WO~~' TIHIIE EMERGJING MAKiIETFI THE WORLD BANK " I9v&|tlKlEL '' Q 1n~~~~~~~~~~~~~~~~~~~I p~ ~ aa Hong Kng (UK) Macao (Port) a~~~ I~~~~~~~~~~~~~~~~~~~~~~~~h I r Sri~~~~~ ~ Tha Korad Brunei Trust Terr. of the Vk ~~~~~~~~~~~~~~~~~~:Pacific Malaysia ~~~~~~~~~~~Islands (US) Maldives ig INDIAN I .~~~~~~~~~~~~~~~ OCEAN Indonesia ' _ .~~~~~~~9 The Emerging Asian Bond Market The boundaries, colors, denominations and any othe nformation shown on this mp do notmply on the port of The World Bank G oup, any judgment ot of any tertory, any enddrsement or acceptance of such bound res TIHIIE IEMIERGIING ASIIAN IBONI1D MAIRJKIETF THE WORLD BANK WASHINGTON, DC ©) 1995 Thc Intenrational Bank for Reconstnirction anid Development/THE WORLD BANK 1818 H Street, N.W Washington. D.C. 20433. U.S.A. All rights reserved Manuifacrurerl iii the United Slates of Amilerica First printin,g December 1995 Priotevi on recvcled paper Design hy Patricia Hoed Craphiik Design The findings, interpretations, and conclusioiis expressed in tI is paper are enti reli those lf tile auLlthor(s) atid shouili not he attribultel in any milaniner to the Wirld Banik. to its affiliatedl organizaionis. or to meumbers of its Board of Executive Directors or the counltlries they represenit. The World Bairk does not guarantee tht accuracy of time data included in this publicatiin anid accepts nio responsibility whalsoever fol alny CoonsevLielnl e of their mice. The boumid- aries, colors. dlenominatiors, anid other inforniation shown ori any niap ii Irlis ohiii-e vd nit impli)y oni the part of the World Banik any judgmmienit on t[ie legal status of an,y terrilory or tihe el,dorseu-ent or a, ,eptanr1e of sLIch II OLIviaries. Ismail Dalla. principal aLIltor of The Emerging Asian Bonid Mamrket, is a US natiminal anncl past prilncipal financial speoialist in the World Bank's East Asia Countri I Department. He is cuocreti,r President of Wlashington Assel Management. Ilnc.. Washingtoni. D.C. Time Ennerginng .4simmn Bond Market bvy Isniail Dalla. Deemia Khalklatle, .(C. Rao. Kali KomidiUry. Kwang JLin, aim1 Tens Chiippe. ISBN 0-8213-3487-5 Libhrary of Conigress Catalaiging-inn-Pulniicatiomn Daoa Dalla. Isiimail, 1948- Time eniergimg Asian hond market / hv Ismail Dalla. p. cill. Include, hibliographical references. ISBN 0-8213-3487-5 1. BRed market-East Asia. 2. Monetary policy-East Asia. 1. Title. HG4651.D35 1995 332.63'23'095-dc2O 95-48236 CIP FOREWORD The ecoinomic performanice of East Asia las been a remiarkable storN spanrirnrg -seral deradles. The regi.. Ira, enjoyed rmacroeconomic stabilily, rcoisistenit growth, low iinartii icrireasing operirreso to iieri-atlionral flo-rs of trade arid private capital. arid a sleady rcedLlCtioI iir p-Iverly anid imprr1riemrentill livn ig stanidards. AlirIg withi rapii expansion of productive capacity a nd eterisi B u sICtr iral c mange- hr iri r ct b ie, ies. rlie f i irai rcial n eti a rs - if tr ese ciinrtries Frave also vieselipeLi vigororisly. The r egioni riow has a rell-developed iarikirig sy .sterrr. annd ioasts four if t[e trp twertvy slur k riarket, s Ille wnirld. However. East Asia's bond Irmarket.s are relatisei simall ald t an early slage of ieselopmrrenrt. Trie canibioi i izr of its bFond rrarkiets at USS 338 billirot. or 22 percent of CDP a lihe enid of I 994. was.s o nliirie-tiiil if tIre size t[ie regioir s eqLityN rirarkets. Tlii report has been psepared vis Airld Basik staff and is basevi air stilidies f bond ora,kels in Chinia. Hung Koig. Inidniesia. Korea. Malaysia. Philippines, Sirigapre. anid Thailaivd. These studiies rave ieei r arriei iit im a ,I- laborative effort between Banik stlrff arivi ililrtittilrral rLiriiterpalts lin these corriutries. These stuiiies are ircrlFatl- ed separateiy as backgrournid paper-. The iiiaiir objecti eo of the report are ti pinn ide a comrrprehensive ires ey il the East Asiao bsnid miarkets, irleriif) tie beot practices iliat have fostered vderelopoellrt of these haod urarkets. and preseirt a bsriad agenrida fol refirms. that wouild firrher coitrlibite tin lieu deseloprrrenit iFr lie rlegionir. The repoirt fi rds great diversity ariiorig these miarkets ir thieir ize, sphistiratirri regLulators frarrrewn rk. and iifra- structure. Each of these enrantries has taken, sigirifuranit step.i in rereir vears to imnprive ire frirectirninrg of ils lird iarket. In soiie voaUitries tle relirits are already arhprarti aird Ilie board rirarkets hIarve bieguir to geros. In ililers. iiiore conicerted efforts are reqlrireni. Hiwever, it is -lear thal riool of these urarkets are piiied for genwth and. i moist cases, the irtiitinal prereqriisites nither are alreardy i place ire are beiirg sLI inl place. Market deveh nprrert is essentially urn rgains pricess. FLIt on,e tFial ian re ainleni by apprinltiate auipprirtie actions by governments. Thie World Bank hiipes that this repuel Srill fa ilitate a dialoiigrue belteeir key rioarket parlii irptsil, regilators, and officials responsible fur plreoniolirig market dlevelopimrernt oo pierific irreairres Ihat ar, reqnired for each eoairitry. With tire right iiieasLrres. we evpeet tire bondrir iiiarkets in tlhese r iirrities to glw very rapidhI anI beciirre a rrrajoir soiLene ful filairirig inriestimuerilt il irirdstry air1 infi-silLorirtLle that are es-sitLial ii -surtri rapid dveeloprelilt in tire oinds irIuost nhyraric regiionr. Nlanaginrg Direntiu, The XX,inld Barnk ACKNOWLEDGMENTS This study has been carried otit in a collaborative effort by the W'orld Bank staff arid the coLinterparts ini eight East Asian countries over a period of nine moniths. This report has been prepared by a teamii beaded bv Ismnail Dalla (Principal Finiancial Specialist). The team included Deena Khatklrate, D.C. Rao. Kali Kondurv. Kvang Jun, anid Tem Chuppe. Subir Lall anil Gary Kleiruair made important contributionis to the repoirt. The Asian bond market teari would like to express its gratitude to Gautam Kaji. Maniaging l)irector; for invaluable gijidance anid contliued support; Russell Cheethua), Regional Vice Presideut. for full support; Vinod Tirorjras and Ishrat Husairr, sur:cessive Chief Economists in EAR for gettinig the study off the groond and for bringing it to a sIc- cessfur couripletiorn; Callisto Madavo, Pamela Cox. Williamii McCleary. Vineet Nayyar. and Khalid Siraj for provid- lig guidance anid resources to carry out this regional study from thIe EAI Departurent; and Francis Colaco, Gary Perlin, anid Halis Rotlhenibuhler for providing coisitructive comments on the draft report. The team wotld like to express its appreciationi to Josepih C.K. Yarin Chief Exercutivre of the Honig Kong Monietary Authority (HKMA), and Andrew Sheng. Deputy Chief Execulive. for full sirpport and for providing a platformi to dis- seroiinate the stirdy; Loretta Wniig of the HKMA for her total dedication in ensuring the administrative arrangemilenits for the Uonig Kong conference; Cosirias Robless for guidance arid prorvidiig the resiurces ii cam oult a parallel stiudy in Iirdia; Roger Hall for statistical support; and Amy Menden. Joyce Rompas. Muriel Greases. arid Patricia Hord for their valuable conitributionis in tlie prorduction of tire report. Joost Prlak edited [lie repirrt. The study would not have beeni complete without tlhe support and close cooperation of our courinterparts in these countries. We wouild like to thauik Dato Malek Mericau. Advisor/Director. thle Arab Malaysian, Merchanit Baik, for valuable guidairre for the Malaysiarr stLudy; Ekanrol Kiriwat. Secretary Geireral, Securities arid Exchange Commission of Thailand. for full support and guidanice For the Thailand study; Koh R3erig Seng, Deputy Marraging Director, Monetarv Authmority of Sinigapore, for valiable commreuts on tle Sirngaporie study; Roland Young, President. All Asia Capital. Philippines. for agreeinig to ptit together thre finial report ..iu the Philippirno; Priaswijanto Sabrawi of the Institut Penigembaugan Analisis Finansial, lirdionesia, for the liudonesiari report; Insirp Lee of tire Korea Secririties Research lIistitote for the Koreair stody; Priscilla (:hiri of tIle HKMA for valuable cuen- tribution to the Hong Kong report; Arrjahi Koimar of the World Bank for producing lie China report; aid N. J. Jhaveri. Chairnrari of ICICI Securities anid Finanice Company, Ltd., Iidia, for agreeing to participate hr the stildy and1 prodicirig tire Inlia report orr a compressed schedule. Ismail Dalla Task Manager. Asian Bond Market Stur(ly - a- - TABLE OF CONTENTS EXECUTIVE SUMMARY i INTROl)t C'l'ON I 2 THE EMERGING ASIAN BOND MARKET 6 Bonid Markets is Selected Industrial Countries 6 Size auid Cronposition of tlie East Asiani Bond Market 10 In vesto,s 13 The Primary MarkeL 13 The Secondary Market 19 Benchmlarks 23 Role of Credit Ratin1g Agencies 24 Derivatives 26 Taxationi 27 Summary arid Conclusions 30 3 REGULATION OF THE EMERGING ASIAN BOND MARKEI' 32 Introduction 32 Securities Market Regulatory Systems 32 Government Oversight anid Self-Regulation 35 Regalation of Securities Markets. Private Issuers, and Ltenmediaries 41 Regulation of Government Secuirities and Iltermediaries 44 Regilation t Investment Companies 46 Sumimiary aniy Conclusions 47 4 INTERNATIONALIZATION OF THE EMERGING ASIAN BOND MARKET 50 Role of Foreign Portfolio Investment 50 Bonid and Equity Market Opening in East Asia 51 International Bonid Market Access by East Asian Developing Countries 51 SLimmary and Conclusions 55 S BOND MARKETS AND MONETARY POLICY 57 Introductioni 57 Indirect Monetary Controls in Selected Industrial Countries 57 Indirect Monetary Instruments anid Monetary Policy in the East Asian Couitries 66 Summary and Conclisions 72 6 LOOKING AHEAD 74 The East Asiani E-nn,,nfi ima 2004 74 Iss Les 77 linvesiols 78 Su.mn.rs aird (CjXeli,sion. 80 ANNEXES A BOND MARKET-STATISTICAL PROFILE 81 B THE INDUSTRIAL COUNTRY EXPERIENCE 116 ENDNOTES 134 SELECTED BIBLIOGRAPHY 139 - re R- . LIST OF ABBREVIATIONS ADB Asia, D-ielpirneri Bank AGSD A,crediled Go-nner mirirei Se(unties Dealer, BDC Baird Dealers Cluii BIS Batik fire iiterriitaional Settlenirnints BNMI Banik Negaro MalaN ia BIOK Batik of Korea BRI Bank Repudbic Ilnid-rsia BSP Banigk Seinral rig Pilipi;, ia CMtJ Cetral Moriiev NMarket tri,it SerIes (.PF Celntral Pro, idleirt Firrnl ECAT Ele-tricil, Generating Autliroriy of Thailarrd EPF EliiŽ en Pro,idenit Firrld G[DFI (;rio- Di.eol -i, Fixer1 Jlire,tiiei GDP Groo- Di-i,e.I Product GHK Go%erriiiir ofi Hirg Konig GOS (; merrirrierit oif Sinigapore ;I GlCoerrilnllelri il 1ridoide,ia (GOF Giii errilnierlt of Korea COM ;,,ernineill ofr Nlalassia CSIC Giii-ecriiierll ofSlirgaprire Ir-eLtinierit Corpi.ratrlri G;SIS Go'err, merit S,ri ire hiiuxirainie S! ctii H KMA Horrg Ko.ig Milrretara Autlhori te IDR liidoiisiair RBiruali KLSE Kuiala LLIrrripLr Stuck Ex-khanige KDEI Ilidoire,iati De,ojioioi airlc Clear, rg Agency LAF Liqpridits Adj-1tri,eit Facility MAS Molnetain AtilhiirrLx of Sinigapore MGS Malal isiarin GI Veln rrre,r- SenI till-s MSB Monretars Slabili,atirn Bonld, MTRC NI i Tianin BailRsad (oNnpinratiori POSB Pied Offlin Sanirig, Bairk RAM Halitig Agen-ni Malarsia REPO RBe1nprka-e Agieennit R1TG; Ronal Thai Gon merriiernt SEC' SeciriBtic and E-xhlnangs C(onilriosin SEHK StuLk Exchange if Hing Konig SET Stiiik Ex chanige of Thiailanid SSS Siii1al Security System TRIS Thai RaLing aund Iniforrinatiurn Sen is- TABLES IN TEXT 1.1 East Asia: Selected Economic Indicators, 1993 1 1.2 FDI Flows into East Asiani Countries, 1990-94 2 1.3 Eqvrity Portfolio Flows arid Boirvl Issuance tI East Asia 2 1.4 Relative Position if Baiikinig Assets. Equity, arid iBonds. 1994 3 2.1 Size of the Emerging Easl Asian Bonid Market, Errd-1994 10 2.2 Size of the Erilerginig East Asiani Boird Market. 1990-94 11 2.3 Main Sectocs if tie East Asiani Baid Market 11 2.4 Size of the National Coveeriiiierit Bnrid Sectoc 12 2.5 Size of tlie Central Baink Bond Sector 12 2.6 Size of the State Enterprise Bnid Sector 12 2.7 Size of t[ie Corpocate Bond Sectonr 1:3 2.8 East Asia: Irisestors in Bonids. 1994 13 2.9 Net Issuance of B1 rids in Selectedl Inldustrial CoUntries. 1980-93 14 2.10 Withiloldinig Tan focl US-Based lstitutiornal Investors 28 2.11 Inrdicatine East Asiair Biid Tax Rates 29 3.1 Asiani Bonud Markets: A P-nfile of RegUlatinr Systems 48 4.1 Prisate Capital Flows to All Deseliipinig Counitries: 1989-93 50 4.2 Capital Flows tin East Asia. 1985-94 51 4.3 Share of Deselopirg Coautrx Boirul aniy Equits Issties 51 4.4 International Bonill Issues bv Selected East Asiani Courrtries 52 4.5 Bud Issties in International Mar kets by Issuer Type ir Selected East Asiai Ciantries 53 4.6 lirterriatiornal Bourr IssLies liv Selectedi East Asiani Couiritries by Iirsitr.rrrreils 54 4.7 Average Maltirit) 55 4.8 Ratings of Sovereign Foreign Currency Debt, March 1995 55 6.1 CDP arid Gioss Dornestic Fixed Ihvestirenrt, 1994-2004 74 6.2 Capital Structrure in Sele-ted East Asiani Countries 75 6.3 East Asia: lirdicatise Finaircing Plan if Projectenl Irrvestment 76 6.4 Ilidicatine Size of tIe East Asian Botid Market 76 6.5 lirdicative Investmnteri Req.in ireirts in Irifrastrirttire. 1995-2004 78 6.6 Asset Size of East Asian Ilstititional Ilvestors 79 6.7 Total Perisioir Assets hr Selected Conitries 80 FIGUtRES IN TEXT 1.1 GDP Growth. 1980-93 1 2.1 Relatire Positioir of Bank Assets. Ev1Uities. arrd Bonds 7 2.2 Biiid Market as a Percentage if GDP 7 2.3 East Asia: Secolidar) Market Trading in Binuds. 1993 19 2.4 Yield Cones in Selectenl East Asianr Markets 24 4.1 Interniationral Boind Issues hr Selectel East Asiani Countries 54 5.1 lirstrumert Mix and Operationir for Selecte(l Countries 59 5.2 lirilliect Miniretar Policy Ilstrirurenits in tie Eaist Asianr Corinrtries 70 6.1 Conryni.sition of the East Asiani Bonid Market ii 2004 77 BOXES 2.1 Cagainias 17 2.2 Singapore International Monetanr Exchainge (SIMEX) 27 - r * - - C U R R E N C Y E Q U I VA L E N T S China Year-enid 1994 US$ 1.00=Yuan 8.45 Average 1994 US$ 1.00=Yuan 8.49 Hong Kong Year-enid 1994 tlS$ 1.00=HK$ 7.74 A,erage 1994 US$ 1.OO=HK$ 7.73 Indonesia Year-enid 1994 USS l.00=Rtipiah 2200 Average 1994 LISS l.00=Ripialh 2197 Korea Year-end 1994 US$ 1.OO=Won 788.70 Average 1994 LIS$ 1.00=%Von 791.86 Malaysia Year-enid 1994 US$ 1.00=RinggiI 2.56 Average 1994 US$ 1.00=RinggiI 2.56 Philippines Year-enid 1994 11S$ 1.00=Peson 24.42 Average 1994 US$ 1.00=Pesos 24.15 Singapore Year-enid 1994 115$ 1.00=S$ 1.46 Average 1994 US$ 1.00=S$ 1.53 Thailand Year-enid 1994 US$ 1.00=Bahl 25.09 Average 1994 US$ 1.00=1aht 25.10 EXECUTIVE SUMMARY INTRODUCTION in,trintuents like bank deposits arid equities. The deseloprment Of botid miarkets would also enicourage he Xorld Batik Group has been etigaged in niew risk irianmagemeit products such as interest rate fiiaricial irrarket stLidies ini many East Asian' fttirLles aiid options. Firrtheririore. nell-functioning c'OluntrieS aS all integral palt of its ongoing oper- b iad rirarkets with a bIroad ranige of inotlrlameits esLllld atiotis. The inofriation gathered and the insights etrableierttral banks to caurryon l iidirect rrimonetary pol- gaiied from these studies, especially on Korea. icy thriiugh open lrarket operatiiirs. Thailand, tire Philippitres. Indoresia. atm l China. hase eriabled the Batik to make an impirtait coitributirrn to The pa.t fitatnri ng patterno Elk if daced ani electronuic book-en1ru) Ns,lerin fir the transfer if trading takes place over the couniiter This niarket prac- seculities arid ii facilitate the t-rai-ferof foods. However. lire is typical ilil ii st countries. Inivestors in corporale the ueppli of MGSs lias declied iii recent years because bnids are pririlarily i mstitutimial investo.rs iclauding if the conifortable fiscal position oftlie GOM. As a resull, baniks arid penlai fuods. IndividlUal investors are out MGSc are urn longer ani effec ive belirhniark. Securities autive ini the -cirporate bond markelt, and e,em t prefer issued by [lie Cagarnas Berhail (the Natirirul Mortgage tlie risks aird rewards ass(,i-iated vi. ii the minre volatile Corpuprtialirn). which are ciinsidered tol be corporate briuids stock iiiarket. Mireu-er, [lie retirrirs aailable in the are iften used for this purpi-se. equiities market (rave beeni quite highi ii rcen years, witli the Hang Seirg Stork hides inu..re thoa doubling in Tire corporale brid riiarke,t 0as lanilhed in 1987 with 1993. As in olher Asian iiuntries. irdisidual insestor [lie eslabliehm-enl if the Cagamas Berhiad. In 1994. tire in Hong Kotig are perceived iil hsae a see sirort-lerin amniuirt of corporale boIrda issued was RM8.4 billion. investiiienit horizn. However; [his iiiay change as the compared Nish RM1.8 billiour in 1988. Cagamas pur- popUilaie ages. In lighlt of this. niiariy fund managers in Chases hoLusilng liian, frimnir moirtgage originators stich as Hung Konig expect ihat there rnay be a shift in eorplia- barniks, iilter fmiancial instititionis. asun the goveririileiit. sis froni wealtih creatiion to wealtih preser,ationr in tlie raid inones tirisertired iiuortgage-backed securitiie 1t1 years ahead. fuirld its niortgage portfolio. These se-urillue qualify as liqoiii assets. In a relatively short time, Cagaais has Unilike Siigapore, tle iifrastrultiAre requirements of eslablislueviLielf a a niajoie pluser in lhedomeetic bond Hong Kong are sery subslantial. MTRC has estilinated mrarket. Since its inception. Cagaman has issued RMI I tlhat it will COrt HKS23 billion to coiisinsct a 34-kilo- billiin worth of boids. represeirtiiig about 45 percent of rieter railiiay Iirki irg Cenitial aimd Kiiio m ith tire tiital corporate bond rinarkel. Bolh lined rale bonds Norrthern LaitaLl Islanid aniid Hung Kong's new airport. isitil uut-atritie, if 3. 