’s debt markets. Seven years after its most profound financial crisis, Asia risks new contagion from any similar, unforeseen loss of confidence. Active debt capital markets would help limit such risks. The world’s foremost bond markets developed as a result of intense national needs, and while economic growth will inevitably lead to greater bond issuance and trading this will be insufficient for the region's wider requirements without official sponsorship of active cooperative market reform. The paper concludes with three linked policy proposals: a matrix of steps to remove legal, fiscal, regulatory or systemic obstacles or omissions that severely hinder market usage; measures to encourage the development of a unified regional offshore market for local and major currency risk; and the concept of a regional body to promote the creation of assetbacked securities on a scale not previously contemplated.