5. aim1 7 vears arid floatinig rate Miire iniportanitl,. there is a hing-lerm rieed to desel1op I oidi pegged to the 6-motuth Kuala Lumipur Initer-Banik the brind mnarket to fac-ilitate the financing of China's Offered Rate are issnied. Cagamas is broadly owned by infrasilrlt-ture. A, a regionial fiuiauicial v-miter. Hung tie finrairrial iristittliotis in Malaysia. iruludilg tlire en- Koiig is -si11 prsaiined to int,rit ediale inn briids fur ibe tral bank. aoir lIas beell profitable sinire ils inreptiurn. East Asia regiru. The cuorporrate bind nuacket in Malaysia lias grown The second largest bur..id nuiaket ii the region. iurea- rapidly since 1988. In the past, t[ie bond niarket was sured relative to GDP is iliha f Malaysia. At tlie eirn ronifined ii g- -veenrocnt b.onids issued to riieet tire invest- inent needs of institutional investors such as the EPF Sinilar to Malaysia, the RTG has decided to increase arid the insurance comapaniies. The mandate shifted to the role of the prBiate sector in finazicing the riassice the prixate sector with the launichiiig of the Priv atization infrastructure investnieiit tihat will be required to sus- Master Plan. Since then, the COM has heen actively tail the high projected growlh of the Thai economy. privatizing telecomrmunications, electricity supply. high- Fourteen large public utililies anid other state eirterpris- ways, and olher Ltility sectors. This policy chanige hla( es si-lih as Thai Airmays will be corporatized. aird their a major inipact on the corporale bond market. shares ace to be issued to the public in sniall iristall- meets. These enterprises are encouraged to raise finds Malaysia has very large inslitutirrial investors. The to meet their i nvestment reqrlirrenrets from doniestir EPE: thle Social Security Organization. the Arnired finarrr:ial niarkets. This has levi to a dramatic increase in Forces Firnd, pension funds, aid insuranrce companies the state enterprise bonids. whrirh did nrlr exist until 1990. are tIre rnrajor incestors ir tIle bond mrarket. The EPF is by far the largest. with total assets of RM82.6 billiori at The corporate birrd miarket in Thailanid is relatively the eird of 1994, and is to renrairi as tIre rirajor source rrf new but growing rapidly. Histolically, the few bonsd long-ternm fuirds. It is required ry law to invest at least issued by private finns wer-e mostly short-term promis- 50 percent of its aninual investarle frinds in MGSs ansd sory nritex arid ill, rrf exchange. giiaranteeri by conr- it is not permilted to invest ir llnsecured corporate nerecial banks. Prior to 1990. orly public cornipanies bronds. However; it has rere-rtly financed large inifra- anid cormparres listed on tire Slock Exchange of structire projects such as tIre independent prrwer Thailand (SET) were allowed to isosue brrds arid crrse- plarts, the Light Rail Mass Transit, arid thIe rew Koala qrently the rnumber rf prirate sector issues nas quite Lirnipur lirterriational Airprrt. limited However. frllrwirg tIre enatimelt if the Securities and Exchange Act in May 1992. linrited It is estinraterl that private capital requirerinents ir companies were allowedi to issue dehentirres and maniy Malaysia over the next 25 years will be about RM6.3 qualified companies- have regLin to do Si. '[he volume trillion I USS2.5 trillion). Traditioriral borrowings arid of nrew issues by hr. corporate sertor rose twelvefold equlity filnancing are uinlikely to satisfy this massive over 1992-94, surpassing state eterprise bird issuarce. leel of inrestment. Therefore, nrrst corporations are likely to resort to bond finanrcirig. Malaysia hrs birilt Thai bond nmrlkets liave developed rapidly because ,mf mnost of thie basic irfrastr'sictrire. incluidling credit ratirg the cruiscious decisionr riade ry the RTG to develop the aird tax irieentives, to support the develrrpment if a market tr ineel the need of the real sertor. The regula- robust bonid rmrarket. The mairr shortcomings are: (a) tiny framework was streamlined to citable issuance of the inrultiple regilatrrv regimei (h) ani inactive sec- bonirdsr rir a competiti-e basis iith rither debt histru- o0ndar' niarket exiept for Cagamnas bonds: and (c) the nieirts. The Ser-arities and Exchange Coorreissioln arsernce of a mechannismr ti provide liquidity sorpporl tor ISEC) of Thailaind has been given the manidate by tIre the rirarket makers. Ministr- of Firiarnce arid the Banik orf Thailanid to be the chacmpion of he hbun caroket. SEC has played the diial ThIe bonid market in Tiailand is small but growing role of a promoler arnd regulator very well. Tax disir- rapidly. At the enid ruf 1994, the total size of tire boild centivexs on borid irvestnernit have beeni reriuoved tom a mrarket was Baht 344.6 billion (US$13.7 billioni). or large exteit. and additirnial nieasures are reinig taken to only 10 percent of GDP Tmle main, sectors of the brrirnd simplify adiministratini rf bond taxe, on tfire se,-onidary market were state enterprise brmnds (55.3 percent). cdr- markel. A iredil ratinig agency, tIe Thai Rafing and porate bonds 125.5 pe,elt), aurd go,erirrent binds Irfornrutiron Seni-es (TRIS), was set lilt it 1993. Tn 119.2 pereeit). In Thailard, governument brirds were help stinrutlate the grsrv,th ol' the seroridary mrarket, the issued primarily for openi niiarket omperations to control Associatiorr of Securities Ciiimpaamiex fornmed the Bonid liquidlilv in the financial systerii aid, to a lesser extent, Dealers Chim (BDC) in Norvemrrber 1994. Membership to fund the buidgel deficit. Goveronmenit bonds were in the BDHC icludes sectirities compasies amitl Financial mainly pirretraseul by financial instituitions lo reet thleir irstilttimIts witlh hbond tradiing liremises. There ar'e morW statutrirs requireirenits. Given ilial the Royal Thai 62 dealers. ail they make rrrarket in 37 corporate bonid Goverrnmernt IRTG) has been running fiscal sirpluses i.sues However. the average daily trading volinrn was for the last fe'l years, there has been no riced to issue munlr US$5.0 cnillio. bohids sinice 1990. As a resuilt, ilere has been nio riced to set up air auctioni systeci. vi The inestinient fiiaicillg req(jirelents of [he Thai .uitable coupon rates. Howesel; the coiuponi rate has to econiomily over the niext decade are very large. Since be wilill a band of 2 percent of tile base rate. Korea Thailandl does not have a large contracinal savings see- ha, three credit ratilig agencies, but noInle of them han tor like Malaysia (Pr Singapore. ins slate elntecprines anin niailred intop all effep tie institution becaLise all bionids corporate sector will need to rely on the domestic debt aere giaratileed by the ban,ks anld tlere as ipo rooni narket, erjuity. and foreign borrowing. At ihe eid of for differeintialing credii risks. Thiis is likely to l hanlge 1994, total size of the contractual sayinlgs, sector wa in tile foitiore with the inllceae of 11011-gaarant-eel less tian Bahli 125 billipn (US$5 billion). inclading bonldis. whipic hae pbeen alloedi silce 19)3. anid ((ther 757 prosideilt funds. social sectiilv fniids, and life apid finanlLial deregillation imleasiren i plllelnleled an a Part non-life insplance colmpanies. To accelerate deselpop- ppf Kpprea's ifinalpcial nectpr reforrm p,ogra s cent pf the boPP(l prarket in Tilpiland. there is a need lo take seseral additional actipps including an appelecat- Korea ian illplace mnst pf the basic infrastpiltellre fpr a ed development of the contraeltal sav iPg cectppr: P-e- oib-Jst bolnd miarket. It has a large nombec of corporale atioii of a benchmark; provision of lip1piipitv suipport tpp msnecs with a trolig appetite for ilnvestmen fanvdn. all accredited dealers throligIl the REPO narket. wiich Kpprea also has a large alid grlowing ilstitut illal anin in p-nrenilt limitepi tl the ipanks: and ilciusiilo of slate individpual biavetppr Pase. There in also a strli,g iliteresl enterlirise bovids for tradling ti-uvgih the BDC. phich in fiomii foreign invesiopps ip Ko,rean bvnvldn. Korea is currenIly restricleti to corporate blonds. Vigoroui efifort espectied t. comliplete all its aPinouliped lIlialipial sector are being imiade by the RTC. SEC. and miarket partici- refpppnns. inPlrding full capital a,ccopippt opePmliPg. by pants to address tipese issues. 1997. This shppeld proside a milajor iiilpetiis for its bond market deselopeoent. The Koreaii bonid market is tipe largest anliong East Asian bonid markets-at the end of 1994. the volurne rf Indonesia is the speallest bond market in East Asia. At ouistandinig bondn stood at WPn 127 trillionp iUS$161 the end pof 1994, tpal mize of the bonin mparket was billion). However: at 43 percent ppf GDPI it was sIlmaller US$9.1 hilliopp, Pr 5.8 percent of Cl)P The main thani Malaysia. The IllaiIi nectors of the hond miarket issuers of the bonds aee the penptral bank (75 percenlt, a ere: corporate 137.8 percenlt). state enterprises 123.3 state eltrerpri5en (17 percenti. anid 1ppppaLtiplps 18 per- percent). cenitral banik 120 perventi. government 117.3 ce"u). The Gopvernment of Ipdoppenia oGiO) ihi pre-lid- percent). anin the state government 11.7 percenlt). The ed bsp itS pp0ppstitrptippp fck>nl isliig bonds in dpppsi, Gppsereppnnt ppf Korea (GOK) ha. followed sounivid fiscal ppparkets. Sippce osippt biopldl ins.,ad by tipe cenptral bappk policies. ain I(post bopnds issued by the govenument are are nliopppep market instrulelnts. tipe ppnpi scarket ip adcliilistralively deteripppiiepl and distributed to finpan- lpllppnesia is e-selltially vlimited to the state enierprise cial ilntitutiolns in tIle CoilIltr-. The Bauik of Korea apid ppcsppclpte ippld negmenlis. The first privlae sep:tplp issvres a large amouppppt pf Mppnetarv Stabilization Bopids bovd issele wao irrlorght to ithe piparkel in 1988. To date. )MSBs) to absorb liquidity from the uparket. Until lhere lave been 26 privale issuers of listed bopids anid 1994. MSBs weae administralivel) allocated to the an estiulatepi 50 ip [lie private placeument hoipd ri arket. hanking apid ronbank financial institatipuns. Startinig ip A total of close t 11IDR 1.4 trillion (llS$636 million) han early 1994. alsot 30 perpent orf MSBE acre auctioneed been issiped in cpporate bpopnd, since 1988. Cosrporate tlhrotigih a pietwvrk of dealers. There is an ratIi se ep- bolid innpanpce pas beepi hamp-derepi iy In eeral regulalo- oniiairv miarket in MSBs, anid they coipd sere a a r requirements ilCh as guarantees and iking fund,, benehmark pp Korea. However the mlatiri tv of MSBs is annlin p leppgthiyalnuimbevnoppe ivsiiilig prlo,es-. Tile generally limited to ta,o years. capital toaprkets Pll also places lippitatiosnps on pppatliri- Iy-a m ipbmipn of 3-year pppatipity is renliliced. The Until recenitly, new ivolles of corporate bonidn were high cost of issiling bonids appd lengthy issaanie prove- brougilt to the market voftepi at adpippistratirely deter- dures s1isclOrage corporations fron issl ing shprt-tecip minied yields. ansd issiLe tipi inig was also admdpinistratise- I....ls. Anorther ilimpedilmrent t(p corporrate i,ssers is tile I goverined. In essepee, Koreani 1ooni isIale, can be Iiigir all-in cpost il tihe dippestic Iciarket compaeid ailil viewed as loain packages instead of irndp ip l pm lie iadi- the cost of raising fipeils in ipiterpialional ppparkets. Fmr tioipal sense. Prior to 1981, tipere eisted regulatory this reasoy]. lnany Indoppesiamp rrorporarrtion prefer to guidanice over the maxiinipiiPl coupon rate opp corporate raise fI'vids Ii ippterpiatiopial capital ppparkets aili SW,lp bonds. Coirreitly, coqrorate issilers are fiee ts select tipe Prp-oeeds intoi Inhdpppesianp Ripiah. sii Indonesia is clearly at all early stage of bond market while comlililercial paper issoies oilds require approval by developmlent. To develop the bonvi iarket, addilional the board. Corporate issuers get arotiid this ceetriction efforts will be reqiuired by poli,yviakers in adllressinig by issuing loug-term collmercial paper which is. in both policy alid instilutipipal inufrastrUctores. These will effect, a bonil issulalnce. Will a olno-in-estlient grade include (realion ofa market-Flased lbenchihark. a sroilg sovereigni ratin1g. tle corpoliale seclor, in genieral. has dealer network. a simplified issuance procedure. aLid 11lilell access to interiational financial markets. an efficieiit cleariig anid settlemelit systemn. In this Hl-oeve. bilue-chip corporatiois sucih as tlhe conilectiin. a cledi rating ioliilpall\ -as set tp in earl) Philippines Long Distance Telephlone Cormpaniy alid 1995. and a scripless clearing and settleiiieiit stem is Saii MigLel glCrporali..ii has-e ieen aile tii tLi fioreign ilder preplaratioll anid is likely ti he in place iii lite capital markets. milailiY tii-Uighi Ceqiiiy ies. 1995 or early 1996. Similar to Malaysia and Sinigapore, the Philippinles has The Philippine bm(11 market is dominated by govern- a relatii,ely large conltractoal sasings sector whiili has ilielit issues to finani e the deficits of bhth [lie lialipal nipobilized a substantial aiiioioiut of long-term resources. goverliment alid the ceilital bank diirinig the last The Sipcial SecLirila Systemli (SSS) aiild lhe Government decade. At the elivi of 1994. the total ,size of tile Service Inslocanpe Systena (GSIS) together had itoal Philippille bold iiarket was Peso 612.5 billiipn inveslable respources o)f Peso 147 billion (US$6 billion,) (US$25.1 hillionl) .39 percent of ;DP Almostl the al the elld if 1994. Both imstilutions hale been the entile dpirestic debt aipacket consists vf debt issues bY major inestors inl gilleilllellt seCarinies. However. the nlatio)nal goverililienlt. goverilIllelint coirIlPOlatilPlS. alli libolh ipstitutinini hale played a limited role in capital g-ienmllellt-oiwiled fillail ial iistituitionis. Sipie thie Ilarket de-elo iqlelit. alil their itiestIeilt pllicies also bulk of outstanding bi-pvl issues cairy ilatlirities f less resterict thepp froppi ilisesting il relatively risky projects. tliaii ple year. the Philippinie lI..lv lil irket is essenitial- The size if private pension fiilpis is qllili small tabvit Iv a mon er ipiarket iput is tl-ealte a.S a bo11d imiarket fur US$1 billioil). anid tile hulk of tileil fUilrds have beel Completeness in tIhis stuivy. The goverinimienit 1ran issLues iri-ested il equlity arket anid real estale. treaspiry bills witi ppiat-oities of 63. 91. 182, anid :364 days. Goisveninment seclurities (treasn-s bills aim1 notes) Although the size of the Philippines blond market is rel- in the Philippines are issued Iia colulpetilte aLictiopi. atiielv large in relation to tlhe GDP its niarkel is at an The ciirrept Lauctiopi stseni adil dealer network were early stage ofcleielop)liellt. The Philippine market suf- estalblishiepd in 1986 based oil tEie ULS model. The fers fiiii a lack of lllg-term fined rale ilstruiRients, dif- Goverpimepnt Sec-inties Departimeiit oI the ceitral liapik ficiulty 8 establisihilng benchmiarks for lolig-teri fixei is r-esp-insilble for Ilnallagilig the aniwtioln 1)11 onbehialf f the ate instrupilelts i-ei aise if a lack of llla,irecorloiic niationiial gover-menit. The alictiopi is COMipLpIiCtevi O)11 a stabiliy in l tIe past, abseice ol Li ratimg agelcy witli weekly basis. The pcimiairiy dealer ii,eti rk has expadli- iroad-b)asedl o wniership anld lac-k of all efficielit clear- ed froni, 21) dealers tO tihe ciurrelnt 8(). shi,c1 illlulees hig and settlemelit s stem except for lie a(icediled lie large ronilercial baliks aiivd ilivestumienit h-uses ii dealers iii the prinlar) malpket. Seolindary market imifra- the Philippilnes. Ohy Acvredited Governmpiept Seiurnties strniptUire pleells t be develoi)ld. Liqtiiditv su1pp)ort for Dealers (A(;SDs) call pautlicipate viireetle in the alitionps the accreditedh dealers will fpvter the growmi of 'he sep- as competitive bidders. All p-pasi,, a,,tion me oll- ollida- market. Howeecr. the most illportanlt Of all in dup-ted oni a yiId basis. The aaciipp coplilittee ranks the [le case of t[ie Philippilles is the liscrimiiatory tax copliletitive hids froni llie I IvetyielI tp the highest. Tle agaiinst blundLS at the primliary aripi se-ondary levels. Philippines has ili ll n place a relatisel vell-Hfijiciliing Roid., are dlso subject to relatively high dvcnineilary prililaly market ill golvemiilernt securaiies. slaiip viLaties. Conisiderable effpprts are reqlliredl 11 dlevelopp Ihe bhvid iiiarkei ile-lild lie prilmaily iiiarket in Ciirporate dieb issues in the PhilippIines are generous i'isernient seCLlriies. limited to a handifol of bille-i hip corporat ions and are usually shilrt-terli coPPiPnleri:ial tlaller l]iiaLlriiig il lens The bon1d iiiarkei ii Chiiia is il transitlioi fropii a cel- lhoau oem ear. Long-tern -lperilerviil pipe tl(atuirities tiallI pllaned ally adnillisniuiatisely colililled c:redit of Llp tii three yearsl is alsi) o,u-asiu..iahly issuedi. allocatioin mnechallisin toviarp a i- petitive iniarket-plri- Corporale bon0dI issLanlle is limuiledi hbecauise pf tihe veli systeim. Al the elld of 1994, total size of the Phi li pp)in lies C.r..poratioin La,,. ahicli rellliries that bollild Chiiese honi marnket ,as esti iialeei at Yuauu 281.6 bil- isslalie le apprvid by tio-tilirdvs ofthe silarellhldllcs. lio (US$:3:3.3 (pilliii. or 7 len-eipt if tle GDP The ciii mnarkel consists if two liain seelsrs: governlmeilt (73 In addition to the drassbacks discussed abase, Cbhina's percenit) anid the slate enlerprise (27 percent). Since bond market faces sexeral other constrainlls. Efforls to 1984, the sloune alid variety of slebt is,ae in Chioia establish e, benchmark scarities are hamipered by incter- Ilale grccun rapidli. Total debt isLles ilcrel-sed from -ot rate ic,ilnrcis. adils ile accoutililg sIstem is at an Y48.7 nillion, is 1981 to Yf65.6 iTiill il it 1985. aIls1 cc early stage of deselhopmelnt. Benchmnarks will be harl Y113.3 billioni in 1994. New issues plaoned ficr 1995 to establisih witholiut the dleregulation of the financial are Y 150 billion. -osernament debt in, Chlilna iN issed marketl, e-pecially interest rates. The conractal sac- prinliarily by vthe Ministri of Finalr,ce (treascsry I id,), iligs setor is vets siall aml institltiollnl insest,rs arc alid ihe part of this used for general biidgetars perp-lses fets. The Slate Planninhg Conlillliosoioi piays tll aips r- is referred to as Ireasury bills. Since 1994. ilhere lias lanll role in the bonld ciarkel by issuicing an, aliliai.l asect- bcele a significant increase in the vslunlle of treasoutN ritice phain. Tie regilator friloew-rk is esolvin(g. aIlis hall.s issed, prilnaril due o lthegcccer(linlets lecisiso seeral lnstittltion are insl he,d in cegolating ald to cea,e to finance ils deficit thc11olgh fIlbricaing frons super siing the issuance of bollds. DisclIsrir requnite- Ice celitral bank. GCo -ercimeti delt isues, at ovelr ienl are rodielnltary acld *ill be Ileallingless uInle-s Y113 hillion, inclcasecl threefild 01cr 1993. Planned filal(cial statelllenIts aire p,epardm l ill accordance ,ith issules for 1995 are higller still, at Y150 billion. gelnerally accepted acoil clilltng prin(ciples. Market Enterprise bot1dl issnes. mean.thile,. were redulcetd. ilalkers alidl inlermediaries are at an early stage of de-elopmnent. lintil 1990. all debt -ecurities it C(hinia ccere placed adllllinistiraltiely and oln a llalcdatlor basis. Sin,e ticeli. Develop ient of a bonsd miarket in C(hidia is likelv lo be tlhe governnetil has recenitly experinielited with differ- slots nliless thl authorities decide to address tIle alcove- el,I rllethlcds of issue for treariry bills. These inlllded lIleitliledl onsiraints. Non,etheless. the Chin-ee blind ulideris riting bis pr ilary dealers, sales via lo,al finin, e ii market aill grow i, si-e because of the nieed ti filnulace departments. dsirect placement witI ins8tiltincls acid gosernliuent d,eficts anid for mtlssise iiiestiieii certificates allocaled by Peoples Bank of Chlicia I., the requ,niretitS in ilflrastliLtre. headquarters of the specializes1 buacks for sales tic ildi- siduals tlhrouigil their branche. Government bo0d, are Looking Ahead issued al par aindi the Inajority cam a predleternilned Invesintent leqniirenieits. East Asia is e.pe,led lo conponl. There is 1(0 aac tion priccess to determille the c'cclitiliae its rapkil pace of growth viler the ciest dev ade. yield ill tIle priniary inarket. COupOnl aire adlinnivritra- lUlider the World Baik's blsseline growtih scenario. tivelt bel at a margill aiore deposil rates of coniparalsle regional ccctpnt is pljceetled tic groul at alt alnlnial acer- malurily. wilitout refere,nce tIc the secoilndar nmarkel age late f 7.7 percelnt. similar lv LthaL if the past 15 yiel Oil is ioen of coirparable mlatUity. Most gove.n- years. Vnalnclig this growth will reuILlir rete itobiliza- nicelit Issues are if three years i o I ,ille in Ilatliti aitlt tilll Il riasi-e a,llnclitfl reod ilir es licr c'ccr1icate vince 1992. hate hadl a c'otluph r ,elate,d tIc tle ilflatlicll iiiestlleiit ini capital-initelcise leliciftlctllrilig, uipgrad- rate. Onily tcst Ireasuo bills pat an anulliil , M uilictl: the iccg exiticig infrastnict tre still L acid evparliing ser- fise-s ear 1993 isise add the -r ples issuje 4f 1994. sireN ticd hlulslrig. Based cc tihe pru)jected ilivesticielit All other bodlds pat a redemoption alricililnt oansisti hg vif rstles iy the 1995 Chuchuul Eutc,z ic Protspe-cts. regicilial principal plis aicurimulated sbimple ilitereit est-ill,ltd ccii grccsn dicniesti fised illrvesillelit ((;DFI) ih expected tic tIle basis tf the ' soulul al issue. arerage abudit 36 per, eit fD C;DP *.hic,h tralislates iluto a cLtIlUlalive ine-stlilenlt of US$8 trillivin icier LlIe 1995- A drachback nf thi prilinary issnLe lrccess fur gvc ernl- 2004 periol. Prisale gross drcllmesi fies inhseeltecct ilnelt securities ill Cliica is thalt treasUr hills ttp1iCalN aluilce is exp,ected to iCcciili1t icr aboutI US$i.0 tnillionli. have beeci ciffer-el il a sil,all niliiber of issues,. ill Ihe The hIlik of projected GtDFI will le ii (Chiia (tJS$3.3 first half of the year, rallher tltici in sexeral cifferi ngs trillion). Korea (US$2.1 trillicic. Thailand (US$931 bil- spread over the yeals Bccnsd islilance gecierally take' coil . cindonesia (UUS$681 illion). acid Malaysia ceveral nlliolihs adli has effec tively beeci aci on tap aittr- tUS$449 billicat). Tlht cilaicfct clrlig sectttr. as Oce ket. The sale of scriplesI treaiscr, bills aimed atlwhicle- largest sec will fiiid it increasingly difficult to iope witli ly to change draniatically diiriiig li,e neXt decade. Thie fiuture demand unless iiimortgage-backed secuirities are goveriiwient bond sector is experted to decline to about developed. Malaysia is the first counitry in the region 33 perceiit by 1999 aind to about 23 percent by 20114. that has takeii the leadl in this area by establishiig a The governments cuf Malaysia, Thailand. Iidoniesia. aid mortgage-backed securities market in 1986 through Korea are expected to have fiscal surpluses. Hong Kong Cagannas. Additional institutioinal infrastructure for aivld Singapore have already accinnilaled large surphis- mortgage-backed securities niarkets. such as miortgage Is alsin will conlHivue to do, so in the future. insurance, wvoild further facililate griwth in this inarkel. Governments will be the rnaini issuers of securities only in Chinia anid the Philippines. The fastest growing see- The region, is likely to witness a niew trend of increased tor of the bonid nivarket will le the eorporate sector. reliance on doniiestic deht financing iroughit about by Bonds issued bY the cotrporate sector are projeited to the comhlinenice of fiiur iniajor Factors: (a) t[ie rieed to grow froit, US$77 billion it, 1994 to more iliani US$500 mobilize niassive aminoinits mif resources to financ e irifra- billion by 2004. T'he sector's share will increase from stricture investments amid mhousing, both of which 23 percenit in 1994 to about 42 percent in 2004. The require long-term, fixed rate debt capital; (bI structir- niajor issLrels of corporale binds will come froin al changes in the econvomy frvoi predomi nantly lahor- Malaysia. Korea. and Thailaind. fIne seconid largest intensive manutifacturing to caapilal-inmtenisive inidustries group of issLuers will lie state enuterprises. which are in x the process of beiog corporalized as a prelude to fLill their operations. The Thai social secIFrits funid ib likely privatization. Most of the issuers is this categorn will to, grow expon,entlallv witlh the coverage increasing be fiom Thailaod, Malaysia, anid Korea. from the euriest one million to about five million menil- bers withinl the nlext len years.' Social security ftirods Although tLhe conttractual savings sector across East in East Asian economies are ptrojected to gros rapidly Asia has mobilize- large amouost of long-term over the next dvearle because of the densographics of resouren, its role in capital miarket developmeni has the region. asd will be a major source of long-terini itlits far beeni fairly nmodest. In thie past, these prosident funds for indlsirv. The other miiain s,egimenl of the -on- fnliics oere tised to nmest government foil^inlg require- tracLual sa,inlg induosrt, ifisuirance, is 0ot yetl well nelts, leaving their rslanagers Iiimited freedom ini asset developed, biit it is likely to flluarish with tlhe deregila- allocationi. However, most East Asiani oauntrie, have Liou of the financial seLtors in counities ouch as Korea recently moved tllowarl laking the voltracliltil sashlIgs . oad Thailanld. The mutuial fund inidusiry is also sectors i(lore autlolnomous by lifing coltrols (In their expanding rapidly in East Asia. Al the elnd of 1994, the ilvcstmellt policies. The Singapore aUlthlrities are size olf tile mlultIlal foLInd indlnstrs ,a, rolIgil) ly S$20 bil- opening tIle CPF to professional mlanagers and allowing lion. Hong Koig, Malaysia, and Thailanid have beeli at mlole freedom in investlllenlt strategies. and Malaysia's the forefrolnt (If leveloping their illulial fUnrd i(l(l(lstries. provident fuoid Ianagers ace sow revllired to iellset (10 With the deregnlation 11(1d1 the licenllsig of niew fIolnd nlore Ilaal 50 percent (f tlieir assetsll glivenulelnt nlallagers, the size of the Thai nlutulal funvi i ndustry sevarities. The driving force behind the change ill the expalnded teIlfold vl abolIt US$10 billion (ver 1992- asset allocatioll aid inesinemi policies (If these pen- 94.' In Malasia. Illiit In,k have e,perieneed dra- sion 111a0i( is Ilie fiscal sUIrpluoes of tlhese cOLUIltries. Illatic growtlh. vhile Ilcidhoiia a011 Korea are il tIle especially Singapore. Malaysia. and Thailand. Wilth early tage, cif vevehllping Iltliolu1 fUllda. Ilew-foulnd fieedomn il asset u(lnx alid i-ve ntmell den- sin,allkinlg. these Intitlltiollnal ille stlorl are (0ow oeek- Assulni ng ihat East Asia coan (ilailtaill ils growtll rate (If iIlg lo mlaximize risk adjusted lretu0us. for which lolig- 7.7 percent over the next decade and filanllcial sector teron fixed-inrome ilstrlumelt are the most logical reforin prograns ao-e not draslically reversel. the size Lhioire. of tlie instituItional inveetors (gIIverllellln-spollsvred pellnsill plan1 s1cial se,urity orgalizalio-ll a,11 illulI- lInvestors. Malaysia. the Philippin-es alid Singapore al fuiod dillvUsties) is c-Itlated tlo increase to ((earls have relatively large inslitltional ilvestors. loiah (l tile US$400 billiion b! Ycar 2004. Since the supply (If gos- colItractual saings sector. Indovnesia, Korea, 0d( ernilnet securities i allte Ililtes except ol'r China and Thailalld are at all early slage (f developolent. China the Philippines will be limited, these ilelitlltislrs will has a very 0ma1l -otractanal savings sectll. Al Ithe eId lave to seek olt otlher invetlonenllt (ipllilt11 tIes. of 1994. tile lotal size Of domestic illsti]utionial Mlalasia nlrd Singapore have already taken the lead in ivestors-inoiilly cerltral providlell funds,. -sial seCU- enaling their conltlactIlal savIngs iltitlltmls h) diversi- r itv orgallizaliolls atid ltlUIal follvds-was aboilt fy theiri portfolioo 11111 to .l Illited exell iallowed tlein tlo USS109 billion, with Malaysia ally1 SI ngapore a,cllnlIt- illvest ove,reas. ilitiallv within Ea,t Asia. These illoStitU- ilg for abo1(t 70 peretil. At the end of 1994. total tiolls are therefore likelv to e,lerge as Olajor inve,tors il assets of the CPF in Singapore stlood at S$55.5 billi,,, lolIg-terln deblt ilerllelis and would provide a nlajor (US$38 biliol), while the EPF in Malav-l had arcs- boost tIl the el elIlilent of ((Irporate hond markels. Isiulated RM84 billion (US$33 billioll). The RTG sLart- ed funding its civil eerSalt pensioll plan il August Ioiternatioiial Investors. As dis,nosed in Chapter 4, 1994, y t itrodlicing a elew plan tilat (onlibinleo East Asian issuers have raised large ailInots ill tle defi ned-benefit a01d defined-cotribution plans. This international bonid markets in recellt years. plani will be foin(ded aIld it is eipecled to start wilth ani Between 1991 alId 1993. Asian issuers olher than asset size of US$2 billioni to US$3 billion inl 1996. Japan floated US$25.7 billion il fied income securi- ties il foreign ((lokelt. far more than these finis laised With the increane il incl,re and aging of populations. through share offerings. Avldition of coclvertilde bonds ((lost East Asian colltries lave adopted or are il the issilerI durilng this period brings the total issues to so1me prIlcess of adopling social security progra>s. US$32.7 billio. Unt[il recclltly. issuallce of bonds il Indoniesia a0(11 Thailasid hose desletped social secllri- dlolnestic llarkets was rather culrlber,ome a01ii otly ty orgallizatililln ( and are ill the process of strelngthelninlg !onimpared t(] issing liom-d1 lhroad. The (nvestor hase xi wa, also (olited. This is likely to chanige witl the reg- investors are likely to be inslitutional insestors withini the Ulators eforlrins intriiduc-ed in the East Asian ctountries region, especially the contraclual savings institutions. allnd (lie ihi,nges in investimeTt poli ies Of doai5es(ic institulional insestors. The projel cions indicate thal by 2(004, Korea will emierge as the largest bo1ndl starket t(i dollar terms) in The rapid gi owth in East Asia's equily markets has the region followed by Chlia, Thailand. andl Malavsia. beeno inflie l]ed to a large exsen ty sthe inc-rease in for- The ranking by percentage of CD)P in yeair 2004 shows eigli pIatfoli" iis1estirient espeiially by iiisiltittional Ilie following orier: Korea (9() per-ent). Malaysia (68 inv estors mlainly froi the U lited States. Most ,, these percent). Ilie Philippinies (59 pereeiut. Thailand (.3 investmients luave been limited to (lest-tiel -cmpaonie,o rest). Indonesia (14 percent). an1 C:hinia (13 per- and in nailany ounilries t(lie have alrueais reacheil tie -ctI). HIowever. the fastest growing markets lure likely limiiit periilteid fir foi,eiaim ownership. In fa t, the avail- tI le Malaysia and Thailand. abilits of first-lier shares has ieciiotie a cii traiint in Hnlig Kong. Thailand, aiid Korea. Tio address tihis prolb- Agenda for the Future len. several East Asian countries uiha e permitted n li,e The prmjeetel rapid growh iniihe region's biind markets issiaan:e of ionertible bilds. Withi le rrbust roa,cs- is cintinigent upon coiititiation of soUnd macroeao- econlomi, ens iroimiieit in most East Asian i-iniies ilslilie iiianiagement andl poHlicy and iLstilutioiial an d partial or fill -on,erfibilit on their capital refrmis. Although (((anly eLiiitries in the region have ac(ioiiits, (lie East Asian fised iloinie se,miliie iiffer takeii baid steps Lo bIoost hei lond ilmarkels. lhe nec- alii alttactive alternative in ,sitment oppsrtunity hfr flr- essarv anid safficient conditions for ribusst EnntI mar- eign insestoro. lliiweser. acieess to II.. st of these, ilia- kets are not vet fully ii place. F)ainanial sector refoiiiis, khos has beelel limited l (hapter 41 he,vl-lse laige lilac- regulator, reform. biiildiing of .illpp(crlinig inslilulaiial kets such as Koieoa aoe rehlis-tait to peniti Itmoeign port- infirastif-,tue such aSs reilit rafirig agencies. effic-ieiit falio iniistMeiit in liids hleca-se of the impact on the learing anid settlement systems,h bhrnl insurance. and exchange rate. There are cucrci-l Ii five niiarkets (Hing market iniiereimediaries re qaire further de,elopment. Konig. lindoesia. Malassia, tIle Philippinles, amll The gro Iih rate of the East Asian bonid iiiarket will Thailand)I whiih aire cmii(pletely opeii Ion loreigit prt- dipeldil tLo a large extenlt 1 these ralinitries effortis to folio inveltinit. HIloeser this is likely to change with sNSteIIatim:allv hulil lie markel. Smile of lie key build- tile a, elerailed implementatimuli of financial oe-toa ing lilsiks are iliscissel below. refiuls ii Chinia and Kl rea. Finiancial Sector Refornis. Boad miiarkets lIe elolg Th . ....p. shition if East Asian capital iiiarkels. ho.e - most rapidly in slable ciononiic enviemniiient.s aiid cr. is expected to change dramiialically ver the next dereguilateil finauncial imiarkets. East Asia is kniown fur dec ade. Iln Ilhe lilore mature markets of the region its stable macaoe,o-nooic enviroinment. Most couantie, IH oug Kog. Korea. Sin gapure. anid Thailand). groMw1t in Ilie regi ha ve also moved dlecisively iti recelit years in ei(litilV market apitalizaltii is expsie-led lo be similar to deregiolate their financial secturs andrl reduee goern- to that of nature ei- liofies, while in Ihe developing inenil initeri-i utiiou (Chapter 5). Malaysia adi(i Thailaiisd narkels mlib as China andc1 Ibladnesia, ilie equity mae- have defimuile plans tl arry r out (lie fiial slages if kets will gron. bELa aluation will refeit thii fiiiilaiiieii- deregulatimo. Korea is set to i:omniplete its ainon eed tnkls f these imarkets. Bonid issualne. espe ialy Iin i-or- financial scm-tar reforiiis b 199. The Philippines has ,oralte. infra,tml-turee. ails iu.ing se,it hrs. lOiei will comlilpleted maost of the fiiiatiiial oetror reforms. surge int ilie light if the neel for Iliig-termi lebt fiiaiis- lindounesia has node substaiitial progress, but its fiiiaii- inig. Auialysi-i .7iiidiictd Id r this repplli iidi-ate th(t (lie cial markets ace still al an ullyeo stage of cevelopameut. size of the East Asian hoitd nmarket emiulid geiw fiiuoil China hias a great hallenge ahead of it I tranisfirin its US$338 billion In9)4 t1 os-ele US$1 trillion bs the end of finauui-cial miiarkets to lie level of hiher East Asiaii cOU1- 2004 (Chapter 6u. The tital size ol the market relative to tries. A nuajor ingreulieuut of these liieralization pro- GDP will still le mouch lowel thw tilat of iuldUstrial cown- grams until ino.w (as he-n b lie freeing of iiterest rates in tries sujch as lie ULmited Slates lover 10() peu entl of GDP assets anid liabilities if bliaks, bit the coverage of in 1994). However inlike the industrial -oaltries where refomis is beinig extenvle-l lo other ilebt iistruments the I ud miarkets are diiiinated by gdiverinient sevurities. such as govenminiemit seiurities, private coirporate bonds. those in East Asia will be ce1itered all the private s5etile aim moiley marke-t instrunments. aiid state enterprises in tranisitiion to prisalizatimn. Most Open niarket type operatiorn, if lnot full-fledged open imarket. Factors thlat hovil(I lie takti mintt aecoajit1 in market tpe,ratiiis ar-e c urrently pa1rsuedl in Indonesia. bui ding a regulators frarnet,'-k incinule hei extentL of Korea. Malaysia, lie Philiptpitres. and Thailand. These financial nectar (Ivelsp1-nieit aird1 reforiti. the legal take the forin of sale of gover.oniienii bonds or central fartne-iirk. tire mission of thie regulators bo(Iy. an(l hank 'ecarities, parch aseti rev erne purchase of biul., types of intermiediaries ci rnpri'inrg tii financial sector. aidrs1 cclring if batik sleponn by tire Lcentral bank and Finally, it is ti aira thiat tIre regalationn, recognize thei Nic-e terna. In Honig Krr..ig andi Singaprir. ria-ey market econtont,ic fumtirini sif a capital marketL: capiital mrobti- inrter,'rt,tirtn by tIrle irionIItur"s' authorities in tarrie n l izatiorn ains Ih, allocatiri sif I'.ipitai iii its stntroidur- tlirotiglt briying arid selliiirg treason bills. firreigir Ose ses. Ii tlire Irrig rit. thin requir-e [lie (le-elop-nir ec-hange staps,, lerdinrg in iriterbairk, riurket,. airs if a regrilatiar> sytern that in (de'ignied In r-egunlae lathrer re1lrirchiase ugree nrirt iii gINriertirieri bSind,' In Hung thian 'rcoitrol tir rmanrage the mrarket and niarket partiri- K,itrg. Exchange Fanrd Bills anIL Note, are innerd. In pen- paints. At ani early stage. a pIr...actoi- regulatorNsnystemr et-al, ripen iiarket tipe oper-ations are firiiiteih lit the tsa, Ire -'nerntial tsr fat-filate mar-ket de-elorpmenrt. Thii thinnes's of tire mrark-i atii( a lack of eligible gov%erni- level ariid INpe if regulators ciirsel adopr1ted will aln- iiient paper. Tnt gnt airoundi these prolienis. 'entral depend oil tIre stage ofd~es-lopmtent of,ntppo(rti ng inriti. btanks ini Inidoneia. K...rea, rlalassia anud [lie tiiiaiifarn treiisilrgth lusat1abity o Pitilippriries rave issueti thei ii omi debrt inrt'tuurent'. eniforce -arIr la,,,. the pretadltig art r1itittg oSrternr Mo.st trarisactiourin sicrir iii lie jrrrmnar iia,rket, ,isile and tlue at*t.ttIiuIi,,g stairtiads. the- nphiriitit'atioii if op1eri iiarket tranisactirons vin tule secndnrrarN iarket ar-e iriestrirs trid is1Jers, arid a rtcitrelaeiregulators estreitrely litiited, trhonghi arraingetietits ar-e ic,ing mtathe syterti. I., bictiadet the, scope f tlire 'ecitidars rmarket iniiIene coulnitrie-. Lsirtg atv('tiorin to nssne govertnrrent tIcI ceri- Hsitig Kong annc T-lranltd rise Tririsi of thcin iititvitiiial1 tral buatik papler ii tite primrrut' mrarket is brriniginig itheir ififantructurre ini riae atnd Irae made noitabrle progress Yids to tlte level of irraurket iriterent attcs.' int implemientientig reIgUlators' ref0irnns tlat areenetu fitr bornd iriaket dieelopmtenit attnl are mititg t-Iarda Indisiresia, Koirra. !tlalay ia, tine Phuilippiin-. Sinrgapore-, dlier,It e-red . y.u-b- sNteri. Malay sia lia.t all lie cetlvUire(d ati~i Thrailanisl thite pha-dn sort thte tine of ntsibsidiaed infra'urtruret - and hivs carrierd otit '-bsiaitial regulators 'enriiral taink di-osrirnr fricilities ii 'treiigilieri mronretary reforn11 ins rnt ited Intsr reanniinre its regulators nystenn b> conrrtol. TIre third lIpe oif indirect nitiieturt politN cenItt'aliZtnig lie1 vippisri-1 lioness arirl slCetlnrpn Iiei instr'ulrretrt. ennrte rit-11iretrierits. require' Porrtfoioin fUll.-tiont iii a single igetir-. Kirrea needs it net ei- its asdjustmienit airiinug romtr-erial hank asnet.uI d a irisla torts airaket regilautr,' syt ini i line wvithi its plait' lids i-ner risen less frequretrti with tbe itirreanimg resort irs fitranitial mrarket sderegrilatirir aildss capital -r'rrrnrt reenit yearn to mince flexibll intent nirrket tllraiertin. o-inpirg. China insd Iid i-ieia are a an vii rt Isntage if TIre reserve -'qurire -iieit herdI hat teen kept to th ~Ire hmtini arket diet-e pirnici arid regrilatirt reits mriniinmurn in ltrsone'ia, Korrea. arid NIalassia. bitt awrile thin Phitiippinies teedn', ii itake it, negrlatni's svn- rennainredritight iniitIe Phiipi1pinies until 1993 besarine of tenn nirtir viet'hnpmienitvl att itite tIttaRI a ihisc1loLir-c tire inreffe,ti, ernes rig tieir nmarket tpr1rruirrni iii sonrii- Imaseui syte nt genecral. i ninighe leguhato I tiny' finn muma whiere -netral hank losnen. sere largn' iriish It -~uld ai brndnn market ill Ire re-irahile, a' it ptarin'lies a nmnvjor riot uninsertake oipen market iper-tiotin: thins so-risrainit irputreun foit bondr m,tarket deteloptnnirt iid will Inning lia, nuts beeni rerioed. hImplemienitation inn Evist Anivni tlithr advanitagen. inuciafinug a r,m leady' dieinred rep- in0nnutr-ien rigf tIre remiaininig linianisial sneor refotrmru wnill ulatvir' frririew'tik annu netter 'oorrdiirnatirnrr tin d"evehp fac'iitate deselopnitent if tine bondrnul maket, tine tmitket. Aiterriativis,, ajmint tank lone c ourd lie net ill, tin -nersee marvuket d-ileesrniinit. It in alnur irtpa-irtuui RegLilator' Re-forumis. Inn addsitrion tomrnnnnpieti ng liat tIre, eguilatri,', agencies hue seif-fuirsed. 'ritii will firnanisial necor refnionnu. it in ennenutivil tn bnUddl a -nduis enivble menm to ailrast untilretaint qivalitiesd staff. The vindl cost-fetv reguvlatory's errsirirnmenit. ln it -us senurities n'nrnnnnisnion,r inn Hmtig Kitig unti Nilay s,ia are Eunt Asian niiarkets, regnilatorI I'.. fusies jtn:rfori tirle sflval finvkiiiciallir irteen trh- irt, andi thitrr es1periece 5iioutld funictioun of foisteiring tine development f tlire nmvrket hue seteweri Ivy tithe mus ries6.' asii( regnulatinig thin rmarkent. In huni hing an, effectis e reg- ulatlory svsteinl, several fanors, rierd to lie takeni intut Insflutional lInfrastruocture. It is alid necessary' fin- connnisleratur... L. It is critical tin estabrlishn a regilatorr birth lurisate -unti gnersnmnent politc inakers, tlr finnsL Iott fraitteiork tinut f'its tine utni(que nreedis if wit-h enmerginig tline dheveopin,elt of irnstituntionnavl unrdserpininirgs finr the niii bo)0d malket. j iclrlding icedit rating agenicies, efficieit sho.uld be cou.5ideredl in coinection with restrLicturinig clearance airrl settlement systems, b4(1n(d insurance. anid of policy loans.' denelapureril if strong networks of initerurediaries iliat will facilitate pri nary and secondary trading. Al l East Asian, markets except for Honig Kong suffer fmrm a lack of iquidly in lie secondary mlarket which NIalav sia and Thailand now have relatiselv well-func- impedes se!ondaly inarket trnailig. Since bond dealers toil ng ratinig agenicies, while idonesia's PEFIND() operate on a sniall margin, a large tradiing volume is has just coiriieoced operations. Rzatirig agencies ir essential to stas ii business. Withtil ar access to fund- these co tilries will rie-d lirile to farther biLild their rig. boild dealers arc geueral, rivit in a pIsitiorn to iiiake organidzations arild Leveltt1i staff to gain fall acceptance ntiarket or cnary a large invlntorY of bonds. The expen- of rirarket participants. In the iiaie vf Kirea. lie ratiiig eirce if Hong lung shinald he reviewed hiy ile other agencies baie been ii pla,e for orirne lite btit atre nut countries. Thre Mooane Aurtlhoriti has provided liquid- been, fuictii ruiig as rating agencies because of the reg- ity in the bonrd niarket by allowing MTRC arid the Airport uilalotr reqluirement that all blid.s mlst be guaranteed AuthoritJl debt irstinmerits to be used for REPO transac- hy financial ilsliltutions. FLdl dereguilaion if firartial tioiis. Tluailan(l corretsly alloss only banks to partici- markets will provsie a nlew lease on life ic these ages- pate in, lie REPO iarket. Exlension of this facility iith cies. Ii China. a oricert,d effirt seerm to hi? riLeeded appropriate safegiards tii memsiers if BDC shriulvd lo briilvl twi r titlree rating r agerities at lie rational eihairce liqiridity in the sectodary iiiarkets. Malaysia level io sel [lie standards fvir the rest. Rl tIre case of t[ie shotnil consider esparrdiig tIre participation in the Philippiiries. a rein ialirig agency. witi irooaI-based REPO mriarkets. by includirig iriibarrk dealers which ow-ership is cequireld to (cc-iie blild oruicket patlici- meet lie eligibiliLs criteria. The sanie applies to the pant.s. as lie present catinig agency saffesfrofnt its iris - Philippines. which limits REPO transactiiois only to ership sitruclure aind tIe appearns rce if potential oirr- banks. Chrirr rvnd ldo-esia dvm snot cirrreirlly have aoy lict of interest. There is clearly rio rieidl for Hiiiig Kung minechanisrirs tir enhance liuiLidity in t[ie seconolary riar- ani Singani re lo have local raling agencies. given tihe ket. Consivlerations shOUlrl Ie given to enharlrcing litnriil- presence if tIhe majirir i ternatiorral rating agencries. To by iii these mimarkets. lhe availability of centralized furthet increase thlr efficieiri of the ratiig agencies. sources, vf infirnralioll will also facilitate tradirrg activily. necroisOrUsurl0iderati0r lirl.(add be given tri akiig tile rat- rig firnitirn vilirntar, arud addvlitioal rating agerrciei An irmporirart factor that affevts brid maketl develop- shoruldl lie perrritterl in rrrarkets such as Malaysia adI merit is taxation. Ir general. tax treatnrent should be Tl'ailarid. where t[ie blsrilI rrraktels are likely gonw rpidly. the sarre fr both stocks anid londs. The alier tax risk adjrsted return on b.nd i rvrstriments shorauld he corripet- Orie of tIre iriprrtart parameters in irbir ri ark,l devtyl- itie with other irsestruerit rehicles. Irn nary East ripmirerit is a markel-baseil benilniuark thal errables As;ian countries, Ille lax treatment of bornsh instrinnents. riacket parti,iparts tr price bidrils itr boitr pirriary aori both interest irivome aniy capital gains, is riot irifrri. secoridacy rrrarkets. ALrhvfirities SbOilli seritrslyU c C1- hr irmanry cornuties, there is ro capital gail tax on echui- si.ler -eatirg such berrlrnarks These rrray iclirdee ti jrresltlrer, mi atlld divilerid iicirre is laxed at low ncuritires issied by a rativriral mortgage corprration,. rates. Capital gains frm brrird trarlirg. Iriowever, are stale eritergrise bhrrivs. or r,epackaging of existirg delit taxed at brth t[ie rrrrpocate arld irdividiral levels. For issues vif rriuajrrr gon errrrrment-rwvevl erililies (IChapter 2). exarrple. in [lie Philippines. interest irirome from bondl Except for Hring Kong. rio East Asiaon couities have investrrmerts is sahbjert to a nithholdrhing tax of 25 per- riarkel-basedh berichmrarks frir rmatrrilties beyiidl twr cell. Furtherrrrre trnlike stcrks. Iirrds are subject to sears. Malaysia has made air excelle start rlrroLigIl dooniclientarv stamp dvflt. which ircreases transactionn MGS seCalcilies aunh Caganras. State errterprise blonds costs ariv retards secondary market trading. Irvestors in Thailardl roaLIv Ie used1 as benchmarks if they were in Korean bonds are exempt from a (0.35 percen trauns- issironl by uajor enrterpnises saclr as lie Electricity action ley which applies to evauilies whrile rrr-resi- Generating Auliltuity of Thailanvl on a regUlar basis derns pay interest aird capital gairs lax at 25 perceirt arrrrss riialtrrilies. In tle rase of lie Philippines. the h ich canr be lowerevd throughi tax treaties. Honig Konig groverriiet liirotlds rcrnsider issuirig three- to five-year las rio withholdlg tax. sut profits are taxel at 17.5 fixedl rate instrirurntsL t) crealte a yiel curve. Korrea percent. Hirwever. Exchange FuLnd Bills aird snuprana- lhas a grd shioirl-lerirs berrlurark. based vi ilte MSB,. hroral honds are e-eairpt fronii taxativn. Sirgapprre does Creatior if a Iving-term yiehlh (ure uf gouvec,rrrrerrt bondss nut lax imapilal gaiis, althoughl divivends are taxesI at the Xim marginal 27 percent corporate iH]crne tax. Hsung Kong, Organization of the Report Malav,ia, and Thailand l have taken the lead in remorving This report is organiized into siX chapters. Chapler I tax disinceotives oni bond,. Otier East Asiani colnltries pris ivle, an itrtdoluction and rationale for bonid miiarket shotild follow sail in elinoinafing dliserilmintatory taxaaion development. Clhapler 2 discusses the size and conipo- of bood, to remain competiltie. Consideration shoald siliol of the EasL Asian bondi market in leplh. The size also be giveli to the rem.. al of diffelential taxation ally slractilire of b1ndl market, in eight economies anl l betwseen doniestic aIlid foreign ins estols. the mrain eclous f these markets (i.e.. government. central bank. state enterpvrise and pri ale bondsl are Fiisallv. a robust bond market requires well-informsed di.sussed. An overview ofeach country's bond market investors issuers, market professionals. anid regulators. is presented. The organiization, of the primary andl ,ec- Each of iltese key participants needs to ha'e a soand ondiacs boTnd iarkelt is exami ned, floCsing oll In'sW anderstanding of new financial instrurnento as tiles are thlese snarkel are organized in each Lountry aid thIe initroduiced to the rInarkel. trading reehanionis, proce- supporting institutional infrastroctare ouch as primary dures for clearance. seltlemenit. aird safekeeping of dealers. market makers. hIqlailliit aupports. credit rat- seculrities. This task will be-ome fnore oneraus aith big agencies, benchlimarks, and clearing and settlement the introdusltion *f mor5ce siiphisticatedl financing tech- systemls. A uor,ev of the slatas of sec onidary markets is nliiqulex sucr ad reparchane agreensents and leri alises. preoenled. and policy measiures that contributed 1o tlhe Therefore, it is important that the goeniment aliil the developlmelit of theie markets, and factors impeding private sector develop training programiis 1t meet the Ilteir growth. are idleirtfied. needs of niarket parlicipatlts. governlmelit regulators. and velf-regulatorc. Regulatory polhies affecting bond miarkets in these econorses are diseussed int Chapter 3 in ani effort to Conclusion identify the essential elesilents of a desirable regulatory East Asiani e-noinlie, hase rirade renrar kable progress fisaniework. Chapler 4 exanmiries tlhe impact of the iriter- in developing their economiies andl filialicial miarkes, tiationalization osf the East Asiani bonldl markets. The especially the bankinlg systeni. If East Asia in to sus- role of foreigil portfolis inivestmsent aildl it, inspact Oi tails rapiI groswth slyer the nIext decade. invetoieent in bond niarkets alid regulatory aild other factors itiat 5-apital-intelisi ye elIanilfaclurinlg, ilifr astilr. Ie. all1d facilitate or hilpede participation In interliatiinal bond housing will sleed tIl expand tresimendlously. Finlancing markets are liscussed. The extent to wlsicll government of isnvestsmsent vf tisis hulge magnituale will reqrlire ubs- issuers, stale-owsied elllerpjrines asid private corposra- stantial mosbilization of resoliur-e Oh a large scale. lion, sas r a eell aIsle ts raise foiods in iste,,iatiolal cap- Given lhe regili's Isigll saving rate. the iriesImelit call ial Ilmarkels is also presrtedll. The relationship le fiarseed reosIly fimne witsilii the region. However, betweel off-sisore Ilmarkets and the development of local this aill call for rmiajoir efforts shy tire gonenrsiensts aird bosrd markets is explored arl1v ov'nitr risk considera- regulatorx in close collaboration with market panbici- tiosns are disculssed. The use of hbnd niarkets iss the parls is tlhe prirvate -ectllr lo accelerate levelopment of csslnductl of isisioentar policy is deetailed in Chapter 5. doirrestic capital isiarkets, especially bnid mIlarkets, so The imporarince of a rshust bsridl rrrarket is condecting that intermediatiors of lonig-term savings a0(I lohng-tereln efficient Ispen Imliaket operations ib diocis,sed. assns the investmerits can be performed efficiently. Mo.t East eXpe-ielice of selected coLlitries in exansined tIl draw Asiani ciunlries hale uandertaken mssajer I lic)y reforors lessolns for developing couilntries of East Asia. As dtirinig recent years. These reforms will need to be asse-sment of tIle prospects for bosid market growth in accelerated. hr additior to nildertaking lie policy East Asian countrie, and an agenida for bolnd issarket sefonsis in the finarscial sector. there is a rieed to fIslrer developisieilt are presenlteld ill Chapler 6. slevelop instilttiosral infrastrsrtlre (credit rating, clear- rig and settleleIt. ctistody, liquidity. benchmark. tax- ation sssarket makers, and bsnd inisurance agenciest to foster growthi f East Asiall b.rsd snarkets. en I N T R 0 D U C T I O N ili a poipulation of 1.6 billion anid a eorn- Ea.t Asias rapid growth has been propelled by high bined GDP of USSI.3 trillion in 1993. East le,els of saving anin inveetnent. Frrorii aroaniid 22 per- _ Aia' is nlow a mnajor ecririnic powerliouse. cent of GDPin 1965. itosatiogs rate hac risen siarply ln 1993 Ithese eight oantrien aecounted for Is perceni tio 35 percent, roughl) 61) percent mon,re than the aver- ofglobal itput or 27 peri(eir of tlie total GDP of low- age fir i ndusiriai ounlnries. In 1993. Ciiia. Honig arid rridd-i-ii nome ciiuntrie- as a, "hole. East Acias Kong. Indonesia, Korea. Malaysia, Singapore. anid GDP is larger thair tilal of Frace. Italdy, r tIre UCiited Thailaiid had savinig rales above 30 pereent of ;DP Kiiigdonr aid alhroot a fifth of US CDP TIhe region's (lable 11). Over tire pact 25 yearc iriestiienit -ose at GDP grew ierre than, 2.8 tines o-er 1980-93. witih ol aborirt 11 terrent a yean to reach l5 percen itof CDP The arerage annuial griwth of 7.8 percent tFigure 1.1): this ret flow if foreign aoirg, into East Asia during the vas minre thoar tLwice the rate nif global griiwth. The period aiiinrited tIn oaily 0.3 percent of CDP The reginnirs 1994 eco ri.neic grow ii ic eotiiiated at 9.3 per- Philippinres, abinch has lagged ielhiird tire otlier critin- Ceirt. Per iapita nironirreo also oubLled, arid therr tries in Irik grop. -eeTno 11) rave LLirned a 0orner in growtlh is eperted tii aern-lerate aIs ortninuirg eroirorii- 1994 as its C;DP greu 43 perrent. i, progre,e is bi6hlstered by falling popurlation grimth. Table 1. 1: East Asia: Selected Economic Figure 1.1: GDP Growth, 1980-93 Indicators, 1993 (Average annual growth: percent) Pa. -r uric 10 - L*,,9 :V-1311./ c.B tic Ari . ... . I 10Lr. loSS , 1ii14 >1 rococ isoc 5 Pc 8E t:trohi-'. 49)t 426 9i6 40 41 -2.7 1 1 * _ H-ng K-ng 18.060 110 t .5 i 31 27 - I - - - * 1qtiroenra 740 1t-5 5.8 31 2P. -1.4 K-ore 7.660 .1tt 9.1 35 34 0.1 6- NUa *ii t.1401 64 6.2 38 3t -3.1 Pnrpi*ehdqp- 850 54 1.4 16 24 -6. * Orq q q q q q >^^ogapilre 1tott50r 55 iri9 47 44 3.7 14_-| | | | | | | | Tirita-rd 2. 11t) 125 8.2 316 *tt -5.5 2- East Asia's oruiceso is rut liiitedl ti grirwthi in prrlodue- 3 ~~~~~~tiori-es,prir perforiarnuce hoc, also lieri irrtotaindinig. d OOer tIre past quarter centUrN, the regionro erports of CHN KOR THA SGP HKG MYS IDN PHL tAr,aWorld giiodo aird -ercire- for Miiore hlai ti1irt-fiold to about $850 hillioi. and Ir.w accrunai for aboit 22 peirent of world iprpots. Siiiiiid iarriieio ironiiir irraniagement led by onsernatie fi-ral pohiies aid a stable political li- mate .ocrlrined 8ith low-cOst and highily skilled labor Soar-,; tiortit Roo. bla,e ittracterh -n1rporatioroc froiii Ihle inhustrial iiirn- tries to invest ii the region. Most of this (lireel invest- East Asia's success in attracting foreignt capital flows merit has been irn export-oriented industries. As a Iras riot berr iirniitedl to direct inrestmerit. While tlhe resLilt tile region has beeti able to accuirilate large for- region's export oriertatinr anid low-cost and highly eign excharige reserves arnourrtirng to $203.9 billilarn, fir skilledl labo(r have attracted vast arriouirrts of FDI, its 16.5 perceni if the world's fir-igir excharige resoir r.... capital iiiarkets have catile of age arnl East Asia is niow a major reripierit of loreign poritfolii irivestmrernt. East Asiaux share of global filieigrr direct irivexstrrent lirdeed. eqirity plrtfolio irvestmerit inicreased rriore (FDI) was abort 14 percent inr 1980: by 1990, it hail tinair elevenfilol. ahile foreign inivestiierrt in East Asian iricreased ti 44 percent. Ea.t Asia is now tie laigrst bands surged toelvefoll over 1990-93 (Table 1.3). re ipient of FDI flows. sarpassi ng Latiin Aierieca. While ad portioni of tlrese poarIfolio flows has bees due to accorfirtirng for 57 percent of lie total. Histrorially. the lhe low iirterest rale ernvironment of the early-1990s ir LUnited States anid ELrrope were the irnajiur sourcees of the OECD couritries. the robust growth in the region's FDI flows to East Asia. Since the late 1980s. hoiwever. eqirily rrrarkets. togethier with the strength of East Asiarr Japan arid [lie rewly iriruntrialized ecorn'omies of East currerrcies. ias enlhariced lie regior's attractivenress for Asia hase beconre tire domiaint sources if these fhrirs. portfolio irvesiliient. Cthilia and Malaysia haoe beerr tie mirajor beneficiaries of illese irrfloiws in recerrt sears (Table 1.2), rLa the The growth of East Asiani financial mrarkets niuririg this Philippinres arrd Korea will be souight int for profitable period lhas leen equally imrpressive. The firraricial sec- iirvestiierit o)pportitie ues asthi relax. arn ultimately elm- tor in these couoitries was dominratedl riil ilie late inte, the remaiiiiirg resirin lions onrl tieir capital nlfcouints. 1980s by banks, whichl served as the main r:orporate furrding sourer. Sinice then their equitly riarlsetsi hare gnwrri dramratically. Hong Korig. Siirgapore, Malaysia. Table 1.2: FDI Flows Into East Asian Countries, and Thailanil are now aniong the world's 20 largest 1990-94 stock irrarkets. At the end of 1994, tital mrarket capital- (US$ billion) izatiiir of the eighlt East Asianr stock exchairges arinouait- 1990i 1991 1992t 1993 1994 ecl to aboiut $1.1 trillior. or- 71 percent of GDE Co)n- Chin. 3.5 4.4 11.2 258 33.0 pared witi total assets oif the banking system of $1.4 Indonesia 1.1 1.5 1.8 2.0 2.5 trillio,. fir abnot 92 pen-eut of GDP This growth was Karen 0.7 1.t 0.5 n.5 n0. broughlt about lo a large extent by increased foreign Maloawii 2.3 4.0 4.5 4.3 4.8 porhfilio investimenit attracted by East Asia's iooraning Philippi-e- lO5 0.5 0.2 0.8 .0 eroiromies.rraostly open capital acconits, and relatise- Thaliland 2.4 2.0 2.1 2.4 3.0) ly stable exchange rates. The East Asian boind markets, Toaal 110.5 13.s 20.3 35.8 45.0 in contrast. hase grirwan more slowly. At the end of 1994, total market capitalization of the East Asian bond .S-ur"e: W6,,Ot DAl ThOns., b,l,l snr. market ariounned to $338 billioi ofir 22 percent of GDP -less than a tIhird of the equily markel capitalization lTable 1.4). Table 1.3: Equity Portfolio Flows and Bond Issuance to East Asia (U5$ million) Eqoiyv Flow- (Ncr) B,uil Isnufaire (Nel)' 1990 t99O 1992 1993 1990) 199t 1992 1993 China 0 653 1.194 2.278 -48 21 -21)1 2.056 hn,loid nia 312 0 119 1,836 26 381 t56 8 Korea 518 345 3.045 6.029 342 3.020 2.876 3.694 Malaysia 293 0 385 3.700 3 377 754 -290 Philippines 0 -t 333 1.082 395 124 -51 688 Thailas- 449 41 4 3.117 -87 -78 548 1,747 Taint 1.572 1.038 5.080 18,042 631 3.848 4.032 7.903 a: Bondfeserigirriniernnaiosi iiro....... rkrL-.. .S,'ore; UBHd Bn-k. 2 Table 1.4: Relative Position of Banking Assets, Equity, and Bonds (1994) Bank A-sets St, k Market Cap Bond Markel Us$s % offCDP CLI$ 9, P Lus$ 97i fCDP China 388 76, 44 9 33 H.Lig Kong' 257 195 270 205 11 9 Indaneniaw 90 57 47 30 9 6 Knrea 283 75 192 51 161 43 Mtalatnia 711 100 199 283 40 56 Philippines 34 54 56 87 25 39 s,ngappre 115 18(a 135 217 15 72 TI-aita-id 153 110 132 94 14 10 Total 1390 92 1073 71 338 22 G-ini-n 3255 169 471 25 17191 90 Japart 7106 152 37201 80 3443 74 Uilled Kingd,,om 2257 216 121() 116 366 35 Un,ited Slaten 3620 54 5082 75 7429 11 Soar. Wl,d& Ias Althnugh fixed incomnie securitien haie been less popu- Mosn East Asian goterinentas arle iarporalizing and lay iliant equities as fiiianci,ig iisiruniients anid a metni- theti pri aLizinig tlheir state eniterpries, especially iliajor itin for liolding savligs. (his has begtin It chalnge, witi public atility companties. Since tile objective in thin East Asiati corporatiotis toam floanting gra ing amonints tratisilioni phase is int lit rhedl otajoriy om,aership. the of debt sertiritien in itterationtial alit1 (liioestic iiiar- etLterprn,es are being enciiunrged to raise futida froram kets. The n-imber anld nize of East Asilai fiiiis are doiestic market, by issuitig boids to iiieet their invest- growiig rapidly, atid larger finiis find it advantagea,n to ineat reqlireients. This has beeit dramatized in increase the prnpiltion of debt Is eqjity it their finati- Thailaitd nhere ch rporatiois imsued botlds ont a stale ing mix. In East Asia. thii is lik,lN lo be esen more no that niade theii the largest oegnietit of the domestic becaune of the ongoriig pricatizationi f state etiterprisen. boitd oiarket. hich will require lotig-tenti debt to finance their itvestient priograms as the baankiing syntem will nlt be The experieste of lie inadustrial eciuntirien shows thal able to pr, ide lilais iin sulih a large scale. Oni the expanldiig firms terid to favor debt to eqauily financing, rlemiand side. nti itistitutioiial inventors. soch an peit- bolli becaune debt allitm as tners to retaini greater coti- siroi fids, are emerging it tite region ni a larger scale Irl oa,er corporate dle,inion atid because masnsie than in the past. creaig a ne,, rarket for debt linlciu- in-lIenirtt reqitiremeitn caninot be Ituel by bank metits of medlium- anid lontg-terrn maturities. fitiance tir righis issues. The atLractiseness of debt finan,e is also likels to increase as East Asian stock East Asiat issuers have raised seer substanitial amniunts niarkets mataire anid valoLatian is based niore oni funda- in time internatioinal bolnd markets il receit years. ieital factors than oti sentimettal anI teelinieal not- Between 1991 atid 1993, Asian issuern ither than sideralti is. Japan floated $25.7 billiton in fixed linomitme securities in foreign iarkets. far niore that, these firms raised While lie cittmercial baiking system has played a throughi share offerings.' With conovelible bonds iSSnedl ital role in finaincing the needs of pablic and private durifg this period. (lie total would rise to sonie $32.7 sector entterprises ini Eant Asia, its ability to carry ouit billiot. The siilid economic performance of lie East terni transforniation faces increasing cotistraints as the Asian economies tanb prnmpted inteinational rating region's appetite fir capital grows. Mst batik leposits agenicies to raise their sovereign debt iatinigs (except for hase short rnatorityv and too mucli Ing-tenmi lending the Philippine-i In ilvestnient gradle. further inicceaning ren dlt in asset-liability tnattiiiy tminsmatches. The their altractiveness In foreigi insestors. adveiit of cik-based capital adequLacy requireniens 3 institiileil by bhe Batik of Ititeniational Settlemients is iner6ial baniks. they will find it difFeckill to cope wibh ftirtlter liriititig the ct.iommercial banks' ability to future (ldtiuaid. Continued depetidence ott the batikinig finait-e itirpittate exfiansioi. The cotrporate sector is selttir for mitetgage loatis tail catise prollems due io thus torniig to bonds of iiiedilltit- aitl lotig-temi malt- iiiisimiati,hes it asset-lialbilits stroctures uniless tiort- rities a, sobslitiles For bank loaus. gage-backed seturilies are developed. Malaysia is the first coontry in the regitin to have taken Llie lead by For all the impressive record if (ie region in (lie areas estlablislinig a titortgage-ba,-ked se.curities nioaket ii of poverty alleyiatioit anid huinait resotn-rue develop- 1986 titroLIglt Cagattias Berhad-National Mortgage iiietit. itifrastructire de,eloptitetit has laggel. It is esti- Corporation-nhich isstes mortgage-bocked hittds totted thal in stiiie coutntri,s of East Asia in ilie D)80s. ttiat now colstitute alloat 9 per,ent of ilie bonds out- tliere titay hase beeni a shorttfall of itfrastitLilure in,vet- stanidinig iti the Mala-siala tiiarket meilt of as itiochi as 2 to 3 percenit of GDP Despite spectacular growth in per capita itenitl's, utisatisfied 'rhe plteiiotiietitl growtlh in East Asia's equily markets detnand fur iifrastniucture scr,ite,H reitmaitis high in Ealc has allrat-ted east amntitits of fitreigit pItutfllo ino ent- Asia. For example, in 1990, jiust 69 percent tf the tiiit. LIS iistitutiontal itivestor allicatitts to these nar- regitti's populatioti had at-cess lo safe drinkitig water aitd kets hayve tItadniplnld froiii 3 perceit ini ea ly 1980 to abauL 77 pert-ciet to satitatiot, leav iig soite 400 niillion 12 percetit in 1993. These portfoliI inflows have con- peoiple witlhut basic amniititis. 'elec,iiomimiicationtis tribotled to lhe rapirl growth ol the East Asiati toverage raltis are evet lower: it the Philippint-s there econottnies and the deselopiiient of their capilal niar- were miuly 10 telephotie miain ihnes per 1.00(1 ptiple it kels. as dlocuttiented ini a retent WorivI Batik reportl) 1990. Ativl detiandl haI been gr-wi hg expoiietiutal- Thin high level of pttrtfolio inivestient is generally situ- IY-in 1993. the wailiiig peritid For a le1cpht.ne titit- fiiietl to first-tier tornpanies, aut1 ih) tiatn) ttouiitries, it nection was 2.6 sears in Indittiesia andl o0er 10 years has already reached the litilt pernmilted fu,r foreigti own- in the Philiippilles- Addressitig infrastructure tottle- ershi p. In fat. ilie atailabilitv of the firnt-tier shares necks will be crucial io suistaiiting East Asia's growth has beconte a otistrainit in Hlotig Koing. Thailatid. and perftormianice. Korea. To address ii'is pirtblemi, s,ciral East Asian itAintries ha'e termilled lthe issuanne if cottnvertible Iln East Asia-as in otherdet ehpitig regiotis-thie pIb- bovds. These botids cart- onw coitpotn rates attil are lhi sector lias trarlitiotially provided inifrastniiisoure ser- ty pically cotnvertible into shares at a prernium of 20 tit vices, finat-iig titen fron tax reyenue attd, to a less- 25 percetit within a specified periot. KErea, Thailanid. en exr etit. loatis froiti nioltJilateral ti-ganizatiitiis silch as aord Ho-g Kong hiave heert ihe pat e selters. As tf the Wtorld Bank attn the Asiati Devi-lopniett Baik, aitn Deceeniber 1993. the size of the Asiati vott'ertible bond frotn tilateral sourtces. This patterti is chaniging itilh market. extlihdi ng Japat, was entitnated by Euromittiev itcreasiitg private sector paulicipatitin, especially it at abouit $7 btilliot. Wilh paltial tin full coluivertibility of] power and tranisportatiot. The renotirt-es required to the tapital accouitit, there is noow a greater ititerest ill nteet East Asia's rapidly increasing ilemand fbr infra- East Asian fineilmcomnue selrities. Inideed, in 1993, at stLiictUre will le etnortntins; ife Wokll Batik prtjects a least 20 fuiids were Floated ii the US itiarket with lie letel of about S150 billioni a y'ar: fitiancitg of these tairi objectite if in-estitig ini fixed itcoiti ser -tritien irt timassive levels of investnieuit tatl he greatlI fatilitated East Asiati markets. Further detelopinent of dnmestic ly developing doniestic bonid markels a, long-ti-rui bttiid tiarkets wiil offer a wider raToge 'if itivestmnent fulditg sounrces-whichi will alsit serve as a souircet of vehicles to foreign investors. fuands for tiewly privalizcd enterprises. The Itwal cuir- reri,iy-detiomiialed revetue strearnis if itfrastruictue The 1980s saw lhe encergeitre of ten iistitutionial projects dictate that finaticing lie arratiged in dmtniestic itvestors siuch as pensititi atid provident fnuids aild debt markets. apati front the faoit that raisitig capital ini itsliurance comitpaonies ini sevr.al Ealst Asiati t uiintries. inteinational bhtvd itiarket'rsencotit diiffiCLItlies front Thin new class of iniveistors has act LMnIldated vast tue lack of liqtild iwap aitrkets iii cXt11tC cillreticiel. atitiLtits of funds tioaliug over $80 lillitim. These puto- idenit funics were initially used to meet governtmeent With East Asia's uoraIn popuilatioti growitg front, 19 per- fuintditig requirenietits. claoing their managers limited ceit of ltital plopiulatioi hit 197() to 52 percetit in 1991. freelom ifn aoset allo,satiii. How,euer, niost Asiat cotn- finaicitg ultban hotusitig has aculluired1 a itt'W iirgei-y. tries mave retentilY oved toward makipg liele tnitractu- While most housing fitiance is i w putyvIded by 'tut- al sas itg sector more atutonoitttLIs Iy liftitig coitrolts on 4 ihieir ox esin(eat policies. The Singapore authorities aire fixed income in,estors. Gixen the pace at which East opening thie Ceniiral Provident Frild to prflesoisnal A.ian ounlitries haxe been derlegulating their finauicial inianagerx aoil allowing m[re freedom ini lo esterinet sectors. private oisurance rmpanie wv,Ili inhrnoorn in strategies, anld Malaysia's providleeIt fond mnaiagers are the niext few years. reqauiring fixed InIomIle secLarities of now required to invest io 0 lore tlhian S(l percent of tlheir loniger rmaturit ies. Trogether. these ihree categories of assets in goxernment secaLrities. The dlrix'iig fo,rce institutional inxestrsi pension fLnils. miutual fiLIls. behind [hlis change is ilte fiscal surpluses of these arid inlAran-e colipopanies) are expecled to genierate colil nines estiecially Singapore. Malaysia. anid e10orsM Is demrand fol fived-icirzme inxestnr,eottxe hi,les. Thailaud. With 'len free-dom in i--xe ntmet rleri,ion- iiiaking, ilese i ntitational ix estors are no,w 'cekirig Wi li financial liberalizatior hr an advaoced stags in long-tenm fi-ed incom-e instnimieats that will unininize tihe East A.ian coantrie- reliano e onl direct irltrIments their asset-liability misnaltches, opteiig a ew field for of nriraetar podlicy sarh as interest rale ceilings anid fixed ineorri0e secaritse. dire(tevi credit,, has been steadily receding. Mornelar authoriLies in Ea,t Asia are noving tirward osing nmarket- The iitnlual firi( indiistrs is al.o makinug rapid strides rasedl rinoetars poliy i ristramllelrit. slack as (open mar- ini East Asia, aid ill the roming years tlIis class of ket operatiorrs anid on-demarid rediscount operations. in,vestors will rrinstitute ani important segirlent of the tIlhaL i lireltly iollaLice the prices of finanrial asset fixed iucome i -tveor iuriiverse. Thailand aiid Malassia alLi. therefore interesl rates. These indirent inecha- have been at the frirefront in ileveloping tlleir IllatLLal nsi,ns can oily a rk if ilere is a iiiasket forgoerimneot fuinsl iridiistries. With tIle deregulation of Ilre riatual bonds arid short-term comriiercial paper. The East faiisl iridustrs arid the licelisirg of rew friil managers. Asiair countries are falls csrgnizant of the winsls of Iris iridostry expanided leirfold fron 1992 to aboLat $1(1 chanige in ite finianicial cilimate and have irioved in billimn in 1994. In Malaysia, unit roots have experi- reenit years to bild tire irfrastriictiire for bond rinarket en-crl dramilatic grraih. wrhile Koriea and hindoriesia are rlcielsoprnit. inicludiirng setting oip souiild regulatory in tIre early stages of' dexelopinig riiutaal fiuiids. strctlures-credii ratiig agencies, anid leaing ansi set- linxuran, ronispardie are another class of potential tdemeiit systems. 5 2 TH E E M E RG I NG ASIAN BON D MARKET his chapter presents a broad overview of East development in each CoLIntry. Al one end is thie UJlited *fl Asian doirrestic boid irrarkets, their Iriajor see- States, where bonid market developmoent has beeni tors. fonctioning of primary and secondary mar- autononrauv. respooding to profit incentives and a kets, and supporting isltilLtiolnal ijnfrastructure and desire to mini imize the borrowing costs of finianicing. identilies the key issaes thal need to be addressed by Japan represents tiie irther entrerine. with the govern- polirvirakers, regulators. arid niarket participants to oirerit assuming an active role in shaping t[ie profile of foster the developiment of vigorous borid markets ir the brind market developirrent to iriake it consforiri to its region. This dis-assiorn is prefaced by a brief review overall strategy of ecornonric developiorent. As bond of tlhe esperierrce of the bond mrarkets ini four leading rinarkets evolve, however. techniques if issuing bonds. inid(istiial coulitries-the United States. Japan, miarket orientation, arid initernational linikages seeno to Geririaniy. arrld tIhe Un ited Kirgdorrr-to provide a ronir- r:orverge. paratire perspective arrd diaw sTire broad conelusirns iliat the East Asiani couanties carl use as the basis frr The broad features rrf the bhrod iriarkets in iltese fooir furthler deceloping their bond irrarkets. The es>eri- induistrial countries are discrissed in this section, while ences of France arid Spairr, which rave built their hirod corimprehensive dcetails. togethier with the related statis- rrrarkets in recenit years, althongl riot corvered in this tics, are *ontained in Arnire B. sttidy. should alsor be of interest to tIle poliJcyiiakers ini these East Asian, econoities. Bonds foril a significant segmenit of the market for finanicial assets in these four industrial countries. In BOND MARKETS IN SELEC:ED INDUSTRIAL the Uinited States, bonds and stocks were 110 anid 75 COUNTRIES percent of GDP in 1994. respectively, almorst at the samine level as in Japan. The Germanm market for bonds At the end of 1993, the outstandimig dollar volume of 21 was a little less iliarm four times Lhe market for stocks. oirajor industrial country bond oarkets stood at aboLt while the UK stock market was almost three tuines the US$17 trillion-miore [hair three-quarters of global market for ronds. Total bank assets as a proportion of GDP durinig that ynar Of Iris, almost three-foaLIths is GDP were highest at 216 percent in the UK, billowed accounted for by fouo irirlustrial couintries-the United by Japan (152 percent), Germnany (169 percent), arid States, Japan. Gennany, and tlhe Uniited Kingdonm. The the ULimied States at 54 percent IFigLire 2.1). The high United States bond market. whiicl has almost a pioneer ratios of bonds to GDP in Japan and Germaniy reflect staus, is the largest, and has the mrost developed and the fact that baniks in those rruntitries raise a large pro- sophisticated issuing techniques, secnlndarv niarkets, portion of ilteir resourees in the bond markets. transaction transparency, diversity of inostrumrernts reg- alatory apparatus, arid irinoatirois. Though there are The relatire size rif bonxd noarkets in these countries broad similarities in tire patterns nuf boid niarket devel- since 1970 is presented in Figure 2.2. Total face valae opment across these four couintries. there are siginifi- of all outstanding bonds in the US market increased canit differences in tlie organization, and path of bonid fmm 48 percent of GDP in 1970 to 110 percent in 1994. market dev-lopment. The role of goverinmenti in tIre The Japaniese bond market recorded an increase fonii 23 development of bond niarkets varied acucirdinig to tIre perceint in 1970 tir 74 penrecit of GDP in 1994. The inistitotional iniperatives and stages of finnanrial sectrur Genmian and UK bond iniarkets have beeri of rore mod- 6 esn dimieiisions. German bohiadc 'tid at 90 percenl of Got eminent -esurilies has e been lie inainslay of lie GD)P in 1994. lint in absolute lenris aere less thanl half bonid markets in all fotir cnnltries. In 1993. ticey were the salhe of the Japaniese Iniv I market. The IK's the highiesl aS a proportion of GDP in the Uniited Slates bond/GDP ratio. on tle other hand. remained more oii (45 percent) and lowest in Germany (29 percent), tle lesn constant al aboul 35 peixenit. despite a sifold rise reaon beiing the large fiscal deficils ci these countries. in the aiiotniii of bonds outtandliiig beta een 1970 anid In ile afiermalib of World War 11, most of these gi.erim- 1993. iwent, ran large anil cintinienlug budget deficils. first lo finance tle rentrlnrring of their economiiec andillie l to Figure 2.1: Relative Position of Bank Assets, uslaiI social welfare aclititie. As a resalt. the raio of Equities, and Bonds gotmcriienl dilebt to GDP row,e sharply In aboult 43 per- (End-1994; Percent of GDP) cent ini 1980. Sonic industrial iiuaiilries. Including 250 F Japan anid the Liniledi Kingdom. hane -caled doan hlieir fisal deficil,. ual eminiltries willi bigger deficits snili as 200 t Ilie Uiited Slates and Germans. in the nake of [lie heavy fiscal burdeni of an ification. have tot been aSle ISO to d11 so. This rapivls griowing debt raised lie stakes for 150 | | | gase-riiienis in lig tLo minimii e iheir borrowing costs. 100 M1 ainicipalilies and local governiii.iilen have been promi- I*leil IS,Jers of aind, only in tle Uniled Slates because of their la exempt slatLs. Corporatioiis ias e been thie 50 largest i-se.rs of boidrls after giiseriniienli ii the Unitedl Stales anid. to a lesser eWleiil. in Japan. WVithin the cat- 0 egories nf corplirale bonud. hank bonds-allernali vels lapan Gerwiny United United called bank debentares-are iiponraitl i Germiiany K,ngdnem Stains and Japain. while tle iiiaiii issucrs of bonls, in the B Bank Assets * Equities * Bonds Uiiled States were non-finanicial corporations. This differ,eiie in issuer profilen reflects the actise .. nle of 51555 Isisssoielissont ss,s 'eColpozLlilil.l n .......... Japanese aind Geriiian bankL In fiiianiii ng (Srivate Figure 2.2: Bond Market as a Percentage of G>DP The US corpiirsile sector has relied iii1 vicIt fiiianiiiig 120 -iiPore liaii the olher three iiuantries iecanse iiterest expenns arle lax-dedaitible iwhile slivicleiidn are iaol: Ihii, miakes it morre atlractise for corpirate treasurers Io 100 lake on inicreased leverage. Tan deduetibilitvy of iiter- ,esl pavmrits is a rel.tivrely recnL vIeseliipmileint it 80 / Japanl. (Genlam, anid ilhe Ltiited Kinigdoml. Inideed. om,iie 17 Serceiil Sf pritiate fixerl capilal fonmatioin is finainced thitughi bond u ssues in [lie Uiiled Stales. in 60- conotrasl to only 2 perveeiit in the UK and 4 peni eil in Japan.i 40 - Thein US bii iluarlket has been lIbe mosil uinnovalu e .ummmiimmg tlie iid-trial ciminiri-es. Twa of lie mluisl pr,niii- 20 n | lieiil innovationis in recenl yearn have been mortgaged- 1970 1980 1990 1991 1992 1993 1994 backedl and asset-hacked seurilies. which doiiinale - Unted Kingdnm -- Japan lie tlS binld iniarkel. There hate niil beeni conimparable - Germany Unised S. des-lopmemits on the saute Scale in the other three Ciountries. thiaugh there are iidicalionis thal Ihi,v will Smis. ..s.ts ...t sssimi.snd,nklghs tinnd s us t,n t soon h/illow [lie treivls ini the LIS ond niarket. sssslle:.Sstssv.n Bltssis.t/nr.tsIssssisss,slftell,,susrt1nr ss,t 7 Mortgage-backed securities (MBS) emerged in the more relevant to Chlia in view of the close United States duriig the 1980s as onduils to c haiinel ivaolseinent of its banks il financing i,idi,stial fuinds froim investors to miortgage I orroxier. These aIre (leveIopmient. securities backed by a po)0l( of Tiiortgages-whi,ih are in luria loanis ,seclred by specifeid real prioperty. Tie * The fiequpeney anid regulacily of geiverniienlit hlondl nitedil States iluortgage market is the largest in the issuies anid the methods use(d in Ille pri'nalry markets world and also one of the largest compounents of the US dliffer amiong the feaur ' ouiilries. Regudar iss,lance debt rnarket. ardi has benefiteel the inst froii go ern- cyMies suppirt 1leeper markets and briiaderi interest, ment policie.s. It ,ffers an instructive ase of public whwhr arecrial fur those governiments withi sibable policy fosteniiig (lie developiment of capital iiialkets. borri-sing programs. H-een. varying lie size any1 tining of issues an allo. gosecrnniuts to capture Asset-backed secuirities are collateralizedl sertrrities. fa,oralble iiiarket auditions. All four countriess lave They are createl witil Underlying cillatelal as varied as gradually nions cr away from elireit syvslidatl-i Lto autiomobile vehicle loans, c-eeli t arel receivables, nuarket-oriew,ted auion sins as tl,ei,r bondl niarkets house ecluity loans, accounts re,ceivable. boat loanis, matliired. Within lie aurtliulus. blioth "iliforiil anld di- rerreational iehi,le loans, and outher Lypes of loans. crimisatoro pricing of lbnds are ple- uet. Asset-backed secuiities are sniall conipared li nort- gage-hackedl securities. l,,it a fast gril ing seginent of * lhe basic plrincilile goserinrig Lhe u peratuion of pri- tlhe US bond market. Iltars ritarkets ii these f,uar c,iwutries is simillar withl nounor sariationis. Markets for gsverminent bonds ale All lour hond markets hare ieeiu inrcreasiugly exposed soiganize l hy settirng up ruitosirks-grnops of firiaur- to international l,,,ndl issues-bothl foreign bondls (tIlose cial firm,,, acting as priInilarY lealerls in goas runiunit issuevl by foleign eitities in lie list cosunitry) and secirrities siclh Usi,-ally fLilltion inl a q1ui I pro qov Eurocurrency bonds (bonrls issied in huost-unurtry cur- hasis: in exchange fur eellain pri ileges, Lley agree reney, outsile of its bourdlers). In terrnis of ouLtstandling to bid for priiary issiLes alie to miake seril,llarn arimurits, the largest it,er,iati,,nal issue ofl blr ids is in niarket, ini g..enilrlcult lebt, subject to uldes and1 the Unlitedl Stales, followed ill les,'endiig rdele hiV regulations goserning their operation. Iln details, Japan, German,y, anil l te ULnited Kingelem. hunever. the priucedures sary alllong ciuluntries. In Japan. for esanipule. the syidicale has l oii rule in thle Industrial Country Experiences se-orinlars muaiket or neutral bank uiniu,elarv pilicy East Asiai, coiiurtries can dIra important lessonis fr,,t,, implemieitatiuuui. In irouad tums1. lie pricedures lion [lie boiill markets ii these four indUstrial i'untulties adopted in market organizatioin are valiants of lie progressed to their preseiit stage rf develipmlient, the nines Iliat ee eIv ilie Ulited IStates. airll their soiuces of their strength. their characteristwirs. and ile esse-lee lies in acl,iesinrg ih,e objective if inlataill- policy fraiienork in which the i,alrkets vesehdped. In rig to'-sidled lilui1 dity in seconldar' niarkets (arid particular, the industuial couitri espewielice pro,ides thi,s depth il pridmar'irar'kets) arld sper, isilng wrid insights that can lie usecl by tLhe erinergilig Asia, ololi- ri tolringillg their oiperatirils coiinuii...isly awid close- tries in leterrimining a irix of siu'cessful practices they lv io maintain stalilfity in, tI' h, ,d markets. can adopt ii developing their bonld iarkels. These are discuissed beli: * Most of Lhe tranisartions in lhe secon urlay u,arkels are oser the countfe (OTCG exsept in the Ul. * The dreelopmuuent of equliti anld biurud markets depenids .1(1 the an-rall devel,upimeu,t of Ilie enoriorvy * The ability tii eilgage in repurchiases--or REPE - aid ils fi,,anieial sectur. agreeT uerits failiitales nilailage nsit of bloth long anid shiort positions by securities de1alers. and thuLIS * B,rsd markets in Japan and Germnany are de,inliatev reirces the cost if aiarket-mak ig andh (i(reases by banks. This is niiani lv lbec!ausi of the hisiorical li itq y il lie markets. The largest REPO market legacy of heavy relianice oru hue baniking system tii is il the tU (iled SLates; this riiarket is hamp1sereed in firiance growth anid. to some extent, (iiie ti Lthe iristi- other indlsirial c,lntries hy, regulatory restrirtions tutional relationship bsetneen private enterprises or txes. though eff,rts are eing ilade to ulilininize lie ance the uifiiersal han,kirig system. The sigirificanu e rigor if th,ese inpeelimiieits. if (nut toe eliminate theiil. of this characLeristi of lie inde miiarket maiiy lIe 8 *A imiipiortant requi5ite for efficienit fonetioniog of in regar(l to issuan,e if iiniriinipal bonids i. the ollioe [lie secondary market is the plresence of benichmark as ini respect to governmenli bnds. TI Germany ne,iurilies. which are commonly represented in all niomnipail hbods are sold on request arid are kept on foul ontries There are ariotatis in the praclices offer til lie tIesi-red aiiioriil ib reached. The ,ec- a(lopted in designat.ing berilhiiiark secLlrilies hiiw- orldar, miarket iti mtinic-ipal bi,nds is less aclive e cr. In the ll, iited Slates, the diild 30 :t-ir eaar thoriat irn go-erir tilrt and corporale bin.ds. blilids in nined as tle key henichliark, while in Japan, gs ernment binds itlh ani origirial iriatnirity of 1( * Tflere are dliffererice' io a.r...porale bond issriuan'e sears are coiisid-ered ti 1)e the Ierichriark securilies nethnids. In t[ie US, scic bon1ds are distlribitted to evenr trouighi thlex may rinot be Ille iiirst reenil1v t[ie public or plar-ed wilir iristitritisnial iriieslrr iIsIred. throuighi uiderwri ting nyndicates arranged hy i-set- riteirt baurks. often ori a c rmpetiltvi basis. All pub- There is urn noif.ru.ii systler fcrr clearing auici settliiig liclI issued corporate british has-e tir be registered governmiienit securities acrrrnn foor counilrien. Oril i ith tlhe Securrilies anid Exhliaige ( :tiiiiiiisbioir. tie UlS and the UK settle trauroactius in hiutg-teriii Germuanorv fillosw tIhe icsLw rrrelhods for corpr rate g-ceronmerint bornds by t[ie riext day. Book-enutrs aud bontuds which are sitililar Int thirse Unsed for i iterna- the relaled neoting synrms help li iiiniuiize risks anid uinial boinlds. In the UtK. public isscnuoai of corpor- reduce the vilu-me of transactions to be lecLided. ate ..inuds follows lie sanme prr-edures as tlial for Eureurbonuds aoe -eitled iii a -ciesn-dat greriod dulrilig go.esrurmeutl brnds. Thlus Iltere is a wide ilnrui,e of whicl t[ie bonds are held iii a clearing synteiil methods fr thi is-i-ers if private brnuds. an ELlroclear or Cedel. Here again, there is dhicer- geniue. In Japau. for exalimple. norrmal settleuiienit * Setinldary iiiarket tradirg in il'rrpoirale bolilds is occurs ont a iredeterti neil 'vyile rather tliaii at the mostly ii the f)TC iiiarkets in the tlS. thno.ghi they dsiscretimoi f the tradinig parties. are often listed inn nock eXe hanges. Il Japan. in t1,he other hand there is ns atlive .ecnildary market in The investor biase for goveninnienit bonds iS important corporale and bank binds as these bcirnds are triosl- frrnii Ills point if view of t[ie fuiictioiniiig of cec- Is held by inudividlual iivesti,rs whi hold thelii to onidary inaarkets. The esperiern's in these foulr rouin- niani-rt t. GerIirianc, a three-tiered tradsing of inir- tries aiiuply delnionintrates [hat if bonds are held by porate boIuds- official mradiing regolated niarketL institut ioial investors sucli as pensions anId pnri- anid unofficial mrarkelt-pres ai l, While rifficial arid denI funds. mutual foinld. arid illlnaliLe comnnpanies regalael- markets arc corifined to the stitck estahange. lather Iran retail incenlttrn-inidividuals auil hooL1e- inruiffi ial transaitnoon are carried nut by t,le1phioiie holds-there is likely' tr lie greater irnser, impliarl- throughout the oirin itri and airios boders. irig liqunidity anid lenigthenlinig thie miat-ily struitlule One treic i ith imuplicatilvii for t[ie East Asian hlnd * flearance aisi settleinneiut if inirpirale blionds varies mnarket. is that the Irr...poririrr.. rf bliondn held byv Ile acro-s' the fnnir cnmunlriss, riot so rrtnsih in basic banking systems has ,evealerl ai ceinlar devlininig strucitue arid froral at iri plr,edinral detail&. In this trend. Aiuother aspect of tlie inses air nane tf goc- tLliitesh States, thie -ntral clearing Iroimse performs erninnuit libndsC in iisinlstrial countries in thie gri,mrig mriultilateral nelling osf transartionnis fir its niembers, doiminaitioni foireigin lolders if brnids. hIiile vhile tIle depositories pr-cide book-entry iraiisfer hroader markets ion h,elp -ehlnne boireroiwinig evis.c sestenus tor ainhie-e delivery against payienlt fiur they also coniniote a growirig interdepiendiei'e secinri ties. In Japan. gin-eruin,enir anld crirporale aniroinget finianLcial itrarkets Inat ain snake it diffic-lt bmind settlemiret proncedures ars thIs saie. The tnt implerisut doimentis goals. German sy stein requires pay merit .nd drlicvery of .e-men-tie nin Illt -econsd trasih ig day fill-rring thue Muaniipal bind issuance methods ale Lilfelerit inl day of trade The UK us,es a seven-doa settleument the United States, Japan. anitd Geruiany. The UK lian for trades in -rrpirale bicrnnds. virtually im market it, urinicipal bninds. hun th, US, tIle VolILlie of municipal bond issuiance has iee 11s i thiln clear that Iltere are nin uniormi and Llniversal- high duie to their tax-exempt status. Prosier-tnses Iv acceptled oLle governinig thi bhoud utarketo ini these need tIn lie filed arid credit rating is considered inidlastrial cnUnitries. The overarching prinriple is tihat essential by luis,t inrestrir-s Ini Japan. thie proi,tedlure lie market houluld uperale tranrspiarently. fairly, annd 9 efficiently in consonance with risk/reward considera- (USS161 billion). Singapore (US$45 billionl) China Lions and to the faill Satisfaction of bo0th the issuers of (US$33 billion). MalaMsia (UIS$40 billion). anid and investors in bhods. The East Asian econoilijes sia' Thailand (t 5514 billiont (Table 2.2j. therefore prefer an eclectic approach to fuather level- oping titeir honld markets, combining Ilose p)ractices Table 2.1: Size of the Emerging East Asian and procedures iltat have sua!cCeeded well iil inilsIrial Bond Market, End-I 994 coantries, takinig into account the stage of their fi nan- (US$ billion) cial riarket development, the a'ailahilits of local istli- N 111 I-I tLLtional infrastructure niad other constraints. si. I so F tCjl'ira 24.4 01.51 9.10 tIt iti. 33.3 SIZE AND COMPOSITION OF THE EAST 'Hng EKsig tt . 0.8 15. 6.8 4.7 11 .5 ASIAN BONI) MARKET tudosesia O.t (It t.5 6.8 0.7 ).1 Kss-o 27.9 2.7 37.4 32.1 ff0.8 16t.0 Mt.alt,sa 29.0 Ot. :t.7 2.55 4.9' 39.5 At tie enid of 994. the sine of East Asia's bond iiarket Sit;ilIps, 24.8 0.0 0.1 t 0.2 5.1 25.1 was around US$338 billion, representing az niee 2 per- Simgapir- 42.3 55.O (0.t 0.0 2.5 45.0 cent of the bond miarkets in 21 major indLIstrial roan- 't'liaitjo)( 2.6 0.0 7.6 (t .35 1 3.7 tries.' but it constituted ahbout 40 percent of the hord market of the emerging eco ntnsies. estimate,) to be Toa t 1.55.0 2.7 59.3 47.9 77.1 t338. abotit US$800 billion. The size of the East Asiaii h,nd -o hd 1,ss'osot . sd...I.. itia-ket was small ini comiparison to the region's equity Son's Th, d Bn.t k market capitalization of 115$1.1 trillion (71 percent of GDP). As a percentage of CDP it is siiall compared to The East Asian bond market comprises five naii see- tlose in the major insducstrial countries (United States. tors: national goiseinment bonlds, state government Japan. Germant, and the L'Uited Kingdcm). Holseiec; bolids,. tale enIerprise ombd.. central bahik secarili-s She growlh in East Asian boi)d miarkets has beeni and corporate bord, (Talile 2.3). Al the en'd sof 1994, inil)ressi-e. Over 1989-94. these markets grew at an goserminent binds 'nistitatevl lie largest segseail- average aniinual rate of 20t pereti. mitre thaic 1ince as alicost one-half--of lhe East Asian boid tlmarket (Table fast as the bind markets in these fistr iticlastrial d(Ini- 2.4). Coeptcate anil sLate eiterprise bccilcs were lie tries. Bond niarke, iht China. Hong Kctng, Inldonmesia, cext largest segiortits represeitincg 2:1 anid 18 percent, anid lie Philippines have experieniced rapitl growth. Fiat respect)i ely. Central sack secuirities aisointed fcr anoth- lie sine of tlleir hbi,d tiarketks is relatiiels simall. The ec 14 percent a It ilie remaining I percenl was issieild bs phenomenal growth in this grocpi of countries is char- state govemeits. Th- importance ol these segilients acteristit of a lnascent miarket. The reltivet i lratrlle varies actoss etitiutries depeidiing lh tlhe stage of develop- bonld titarkets of Korea. Malas sin. anid Singapove hase metit of tlceir- bond m,arkets amid their goenmcemts' fiscal registered conisiderably lower growth raties. althoghl pil icies. they esceeded those in the industrial counmttries. Table 2.1 provides aic oser l'w of the East Asian solid lar- East Asia represeints a iouinter eboatiple lo itilstial kel b CLulclltrV ancd hs sector as vf` enid-1994. cotnaitn trends iic that its goternmietis are dolwniziing their roles as priliaan issuers of boids dLue tt fiscal sill- Bon) niarkets it East Asia hate been slow tt deselo) in plicses. Htctig Ktong. Singaopore Malao sia. atd Thailctd part because of prudent fiscal policies that limtited gov- aire leadisng the way it lIdis respect. Corporate isscers eritnient debt issuance; and in pall due to the heasy have liegmi ti) otake their iiiark as the remaainiing reliatice of the corporate sector on eclciity markets alid inipediseicts to bintsd issuamice are beirig rernosed. batiks to fitianice tlceir investmilents: tiglitli regulatedl Ilnfastrtncitri fimiac-e. whiere eihalcnceil private semtor financial niarkets with extemisive goiiefniiiient iontrols ovi partiwipatiol i iri Ilie iffimig. is alrea-hs aicelercititig Icle interest rates; domio aice of bankks lack of adeqciate reg- gnuwth ii this sectior (see Chapter 6). Ic [te pist few alators framiework to prmtemi the investotrs: inadeqicate sears. timaty East Asiai moiimntries hate lls oed 1.) priva- itstitcutiinal infiastri'tcre: aiils barriers tt capital flows. line their state-ownyed enterprises (SihEs). though the mittles of pri'alizalion flate beeni ciffereil. Most vount- A bouid market profile of the eight East Asiati trie have adopted a partial divestiture polisy-whi'h is economies is provided in Anniies A. Aniconig tie Ealst Sitilar to m'orporatizatitca-ihere pails of SOEs (case Asian baud oiarkets. ilie ilajor nitarkets are Korea hieet prisasized. while-majntris sharesinte lce llretaiieil t0 Tab lile 7! 2. 2:: S' i;:1 Ce F t e I E irlriuewfr', gsrigI IEl,ri;rt: A au:ru Fl u I JIrucIf Pl curk t:, I 9!1'f-9041 I 990 , D1 )L ) '3:l lDF ['39:1-3 G P3 (3' ])]-' ] 9; .4 r5 C-J- (3 Fi ni:. 23. 6 7 5(1.. . .47'.11 1 11 133.3 6.3' I 1(1111 I4 '12w I.) AI 3 1-3 3. I fi t5 [ 15 81.7 I rllolile4- LL 1.7 I ]1 1. ] .:- 1 .3.l VEI El 1 i3:;.2 :3 1.8 11 . .39.I 138 1 . I.' I6].CL' 2 El ]\u[lnvI s ,;ia :7.1 O 2.3.(.3 3i20 5 ! .]. 1.; . 56.0 Phi lipillj: in EB.i 11.6 ;t5 14 :iY 3." '71 ;.5 2;5 I 39-1 3 211in,;]l4Ell :--1: LEl. I 3 7.4 72.3 38~1 ( .l 6 i.l :3;.1 2 i :-.- 'Ill; ll n3 81. f' :1 4,; 8A 7.6 I ('.1 31. ] :3 '.1 I E13.6 1. 8.1 2; .6 ': .i :1 : .3 .: [ ) 3 .3'LI.0 :22.3 Giei-rril'iy 1 4 LI ] 7(l) 1 .42 ' 7i2. I [5132 E13 1 ].1 i ]9l. - 1III] [nl t[I1)l[II ::, 26.4 24- :3: .I I 33 3 . : 1 35 . 1 Jiian 2LIfi:. 1:2 :2: .41;' '. . :2317 613i. fi; e;31.-4:3 73 ' 1I111 Ij in i..l 1d,S ,t3 3t11. 1 ' 3- E8 1 , 7.6 1 4. j-; ] I I.7 7. 29' 11(.2 :5gf,;'s. ';7,r('. Thi 1 /I ,-! l it r. , S' 1l o o 1 ,,,, -o ht e,5 . Jac IFZRr:Ib 1e . l3: ll'Ilailli Se :ito r'- 11 ,i the East A;I oI: lian i cEl cIll ii larketl:, I '9i91J11- V ''I LI.i. 5 : Ilio:,ll IY]_M) 1 ("I I I',12 i.9'i3 I 141) "Ilatu.. I aI , CuIre i[ C' I 1 1. 1 2:.2 1 I ':2' - 11'14.6 15 3 6 Sl Eta I ;I JrI IEl lllt 1 3 4 . 1 -, : 2 . I sUlte ~~~~~~ I -, 1 21:2:15~~~~~22. 45.56 :.31.9 59 3 (t ril rla I k.2i 2. >23 - 8 41 EL 42 .1' rI .-01 i47. d0.3 77,. 1 '11' tl 1 31.16 21 7.1 27!1.6i :2.] 2 11:3 -1.(] NUti flPJI. El MNIf ll 55 "!" ).14 .C)-.. St4j liuEtiEl I'-I1 tin s e al I:.,-:. 514. I6 1.3 I'(i. 017 .3' (ii.iEt r Xi t a t'Bnrin:.:'i I:3.0 . 2'I '2 1 `i -34I1' 1. 3 BlurIIjISPI Itii lE.-i'lj]]Ei!)i4 WI1E.0 . ] L 1],r IS 1:-3.9 17 . 5 .l;rtrl. [ )/folank -rl 1:.6j 1.2. 1-i ]151 ]' '()i~i' 'y IS le. )o e m ln s Alo wi L 'I111113 :!r3.111 2.11I 1 11:"i 11 1.6 O DO It ( 14 1143' 14 1 .441.43' L billz ton B n 4 1 (143 B . IIll d r i gL3;3 n Lir; eE _, ].E. tL S ii 1) 12 i c 1- .GILIan] i11 I14 1 3.3-oE the ]Vlone[if ' SIn,fhi. Il.fiI.i I i :L'ri I3.U(1 . . (. ]S I,'1.2st /-[>I1-I[lI<3I;(II1 1rD.(] L'.I 7 ] 7 1< 1;;./]_ ! : ' . I I01 orlpTa..e fi ml.ar IE s . ',I saI [b'tco:' i1].;] iiI-ri perta. nI st2gprll t ii' 'IV :3 'H I 4 '14 ! I6 iSi!)snj Eda: bltwIo'i 1i ttrI: 61 rEII le m ii;cll] N , Ic' a1 'Eli.- oillor lhes.e 1U.EI'k2 si S. ]Vli]aL ioi' ::. Vii a tE-l il I Ellc.i np3. lia.: l N uia a i,rn1W S1 rla rri iis i r LU' tIS Il n I so i '(]]1 IE i t I., i3 eiil ] hllnE'1E;a126 Ll.~~~flp(EIEiil.ii:.Tii Si! inns': in pt:. in 3. b~~~I.a. t riSiiA1Ew ~ l5 plarg ELIIEUl- lt~1E at l l.~ h:'- .vrrnII/[)t)F U3 )': AlAs 1: [6g1.E. h I: Lhc~~ end u f the S iL i: (! ol, !ero r114.14? If 'Eli]. e'; :ii IB'e ILtil[IL' 113i; l t'~ tlMW ietar IMAect mu:. rily WAS as; IE ' i' : t 19> 18 V.lb, 'El , nun' OElnh r'i'tLE; i:' EEl:' Ei.L3.t 13 p61', - as ptErn .1 il a pli a Eli o'E :1:' ye j1 :.i:'E 1i.lo i'ric ti L: Itri-nd .Ii I n 21keti in El11i I IE I lbi' Ii:' ,. I U ai. l 4i] Il )I-, 1 141 IJEI if] i ris k e 121 ('Tl Ii e'2 ) ) i [K(i'e - a E mI ' ti Li ' 1)1 li r'd i JEll]' .17t1. 6l1? 1- ET rl I] i is; 1iC (El. E. t]i3e111]; (2 il. 1T1t1 jE W .51 (? [)i' .t11-5] - )- 2 S El 'E! [ii ECSlE The B a n~ ~ ~~ ~ ~~~~~~~~~~~~~~~~~~~w. k-l Ko[l]r re i" I'l B1, 11 HS 1-0-1 E-S1 -1 4i -!l-, 1l CCI-1 l .11!IOMA ilD I 1-,0-iti. ]\/ 1 lill t; A1" d^ie eirldzl ,- 1,m [a, rk . .: it l J; ii ' E1 i El 111:,1)' KI ] itS hi?':'- 1i c]5i541].i (7 ˝41E3L [131 'ii - aEtL, 1i' 1u:F tfL ]-^ lo :lr b1(] EL!] :-EIti i]..'1)s 4?'11ltl] riI IEi. I I Table 2.4: Size of the National Government Bond Sector (US$ billion) 1990 i (;[I 1)92 ', G1DP D1993 '7 GDI' 1994 1 G DIP Chm,Ia 17.1 4.8 22.3 5.3 28.7 i. 24.4 4.7 I 'I g K0 g o. n n o n 0.4 (.4 12 0.4 n .I 0.1 hltdl,iroia 0.0) 1(.0 0.0 (.0 (.0 0.() ( .0 (1.0 Korea 1l.2 7.h 25.3 8.2 25.8 7.0. 27.9 7.4 MaNl-i, 24.9 5 8.2 27.6 4-7. 26.8 41.0 28.9 -i4 .0 Philippioeo 8.5 19.2 17.4 32.8 22.5 41.4 24.8 80.8 Simpgap-. 24.8 67.4 37.4 7.) 40.4 69.6 42 60.2 '1'hoirwl 7.7, 9.0 5.2 4.7 3.9 3.1 2.6 1.9) RfoLb 102.2 10)13 1:35.5 11.1 146.6 11.2 151.) 1(1.0 Aoi lr )wEra B-ok. Table 2.5: Size of the Central Bank Bond Sector (US$ billion) 19'0 ",cDP 1 992 'G CDP 1993 '4 GDP 1994 9, CDi' Chli.l )0.() o).o O( 0.( 1 () Ob 0)( .(} (). H[(og K,),,g 1.( 1.4 2.6 2.7 3. :3.3 0.8 5.2 Inlod lall" 0.0 0.8 1 ).1 7. 11.1 7.7 0.8 4.3 Ko.ea 21.3 8.4 25.7 8.43 299 9.0 32.1 0.5 Mala.sia 11.0 0.)) 0.0 (.0 2.7 4.2 2.0 2.8 PhIilippios 0.) 0.2 3.1 5.8 1.0 I.l 0.2 n.3 8iig).r.- 0.)) 1.0 0.0 000.0 0.)) 0.) 0.0 Tl,OajI,d (1.0 11.01 (I.)) I).) I).)) 0.( 11.0 (1.0 Ihbal 23.2 2., 41.4 2.4 48.4 3. 47.9 :1.2 S'o- The Oarl) B-o) Table 2.6: Size of the State Enterprise Bond Sector (US$ billion) I9) '4 CD9'P 1992 ; CDUP 1993 '4 (.DP 1994 '4 CDP Chi n 6.0 1.9 15.4 :.7 18.7 4.4 9.0 1.0 Hang Kong (1.0 (.0 0.(1 0.() (.0 0.(0 ( .0 Il-n-ol-e.ia 11.8 0.8 1.2 1. 1.7 1.2 1.5 1.0 Korea 13.01 5.1 23.8 7.7 30.9 9.3 37.4 9.9 Xla).11.'a 1.1 2.6 2.0 3.4 2.2 2.1 3.7 5.2 I'l ilippioeo 0.1 0.2 0.1 01.2 0.1 0.2 (.). 0.2 sing.ap-'rr 0.0 0.)) 0.(1 0.) 0.(1 (1.0 0.01 11.0 'Thaila-d 0.7 n1.8 3.0 2.7 5.3 4.2 7.1 5.4 Tolal 22.2 2.2 45.6 3.7 58.9 4.5 59.3 :3.9 S,,--. Th, o.H)( B-kn. 12 Table 2.7: Size of the Corporate Bond Sector (US$ billion) 1990 '5 lI)P 1992 G5 D[IP 19'13 G CPI)t' 1994 5 CUDP Ch.,, 0.) (0 0.0 (.0) 0.0 0.0 0.0 0.0 Hlg k,,lg - - - I.9 1.7 4.7 .16 IIsSrxlleola ().1 0. 1 1.1 0.1 (1. i 1.3 0.7 0.4 Korea 343.(, 12 44.1) 14.6 49.4 14.9 60.8 16.1 Rlo1osIi 1 2.6 2.5 4.3 3.4 5.1 4.9 7.0 Pl.ilt.i, Ise 0.0 0.01 0.0 n (.0 (1.0 0.0 0.01 (1.0 Olnga)lIlg. p...- - - - 2.5 4.0 Ttiadonld 0.0 0.0 11.2 0.2 I.o 0.8 4.5 2.5 TMl 34.8 3.5 47.6 3./ 56.)3 4.3 77 I 5.1 . Th -r, r.11- s.,td 1994. total size of this aector v o- about US$59 billion esrillent-sponisored -olilpulslry saving illstitlutiolns stoch as (Table 2.6t. Ko,rea bad the largest share. about 63 per- the Central PinsidenL Fulnd( ICPF in Singapor anid ceni, followed bs (: Iila and Thailand. As Ille tale enter Males sias Emlplosee Pnident Fund (EPF) is the larges iri.ses were corporatzed tilie i-ouallee of ilie SOE lbcnds single segment of [lie investor rLmi-erse. Flnanwial institu- iicreasedi diuanlati,ali, ill recen-t Nears. epecally l hulis are tile largest illsestolrs i Kmrea, Thailalid. and the Thailandi. The foilllling reshl- ileltlsf Ifhe sllate Clertelrrn- Plilippin-e. file thin1 hiostltiioiial investor Hlass, pesion e. especiall, illi.ties. are mIla-sie a01d gwl-illg. Malaysia flliods (for esalilie, GSIS anld SSS ill the Philippines aIld ib in a sirlilar situation. hblo las Ilied fIl full priatioafioll (Gis Scs-alit PeNnsion Plali d41( Social SecaLtrils of its state e Chelpfles iin.a posli. 1,1 state ele0ergnriiz Org.iiation inl Thailand). is lie -les laigesl ilIvestr ill Ibnlids is ullm eltil tIndeie recie, ly tie gl), len,od. ,llls. Witli a total ilse-tlnlelim t 1f US$83.1 billion in 1ll.. s ill 19)44 the llntractald oasillgs sectlr was t(ie JIn East Asia. tile lomnllrclJ baniking ),Itemll re-lmilns mllajol investor ill mtiese market,. tile single largest leIller tll the lrpoirate sec tli In d1l- lar tr01ni. blIlrlercal nialks' oltstalndilng asses haose Table 2.8: EastAsia: Investors in Bonds, 1994 beell gorhing steliid . H1 ete,. Ile corpjmrale bolrid (US$ billion) Iliarket ias fiially lile ofage. At tilenelidi of 1994, tile 1,5Th.,. i,... ,,,i , F. l (Il,lh. T.1I tltal sizI lf Ile oIlrpslrite 11...1d miiarket in East Asia . .Ils.. .,.. 11 .... amoutil edl tll U.S$77 1illiOll, Il Ilicrea-e iii 3 perle,lI ( Cill.l 1.1. so. 4.0 28.7 .33. s er 1)93. The fatesl grwl i ig olirxiate iodIli arkets Hong hllm 5 so. 11.5 0.0. Il.5 hace been those ill Thailanid. Malaysia. Kore. ad ndt-sla 258 0.1 1.8 4.4 o.I Hlinlg Kollg tTable 2.7). The se uf tIle Ilpr-lisIate b1nd11(1 Malo", 22.7d 1 .5 11. 39.5 market will be bloiostedl as tlate enlterpises r Ire Phripp I'hl ilte- 4.0 1.5 tO.6" 10.0 25.1 iWed alz tihe iprisate -eltl belielles a Illajoe, il5er pa- S'in.(pOpl 38.0 n1.i. 11.0 I.. 44.8 IlleelI,,g iflfrastriltur re Iilirelllellt, of Ea t Asiall tl.l,Iill (1.5 si 12.2 1.0 13.7 c'lillItries. T,oLl 83.0 40.3 110.6 124.1 3:38.0 INV ESTORS ., PsllbsisitogPltg i pL, Ills'.. Sw.Il s,i.. liltT oswlo' The bulk rf Easl Asiall boods are heldi by tillrce ol,jor classes IOf illtilUti-nal ilvestlrs: tile coll-ractual sa g I TA" sestor' 1lellsionl fn and1filna,i(l 11nsititioi1s 81111s 1 THE. PRIMARA MARKET holilings i,f ildliidual investors are liegligible except il Chilia whiere indisviduals ilre mliaji hole ler 1f glerni- Ill inaNy Coluiltrier, the iminpetls for bond market devel- inlet bilIlnds. The e-teilt to whwhs ea,lh if tilese iis-esor iplilent ster1n firom gerlsllle nls leed to linaole e their classes dlolmlilates the bond miarkets. Il..wever. varies fiscal defil^iLt. Inide-, at the end If 1993. 'elitral gil'- lrom ountilitl . 1tn LIWIiy (ilille 2.8). in MalavI ia aii er-mllielil t indlls rep-res dt 4l 40 pere"lt ol all pub,lily Singapoi,. the olntia,ial sa,ilg setor -i in -nllim iig gi i ihL- -d bOidL Ot,tandig il a ample or 21 najw bond 13 rniarkels. As can le seen fronit Tabhl 2.9. the tiel Government Bonds issuance of go,etuennt hoo ids has consislenlly o...t- In Thailand. goterrnielli botds were issited primarily sriiped ilial of corporate htls I over 1980-93. for tpein miarket operations io control liquidily in Llte fititancial systemlL and(l. to a lesser esteot. 1) fond the bad- In East Asia, the organization of pritoar- niarkels. the gel deficil. CGien that the Rosal IThai Goveratient range of isstues andh iivesltr.s. the itnstrtioIlls avail- (RTGI htas een running fiscal stirpliises o.r iie lasl few alle, arid lond issuance tielhods vary sLibsaintiallY sears. there has bee( 10i tIeed tti iSsIaC Ilotds SilIce ac-tits cotittlries. At tne en d of the spe ilitt. titilies 1990. A, zi resitl, the- las beein tilt med Iit sel Lit alt solcl as Hotig Kttttg antI tite Philippitnes issyne bond, i aLcliotill sstne. However, the Gavetretinettl of Malaysia a otittpeliti,e atiction tttarkel wiere prices are tsl l(GOM) stacietl issuitg htiids to itteeti tie itiestliletlj ritarket deter-tinted. while al thie otller end. Chinese tieeds of the cottitatt aclal saviitg Seilor. lhe EPE atid lo botnds ace placed via adcarinistralive alitt-atititi niechani- partiltily fLIIltl tle bUldget defitit of the Federal isin.s anid are often pr-iced at heitto-titarket yields. Gioieritutetit. In 1988. G(OM appoinutedI 18 principtal deale,rs- 4 otiter-ial tanks, 7 rierchatL taniks, anti Table 2.9: Net Issuance of Bonds in Selected 7 discotint hoiuses-to undeenrrite the primary issLIes of Industrial Countries, 1980-93 Malavsiani Goteininterl Secorilies (MGS). which were (US$ billion) anetrioted. The printcipal dealer tnelwttr, was expattded 198() 1')85 1')'>0 1t901 t 19')2 1'tit).3 1990 Itt iticiode .5 tttir'e o"mI"e'cial hnk5. lairgittg ljai/ed Slalts Ike Ittlal it9 23. MGSs a-e is,nied witit trigital titatitri- fJotcnszm ttI BosBd, 49.1) tIC.8 153.6 212.9 215.2 178.3 ties of otttte lhatt tnie cay, MGSs of itialuciities of uni it CostttaLe Bitod.. 36.8 t(16.8 85.1 156.3 109.8 103.9 10 sears are only offered to principal dealers thice ioelger-terttt MGSs ar- issired ait prtdelenniedi coupontls -rlpttrt B d, 1 13.6 5at.6 46i3 87.l 117.8 aid siltd at par to selectled inslitotionoal investtirs. It Cors1tttate Bn..ns 20.5 14.2 t3.8 92.4 71.6 92. Malasvia. prior to 1989. tle MGSs were issued al par oit a sirfbs-riitiitr basi.s Will pre-anintouirted tttiLpttris. Ceerrrtmnv Srtte tiee, NIGSs if tialitrities up It) 1(1 sears have GttCsttt-tt Bd,t 32.2 t4.6 -I t 13.8 32.8 18 beet issued thirouigh the iest price tetlder attiiot process. Malaysiart Tr,easir Bills (MTB) are issiued oitn Unirt,d Kingdo, a disciunil iasis titroitgh tettders oubitiilleti iy the prin- ro-irsiteti Bitns, 67.5 64.0 18.4 37.5 40.0 6w.5 cipal dealers. The 91 -da MTBs are issited weekli. lie I:trpra.t B.titdt 2.5 5. It, 4 1 7.7 S. :12.5 182-dar MTB, ale issLled fortnigitly. altil ihe 364-day Si,-f: .,, ss l f Sit,,. B-ilusti. MI I Bs are issited nitililihlY. Tire deciloprferil of tire primanrs debl oiarkels itl Hong 'rlse rest ttf the East Asianr cotuntries are in the ritdisi. Kong ias giaeb,d fat ilitateti Iy [lie introduictittrn of tLe Ilt Iridotresia. pricing of honrd issies Ofteni does ntil Exciharige Ftirod Bills antl Noles Prograrr in 1990 airif rellect the liue cosl of tapital. as threy are priceti ttff the reatit ..Iofa tentralt learitng anti uslttfoy ssemm for deptosit rates ttf stale-o-tveed ibariks. it hi are goverit- the debtl rrrarket. Priot to) tle issuatrie of the Excharige rrietri cotnlrolled. In Malaysia. goterirrertl bontids u.ed funtd Bills arid Notes tlie go-ernitentl hail issiled sectr- lo be soltd I a sUbs,riptiot biasis witit p,re-anriiouirtedt l lies (Illy ott art ci hasitttr ifasis. Itt faoct. Ihere wan only colipoIr rates. This pratlice. htwever. tas changed attd it silgle isiLe ttf g-tteritrrtetrt debit brouighit tt [lie rrrarket gttverrsirtent bitindis are tiow ctriripelititely priced. tlinieig tle entire 19)80s SitLte lie gtenv-entrret ilormal- altlhough goterntrrreril Secirrities with iarrilies if ioligel Iy operated irs fiscal su-pluis. it was ahle to actrme large hiatt 1]( years are issued al par artil al predelerntinred rash reserves. Ftiiowiirg [le stticesSfril iritrodlUliot1 of cttorpotr rales It lie EPF arid the riatioiral petrsitti lurid. three-mtitrhli bills i MarLIs 1990t the goven-truteit The Singapore gitiertrittent ISSLteS 1litLIS eXCslisi-ely ir lauiniched the six-ristittl hills prograrrr in Oclttiber 1990. ilie CPF al adrntisitrali cly delertnitred i Iieldt. TIhe r ati- Teitder' alce atepled ttle fr-ny t retttecogrized dealers tt Ito aice in contrY practlices. hirterei has bietn deiclitnitng in are pterniitled lo sialitlt hidth al Ilhe ctniipelilive auctlitir. the pas Iwo Yeats. as aolsttcountries of the legion are on- Each r-n-ottgnizd dealeti r IastI eiaintlain atl least IW verging tomwards transsparent anid nitarket-diiseci issuanLre acctuintls wilk lie Monetary Auithoiritv: otre accotiutnt for a flaarticis. The followirig sectiteo descrihes the *ouint-N- healers tItWIt oldirigs arid o separatle accouttt for clieints. specific plu,tices it East Asia'S printars miarkets. Re,tigitnzed dealers Osins comipil wilh regiratitimns issued 14 by, the Monetary Authority-. Tw,o-y'ear- Ewhaitge Fund rooks thie itiopetisti hilo from the, ktoest yield to the Notes were introriured to the miar-ket in May 1993 Is the highest. What is worth I iiitig in Isiis regard is~ tlat he Monetary Authority lo repla,e goteninent hoods-as they got erooteot has pot if, slate a syseml III creening atod mnatured. -se,leciig dealers ill gos-ero ient se,urities who tan sent, as, riarket-nitkers oiid liii. fos-ter a liqunid anit Singapore hias itointally operated ait a fisrazl sorpilis ffirin iiimarket in gilt-runisietstiiis ally1lhas a-cimuislated lnas,i ye -ash r-5er,es. Thui the anim of issiting gilteritmeit setiritfie, is to, abs-rb tihe Priimary markets in Chiina ran test he hIararterizei l a stigiriaS Of lIe CPF and is dese[lo it lie domestic tailtitali iiiaorkets, iii tra,,sition fritil a ceittrally, plainnedl and mtarkets. The, primars tiarket for got erutoeti11t securIities milnt..iiistatisely issitrlled cr-eilit allocatlion, ineihan- 'ii essnete acts like a finiatncial isit-riiediarsli b s liel isil w-all! a -itnpetfiiti ti arket-driet so ti. A tIle, task sif risk tmanasgemenit is tassed froiti lie ont- my-riati if boils are i-siied ill Cititta. SuiteL 1984, thie teactoal Sat itig secLtor to a gii,erniiernt insest Cinet iti- tr1Uitoll alili variety ilf debt i-sne ini Citiiia ltat egrilt,n oir.atioti. CG IIC. Suibsequieiit to the r-strit-trinig of the, rap..I Ils. 'rto) siebit issues in,-a,erd tfn- Y441.7 itillitti istuance tiorket iii May 1987, GOS regularlyN iStues ill 1981 ti N65S.6 miilliti ir, 1985, antI ii 3 113.3bilo varyinig amloLti'ts of secmrities. whit-h tire atittitinteid to in 1994. Netsise ptt -iiii tiofu 1993 are Y 150 bl Lithe pubtlic tltrougl peilliar) dealers n Lts taryiti arket hut, giltertn?ilel dlebit iii Chitii is issusd priiiiaril} Ii deterittuied interest rates. Govrn1nieut seuritie are lie- M6iiisr of Fiutanti (treasonr liiit..IsI) alit tIhe part aUnitOnlesi anti ttii-compi1etiti-e bitdi are ailitted att the Ifl this usedi fr geIleal budgetary ptirto.. is referred weighlted average trie ald ity lid of1) li ies ltt- 1ii as tirasiry bi11;. Situ5 1QQ4. theire hias bseen . sig- ptetiti-e itivs. CimrreintlN eset'CI pritylarn idelel s ale nifiraist intirease in tlle sitiitie If treasury tills isliLell. etniiiiitteii L.) ittakiing twit-way (lilltes in a'll goternittetit prititribv tite tti the gu-st eriitett detisitt ttt lea-e tit setuntieis outd eis-ring lisiuidits It lie itiarket anle fiiatits- its defur it thtriiigli iilrrit-ing fuotit tIle PBC!> all ioniditioiis. GOS im,t issues 91-dia, 182-dos. and( Gmiyrtuiiyett it,it Issues,. at itter ) ! 1:1 iiilliitn. 364-day treasury hiii,, alit 2-, 5-. ailud 7-s ea Itoyl. in i-rased t hreelt& til -t r 1993. Pianntedi-suite Ftor Loug-dated b-1i! ore issuesd IrumaruI ttvo te a to, Ie,II 19915 are higher still. ast Y1t) luiion. Fiiterpirie ititid iteedls if the- CPF, hbnt iftets at adtiniiiitratisel, dlete- issi-, oteari-thile. ttre rI-idliced. mitttet i y lvkiliat tie itsially bieltis mutaket rates. EHutrit-tt lly,N till tdebit seuirities were plati-il adintittitra- Primary- markets in Ilie Philippiries tire dominaiittedl bty li%I- ely tdi ot a nliodli,ittrs bai,tis FHiteer, tIle Mlitiuntt gitterniteti isatualce. Almos~~t the ettir, ilititstit nItI ILL Fitittiut iii 1991 toed an, auvderswrutiug viidiwate to itiarket vvnisusts It! debt isoars by ltie talottttal gui-ru- latwii-li a bondir isue foir tie first titte li ott expieritteni- tient. The goisrittietit issues tre-asuir hublls wIth niatLiir- tuLiA s. The, stiv alit was -iiriitt,d t ithi t1he issue (If tlier 463. 91, Ill2, aoud 364 dhats Gt,er,til-it ecari- Y2.5 Nhioni. ouit of a tital of Y 19.9 bilhl l IIh tlie tr-ea- ties ltretsiuryN tills atit notesi ill tlte Philippines tire smit buoud quoita issue Iti Ihat ,yeir. hi 1)9(3, titnter- issued tia niptililteitis atiieiii. Tetureit,Lm - auctiont is rititig halled I., sell lie diesured q~uaiitity if treattoiii sytenti anti vieae nietw-rk were -stathislued ini 1986. blulls. lile 10 vuitueit611 fro n til tile booio nitg etqtit), ttii Tue CGe,ernitenit Securities [Dtpartitt,nt if lit~-mciital pirittert mtarkets tutu higher (ititaitlitirieidt returns oiL batik is respo,itilte fr mailagitig tile aiictiiin tLat behitf luterpris- iet.Slits- lieu,1 the guieriiiiu,it had1 retlrl- ofthe ntatitonal gi.. erintent . A oi-uuuut1tt- iili, repre- ed it tandatitr adnitiiiisiati- all.i-atitit. senttoti.es frintit the Natiotial Treasory. Diepartmtenut of Fisiaun,e. anth the cetutrol batik tdecitdes lie aittoiti of WVithi -niue re-ital iniilie hotid toarkit in 1994, lie Igot - seLytities tifferevd at a,t-Ii taictittI. tokitig into .,,v.t,itt ertitetit esperintenttiu w itli huturI ihiffereilt I~SsaliveIC lit fitnanintg iteedlsif hit gvi-neromeit arivd Ie, veni mtetlitish fur treatmiu islulls represetitig a t-rnpl1ronnise titaket oi1ertitioi reqihiiir-tient if lie tetitral hank. The itewen tLose itt desiret tiit- it-Aret-oiriiiterl juintiig aiuetioi is condtvl-edl nit a weekly bai The I...r pruiia ioeidtres andily tose hsii ioulttetd [lie ehIe(t-tietiess oftile dlealer nsetwork hias expandedl fritt ant earlier 20 Li [lie utiuvirsinritg systtItl Ini C_htita. These [Iitltols it'it,l j_l ,uinenst 301a.iw! includies cit...iineru-ial tank-s anth iitest-_ cid: Itil Y13 btilliont of sis-rtiiitlt atitii onle-teti siripiless meel't houses. Outls A-sreilted Gott,r-ti-et Set-anti-s treasIs1 b~ill, situ midiertsiting tigr,ent-etus. The hurler- Dealers IXCSDI)o salt parti,ipate ydire-lk ii tihe tIls- sriters (Itiauiy-id whisin ster veiguittedh irimaury dhealersl tulns as eviuupetitise buidders. All i -tesry anctions are iserr gim ael -twek ti I liae the tieb t, alter iswhii it as cOyitiCisctil Ott as y lyLI bais,s Tue aw,oin-ii iuiiuti ttee itwesi lin the Shuttnghaia sisik esshiange: Ill) plot-emett of Y28 billion of to-yewa- bearer treasuir tills via local biisimness anyd the busi-less is financially siable. The fin,arncial dielartiiLents. which apiplied for allocaliois. The issuier. a.sisted bvy a fiianaiial advisoar. must file for per- balatie of (lie year's platined issue (lien become avail- atisSiol to ijst,le boiilod alivl obtain a credil ratilng fai the able hfl distribultiou tia other chaniels. The loy:al finaice isse. The issning ptl' ess fur a ltii if lfel,ring gelier- dleparticiivits ,igiiedl tiiunlets-itiiig igree le ilts with all tizkes aboli (.11 6 la) a. Proceduiire, fir prmiale place- Ijian ial inislittitiins at the Ilo-al lesel, thitlil ihen sold sentlof b1l ( issu-e are ttlim h simpller- than those fir (lie ecuriBti, to iuliviiinal, atid litiers; c I direc pIde- unbli olflcrinig. The is-lier if as asitecured ylebelltsre leiit oif Y2 billiou if fi- ear beare l-reirsn bills sish u,,n has, to register tutuh (he SEC and vutisply ilih(lie instiltuIion,: atid id) allkcaliult vif Y70 iilliion. certifi-at-es reguilatiut for velIing/transf` rriug the issue. Fu r of thiee-year tmaliurity by PBC vi the spei ializedl baiks secuLrled alld s11burldillat.le dtelientures. t[ie issuler files a for selling thri tugh their brauti-hes. requlest to issie tyilil the SEC. If the SEl( does iiot obje,tl t the i-sse withiu seve siir kinig days. periutis- Go-seriurnent bonyls are issiedl at tar aii (lie majority shin is cutnidtered gra,iled. The ioSLiilg proLess flir a earnl a prel-elermineil cliipoiti. Thlttre is ito anilioli prisale pla-eiieuiL typically take, albot 10-15 ilays. As process to dletermiie ille cild iii (he prim.au iiakel. ai res- l, the private pla-euttent market for ,-irporale Cotipliiis are adruirii,tratively set al a zitargin ablsie secturities in 'rihailandt has beeii g-us iig rapisily. dieposiL rates of ounpartble nilaticitV ilihouit efremite Prisale ilayen-etil ati-tutled fIv -ier 50 pereiit iil t lie seilit-tyidary uautket Ywid li i iSsues if LiuMpalcable 1993 aid Ity 1994. this prlportmiti has risel ti 60 her- nuatiurits. Msnt govelilitleill istiles al-l of i ... c years or eill i if ltotal msupiorate bmitd issuawtie. iiiore ill italurilt aim1 siowe 1992. haute hady1 a copiii related to the inflalivit rale. A dratsalok f tie iri priaarN Ltld 1988. the t-ilrailte seytluir iii Mnlaysia sas .,(It ail ibosle firtess fr, gotenoil-1ui set-itilies ill Chi,il is (hat at-ivy isstler if lirid,. tiorporate boilt issiiaUive Irea...ur sills typit-ally have bteen fofelredl il aL slIaill MItTI- itl killed ilttg-terll IlvI al, iiilds w i(ll vall lie ber it1 issues. ill The lii,t tall tf lie yea tatlher tlal iii eleuelil.kle. itiii-tiuitrtilule selurut. iir unseid U revi: se-eralitlenings iepradv ter ll,yiais K3biisslcuau-e IYp- slhiuul-leruu boultls suiAM s it, R lsliig Uliertwrilinig iially lakes seleral motithlis anth1 d s ela s hell iectl altl i Facilities (RUiFs) atid Nt,te Issulatute Fa,ililies (NIFsi: talt miarket. ulie sale vif sripl jilt 1 tsre Vis tills atiet- it a[itl Iaiinii: b-itt set-tint ifsi . RUFs are pitpuilar iisIrit- wholtlesale itisestels iii 1994 lids a selp il (lie righl direz - iturits il tile Mtala si,tii blitd utiarkets aLit Iae isotled im01 ilill i)etllitteil . tut i-It ohtirtet issit- Ieriiutl. aiutilily fi"iiiye -ttr1i-liratiiiii s -rkinug valilal re m-1iretie sit-. The idierwrittllel aLe is Usually set Corporate Bonds bet-eeti 75 Io 100 tasis potiits ab-e KLIBIIR (Kiala The orp-rale bomil sector is lie faslest grituilig seg- Loinpur litler-Batik (ifefriig Riate). NIFs ar. similar ti tinent of the E.st Asiait bytuid silatket. Tue Thai corpot- RUf'S - eseil ttlt,u (ihe> arle tllo tie isteuu. Mostl i-it- rate btuttil tuatket is taelitielY tint hill growiuig rapiilly. pitrale Litt is are isLsed tutu a bloiigiht le,al btuiis .whele Hisluolit:ally Ilt leo tw tu iti isstld by pr-Natte fi'iuts here botl,ds issued are udlls suiitseriiueul ls a priimary still- mulshyx shlui l-leriti plrois-tt is titles aIt bills of -srilier wi,hi h i .irti sells these outids to eligible esi- lige thlt uele Lt-ir-talitId bl t-ttilelutie ialfiauks. i,,,estuirs. Eligible itlsestaos aire tiutse tlhat qualit Prior lo 191 19'!( . 1iii pblh Ily iutianiti-s autyl v-yiii1aiuies Udller Se-itwi:3811 (fIB(c i if e tuatiie.Act if 0(65. isled1 tutu the Sto,k Exk chL tiuge tuf Thailand (SET' were Thus. the s-I iiarY silst r Fiberls-tluSiilly filltuatial usih- allowedi to d o tLid volt elueliyN (lie tiou..iber u pli-i- latiOills--il elrul t. itt-I ait oiiider-rilers. Merlharit tate sectytr isses wa-s itlite linlitlev. Hlouweser. alter -te hainukers pily alt imup-uralaul rule iii sile itliiuig tIle vital. -nuau:tilent ll the Set nrities alit Esehauuge Ac-t ill Maiy 1992, litited tiiupautues wert ailuusted tt issiue dtell- In 1986, tue Mualaysia,t govr-uiniet lihelped labuilih (tires aliv situce thleu ihilalifietd aotituatuies h.ise begait to Cagaiunas Berhiavd. the Natitmial MNirtgage Curptralioti. dot YO. The solumile if tet is.-Les bt tIhe tuurpliuale iev- ii ali eItorl tit prunithe liqi idity to fitiarcial imisliltutiyuis lni rose lieu efovh s-u- 1992-94. suitpasinmg lie slati- thiat put tide it.t..iig hlialts atid to ensure a vOiiliuaulus etllelrlIise is.latice. stililuit if mritvurgaige furnvs. li a relatisely shvrt time. Cuigainas lias eslitlisiled ilself its a tiluajour player it the Public tlfefritigs if holiis ill Tliailandi:i sate tv ulteet set- douuueotiv- b(ttI uilarkel. Its soltilte OI btutd issuIes ia, eral requiiremienibs, anthd ihe issue lioi-e.s is bvmilibler- mtuove titbn qluviatirtji-ed oser 199t2-it4 (see Box 2.11. soliue. The issu,er tas itt satisfy SEC u rileria. stitielh are itteutyeulM to etisiure that the iss5icr has estericilie ini the 16 It is c,timated tatu [irivate apital requirernenit in ally oliort-terrir... i'iin erv'al paper miatLurinig in less tliari Malaysia over the, inst 25 years -II4 be aiioiit 1M 6.3 onie year Loiig-terni mi:iirneriial papter' )nrrtraiir ieo of trillion. [US$2.5 lrillionI. Trdiitional hor-iisrgs anid vii to three years) is also issued. althooghr to. a less.er equjity financing are uanlikels to oati.,fr this ,iassir e extent. Ciirporate boinvd issunaie is almost tion-eisteirt level of in,e-ti,nen andi therefore bonii isonc ill becan-e of tIhe Grporalirin La, wMich rev1ni-e [Fiat have [iiincreased(ranrritially. Another ]inrg force f ir billd i-sranies be ippiro-I ii fry two-tinrEl of (lie share- Firriv usoinarce is priiatuzatmoru if state eunterprises. Iroilr Miiile iouihiseri-ial praterrihe onl, rsi[iire Over [lie la~t -eseral Nears., GO0M luizis bieen, an [i,I l pro- ap i1 ico l bii tIre bovarvi. Courp-rtc issuers get aroirri( urrotiirg rriatizatiorn: telei'c roo iurrisatiorr. eletrwiciy lhii restin-tiiiir is, I-issr g Iloig-teriri voimr ciejal paper hrtll.iighi-sys. any 1 oher UItdts snl vr ar-e IWIerig isib'ri. 1i effect, a biiiril issraUr'e. Witjhl a rmori-irises t- pri,iatizeil. In tIhe ftrinre. these ne.s I pci,iat izeid enter- irierit grade so- reigri rat rig. Ie vorporat sector in irises, will biecirne majo,r issue,rs iif bordn,s generalii I, rrimitevi avNe- to inirerriatir-iia finranicial marketo. How,es" erblie-chipi cirporat iviii snch as tlire Corpoiiate iSSniariie ini the Philippinnes is generally urn- Phinlippirnes Laing Distance Telepihirne Conipanry anid tire ited to a iranrdfo if blute-chi p cor1psratiorns aruvd tire ,u-s- San Migirl Cvr orioatiun riae bieen ahle io tap) foreign capital iiiarkets, mnaiuil tirroighi Wilhits issues. Box 2.1: Cagamas tis rn-rt ii t1986t - iti Btirik Nega-i Mt~A.-i (ithr -cia i ru-ei - ,-riciri ts- ii of is i-ii-aii t{aiiii1,g Ag-rici b.iarku. 1,rriiE(t[ink-. tiiii tEIEiis. aiiit, riE-ciai Naiiv has i ('irtE 4. A rE-It Pt f-or itt 1,is p.r. ti,irksis rtstti. vi, BtNNI trr(ts i 201 [iv- ci st.irC Atii ll,,gtl,itEE[re-iiri-. Er.. igirtilIrt (.grrna ir.iiaii t1,he -((an (it it 5. r -. itarC th O ltE it E' - ibdii(iii ,(tIiriTii- in t[CsIE (E a .iEtr-(II-i iii- - rnitir Er, sit- ti-ian, .Ii Inniiiig it i' E '-((Er(ar tEririrs -.mpEii[5-r EiEiEn- nt IINNI. tIc, i A,,,,, miiiin (2 Btaks to Nttiai--a It(c Asrri- i'rrr i t1o cN,.I-IiEE IlIr Cocuur 2Nk [S ce- In, Ih ihu..rorar... ,ig-i-nu ~C10s Box Table: Cagamas Bond Issues, 1990-1994 iht ra tA Loii(Eir [Li EEiEId g lhiq-tiri i'r iirt -iEtli t onEiIIiIEE '(. (RM1 mnillion) lrrsno ,mir rn'ri-lgag ri ( ltiE -.tirrgli siiti r....E ri-c iI iE([Id r IE O iier d(IEEE pIIE iE (ir- ... s, 11.. io I .at5iaE i ....... i. (r( ~ f- ((thC, furn reat Iiii'ri((E.strIE 'EiiE.iEEE E th (FC - [I 09ii 400( - - - 4001 Crirircir unt .,I ItC I I,- slu t ui -csirt(((i 'Ct -,r-cr (((( 19'2 7511 [[l365 - - 2JI 5 i- rIE Ilt, iti -EE i...... [(((5 ((h-C )'nr''t [IEEEn tIC, -.I, ( I 1)1 hBOt 6r7i - - [.051) FII(sEI-n (rs l ,n to .girr rrr I i'r .s ty Fri tIc, rrrrrr'r Ii lt4 4.7 301- St(i 3[I 5,321i S lrE C isIEE C((irli ('iliilE ha.1 (-511cr VN1)1 [,I rli hniir ri r,lEt ri(r--n'EliEgy itrrru 45 (Cr1, -in r 1(1 [ rI,. r'n(Eri -I ((-(F (h, (EEltrl tE h-CC (nl I rr I 1 'lr, FEE t.rl, f,I itr,t ti , ( picy l-ki nickel. Nd'ui-rFrer rai't, ((rF l,,, i r r , illr, Csrr 3t. .i,7ar) Ci t ii F((IE sCI t :_ rn [n(IrI.... il, -.iFr (iE-ri f-rrrr-sir- a" LI-, airit ftuirrr",- rare, Irrit. (egE 6rr ii rr tirit &LltB( it'ri,(.i hirrnt (ECi -'l Irs' 1F rIC-E itril Ilie- [i - .rr ErI a Birer tuk Uffcrrrg R.EIC lie -,"(ld. StrrilrEEr- -rtr -raEk-g-gu.iiirn'-d I F 1 r rTi. -'11 tE- ( I lE)it r .1rt tiFEr sIi c -- Er 4 . rrle t ias' -tith ,EE ( I (le itr A (- c I n-,rr itii El Inc - E r Fir irmtr ,ok,i iin Iltinc -e lr '-' -. T'iAnlig (rap-E IF, ~lC[E d5El it-, (sIrt- ac irE I.-(1 LEE [(ls I F (mnrE' F 'r-Fnnuog )n.ue -rIIt (Er (till1 Fril(E ii nr,(ic-c. ['re, rI-,I ~ Irrt 1((Iri iEiit [((0 -i Cill, gEEse p I. ,-- - igl rrr- piC-rie F-- I(a itmu- ri,, r d C5gEE lI .-(1tiC l i- r 51i ,nkti. tIl l .E5E i[[i . cirr ( T(arc Firrscrft I kurr-i i o-ir nrr eliE t, C1lll.EiiEh E -., ,,s nsrt ir t I1 tir RNI h5Att F1,. rf shrs-tr'rrrI 5 1ECrE-i-ni tigiruas i.ii iiitti-het (hli i b (Er Iturnu l tim, s p[r - ,lrr - tru kit-r -c-rir, . ih C ,) Imrg-t- pre ns-ri ..... gagi' 17 Local 1I01nd issian,e iv Homig Kong co ilpanie, is In Indonesia. lie Fisl praivate sector bold issue ,Was hampered by the profits tax on interest earned anld the brought to the iiiarket ini 1988. Silce 1989. there has stamiip viuty. There have been n1v fir Be loiieslic cor'o"- ieei all increasiig trelid of privale bolnd isstialiee. io rate boiid issulalices tv diale. ILL recent years. [le alLIIl- viate. tier-e hale be,ii 26 privs,le issuers aetive on1 tile ber if illtelatilli i( boilri sfferilngs dai iifeign L ...ivs listedi bsI iiiarket. an1d all estiia.teri 50 iii liie prvatle listed Ill file Hi-.iiig l\llng Sto,k Exihanige tHKSE) hils pla,elitelilllliid iiarket. A lttal oh abol(l IDRi 1.4 tril- in-reasevl draiiiati,alls. 'rlie Hoiig Koiig gui erilumienlt hiioi has been issued in iirpolate biiiiids silie 1988. iios granted ta(s iinlCe-ioii llS i leslirS iril ie hI sisof Corporate Woild iss-ianve hals beeii liaipeceili secer- nllitilateral dev elipmieiit iiistititiOii1s i.e.. tile World al regiaotoir rqiirieiis sucih us glioralitees. siiikiiig Bank. IFC. a1id Asian DtevelopmenI Baii) I y lvirgiiiig funids. aid , b a leigii> nd I iiiiibersriiiie issuilig [lie stanilp viiits lax aord lie payment of the profits tax bii . rv iess. If anl issnier .ialliot [rIsL siLiffi ieii coillateral. iilerest payable ii tihe Hoiig Kong dollar deblt fferle tie liiilI issue i olis bii le gnaranteed. ILL practice. by tilese ilnstittliissS. In 1993. tlle vilie of inlel-riti(ioi- hiioner.n it is av defav i lieijlresielit that all noni-slate al Iliid offeriigs deioiiiinated ini Hiiiig Kioiig dollars se,itir issnern have siiffivieit colilateral backing their iilCreased li 11 US$37 iioiiiui. a fiveflid increase friiii bvoind issues. Eveii thoughi regiilatiiiis are (lot elear liii 19)92. ILL tie same car. fixe seali clil panics issuled i ivvail art IZ's a giarantii. in tic ile, le link aicepl- Honig K1iiig vollar bI 1, iti tll lica i iaiket. ahbl glialtlian rs liav- ieeii lie slate baiiks. The iiiarket pesl-< es stale laiiks Io le highi Cild ir-vi t h ii l illne of tIle fa.cti at tlhey are loiwied by t(e gill ci- The Korean biiid ii macket is the largest anling East ielit. 11 the BAPEPAM i(Capitai Mackits SuLpervisrle Asian bonid mlarkets-at tile elid of 1994T tie volIale of Ageiicy) deeies Ihat the (ollaterai iiffeed r ii the issuer iiitstlaiidinig bolsis stodiila tLIS$i161 hiliivi. oc 42.8 ptil- is snffi-ient, Woild issues do sit ha-e to he guaranileed. cent of GDP Hiweier, lew issues ire brouagilt I t[e Boiidv isu.es that ar. lot gLlar.iiteed requlire a siikiiig sic oket fteni at adiiiistralteis dletdermiiilned s eis aild fuiid. ilvo ser. the siiiki,g fLiIi is nitl StrL itred in a lIe issue timinig is also aliiiliistatiiei gFuel-led. ri eitiiinal aas sr that I iids are redeeiiied prior li essell,e, Kireii b10rld isses aillie vI iewed as illo iialtuilrs Ii lotter. The egiiatiiiis require that siiikiig liarkages lilsteadi of iboids ill tile ltiadililt al sense. funds iie se Llp ill tIle foiirof rlepssits kept witli a lesig- CitrIsoratle liid issies are Liiiiierisrittlei Ib a s5 n1vIIiiitLe l ilter state lbiiik at ieiow imarket rates. whhii ihicreases comtrisi,lg seviiritiis colpatualies, ilc Iiait haiks. the cost fir tIle issue: The capital iarkels law also iniiestiimenit el clilt es. aiirid other fialii ial iiislilt- pla-ce liiiiitatiiis voii iialiiriti -a minimimiii if i-ieut lions. CIlporale se,uurliti are flvilelioae I- iiie-Mial mattiii is relilired. Tie high iiist if issuing ibsids alli hatLks, ilerilialit iniiks. ,,iI stiii-k-briikiiig cliil1ipaii-s. Iln leligtil issnane lIsceiulC es IisuuILiagc .Orloiratiliils PiUili issLue of 1leo bonds replireis the p-IlliCtlion of a fr ii issiiiig shiii-lerun boinds. Aniitheir imupediiiment io prospevlis aloiig Ile liiies it t[ie pispt,ielts reituilie- crvl1)1iale issileis is tile high aii-ili oiii in tIe doslesti, iiieits iif tle Ciiiipanies At. 'rlie issuiing i orpn-atilil miiarket v-iipared itl thie rust of raising fuidls in iitler- siiisumit a securities report aiid a prelimiillar iiatioi,iil iiiarkels. Fr hIis reasonl. miam lIirid esiaii I or- prostietous li tlie Korea SeLurites Supierisore Boarid. poiialiuns indleed raise filiild i iintiialtiiai capillialmr- Altiihiughi interest rates viii ourpratlue bolhids o it Ilmaturi- kets aid s p tl, e tiproi-ed into Iiidoiiesian rnpiali. ties if loire lualu tou sears ha-e heenu liser-alized. tile Uiindieriieiter s LlLaliv absouris the bulk f ilie issues sillsce Ini Singap.re. corporate sevuirities are floatedr b, c01il- it is generallyv hihficiit ii self these bl Ii ls ii t[ie pubbihi. ierui.al baniks. iiies iait hibaiks, and tock-brikeriiig Alsi. [lie iSuliln,ce aiiiv iiiil cavi ointlith is v 11ntiolledI hI ,miopaiies. PLAilic isstle of lew hmonds requires tLe tle Corpolate Bviisd Covirdiilatinig Coiimmittee 1f tile puiblicatioii if a prospectius alolig tile lines df tile Kirea Seiirilties Dealers Assiuuialion,, ele thiiighi tIle irvspeolius reiUireslents if ile Cioumpanies Act. Where corporale biiid is,i,aulie is. is ptitwipli. Iib-eralized. Iirlds ar,e sItulured air(i issued piirsaiit tIo a Inst Piiir t.) 1981. Ulu-e exisled regullato,l gidiaii-e over dhecel. tIIes Must c1li1pl1 Witli tiiiILrst deed reqluire- the Illaxiniiin i-iiiipOIi rate ii1 ) u-isr1nuate bonid,. nelits of Ole Coiipanies Act. For a horeigii issuer. suit- Cuiireitly. corlpsvrati issiers are fee to select siitable ahl]e arrajugemueit,s iiiist be aoide ful a payiiig agent lii c-ouplon rates. Howieer. t1he CoLIip0ii rate has to hie w ith- Ile sitUatevi in Siigap.iuse as iiiig as lhe faiiiihs are uiLiot- ill a ha rd of 2 perc-loage points fiuiti lie hose rate. ed ..i the excilaiige. li eniiable ioid-ii.iiders i8 Sligapiure 1tl be paid pruiptisN. The iolnvl issula-ie 18 markets il Singapore are domliniateil bs Asian dlllar (see Annes A). lio ever. it is iimportant to reali-e tliat bods--al lie eed ol 1993, ablit 98 peeilt ofall .. ilt- the riioot freeruent tranisaelionii ini [hle iniluitrial eoaulitr stamiliig bloridis were Asian dollar lmiids. bniiI ii arkets astir 1 lei,hiilinark goverinieni ecnrli- lies Imlieeltir familiarity a[iil these seII Lrities. theil State Enterprise Bonds riskr-fee status. suid aiiarket dltefiiiirnel prices. togetlh- Unlike oilier East Asiaii toilnrine. liitonesia rep,-e- er wi[it highis sophiiStaletl suipp)ortinig iilrastirLeture, selrls a uniqilae (ase LIL [list [le goiseriiiietii ha- beeii fa, ilitate travlinig. In emerging Asiai blind markets. altogeIther ahseit frim (lie prilarn markel. The bal- secisivlarn market trailiig in a gi,en issue is typi,alls surerd bndget law adiloiled in 191,7 per)cnileil lie gpi- ui ye slIirtly after offeriig. iitl spre.ad- ,iilling erimiiieiit friiiii isisniig dellt se,iritie. ini vIii-i .,ec mar- q1iiLkly. Heiiie. se-riiilar miarket aetitvh rises asoi kets. Slate-related agelies are able ir isse leblt seiiLl- fals itliurliarim miiarket aCtiity. rities anird then duin,iluae lie iarkelt. 11l the 47 6lionl isetlers lo hille. 21 liie ieeii state-related agenlie-. Figure 2.3: EastAsia: Secondary Market aCClilti og for aliouot 73 percent of1 tiital iel i-ied to Trading in Bonds, 1993 date, and aiotliuer three has stalte-ouniled eititie- a, (Average turnover ratios; percent) millrit sliareli.ullders. Foa [le first f,-e year- iii the 60 biinud market. froii 1983 [vi 1988. tlitee stale s,tu ir issuter-, levi Lyv Jasa Maiga. acioiniled lier all issaaiie, of fi Lel iciullue seitiiies. * - 1In ThlailaiI, Ilie goi eruniletiu stuippei is-iniig -iil- 4 0 ties in 1990. In early 1990. the RTh; 1eiield to increase the role of the irk ae -e.trur ini fiuuaul,iig mas- 30 siv infiasmr-ortre investment liit -ll lreqiiredl to susiain Tlailarls, high grim h i-raes Fonrtee-u large 20 - publiu utilities aoln itluer stati enterprises. sal.h as Thai Airsa-. Electriilv Geineratinig Auuthlrilt of Thailanl. 1_ asn Telpeilione lrganizatioin ofTlilaudl. a illle orpoe r- atizeil asud their ohare. iare li he isue1 it) vuiall iuiotsll- 0 ieots. These eintelipries are eliiOilagevl to raise fi 1, HKG KOR PHL CHN IDN MYS THA SGP iii dvrlne.i r markels thourighiIu bonul ilaoue. As a resi It. Ille ize of thie state enterprise fooul iriarket m it, [5uiis 5,, i'{U is iis/S icu; i(uu[cusu. inureasevl draniatlwall, froom USS1 700 muillioniu iii 19990 to t ti,iu,i,ug i LIS$7.6 billioM in 1994. THE SECONDARY MARKETI' I Ea5^t Asi. as. iii invlilstrial Hioiuirie.. ilbol of tlie tr-ai- o gakes hulave ii, on er-lie- iiouultr markelt. altlholigh A isell-luntltioniog .ercindar, Iumarket not olns reqliies luioid. are in general I ietei on ese-haliges in these voun- a s0LIFId policy frami-iuiirk hut alsi oei-ils effiL lent snip- tries. Eiluhanige l istiing is largely *ieieid as 1 ellilire- porlling iistituitiial infrastrin ture si ul as market- luent [i idsileiu the iuisestu,r base auivl enaliuice the based hcuob mnarks. oell--apitaluzled muuarket ushekrs. a,veplabuililut of blondS as iulutittiuual mi-ilet,irs are pro- effi,iern clearing anil setllenuueiit rss diins. verlit ratiiig hileiled frol ilisestiig ill iilis,te securities. The pl,e- agelvmies, liqiuivit supports. annd cenitral inufoinuatioin ilmiance o'I OT trailing is mainly dule to lie elatis e systemii. East Asia,i .iiiiries are in Ilie pioiess oit e.ase of travling siuch a- nlo set miniliriniii tradliiig building oeia iiiarkel infraslrne,lre. H e-evseu, - amauiuuis. less reirtive trauliig limes, asid faster sel- on-ars market l-ailing thus far Ias beeii spouavli ii tleiiieiil. For e...utiple. irliall all tradliig ini Korea East Asia IFigUre 2.3). Houg Kiong auid Korea ha,e rel- takes Iliae , lii thil OTC suarket-919.9 perelnt if tlital ati sell mire a msan nuarket iufrasrrtmie.-Ioi trail- [iadinig 61 199)3-e-eli though onore than 89 perrelit iif ifig iii these riarkets has beeni ouuiue%Hiat msore arLi,ie ilie livirld oiitstadinig are lictev oid l Ilie Korea St-uk wili t Itirnover rates if 58 an1l 57 percnril. reshieitiiel! Es-halige (KSEI. lIn Mlalaysia. tratlipg takes pia-e onu iii 1993. Il iuIuistrial otswu! bsiIi iarkets. daily the Kuiala LUimptir StL,uuk Eslihanige (KLSEI atun oU [lie tradiiig soluhnies typiialhh rLIll into billi ..s ofvf dollars OTC market. Br1 A tradinig Ol Ille KLSE i.liz ebln thii 9 because tn1it 24 corporate litIds are listed awhile gos- Bujy-and-Hold In,vestors. Ilislitutlionial in-estors ernimiietit hinds sire tiot listed. Ceagarmas bond o are Itad- such as the ontitractual sa,itig sector. peinsion funds. ed riser the tt tilner. In tle Philippinies, governiteCut ati( social sec ii.rity schemies are the domiuianI Classes of securities are tarledi Ithe OTC riiarket pin, bv 24 accred- ii'- eslors in bitnIls. In East Asian countries. all if these ited gottettinenit dealers ..i..st I of cient are tnitisetsal inseslr Classes tend It le bius-anid-lolrl innestiirs who banks. st.ne ilvestinient houses. aLil a gtnneti t..e.tt-t...l.d mininizii,e nijsinathlies in, maiurity of their assets and development is btik. l lininlnnesia coading is Confided to, lie liabilities. CI.i.itraclual saving itistilutions such as lie OTC itiarket. Si t-e bIlimd certificates are tearb6erecuirities. (CPF in Singapoure atitn the EPF ini Malaysia invest in there is tio comlpellinig leasoil tI trade thniughl the ling-tecil bondls for the express pufllise of hoelintg lie esihaige. eteti thouigh i ere is nl, charge for bond tradles. boitris tot nuiaturitv. Singaponres (CPF hotils about 8(1 percent if gitseriitnienit securities aii1 is essenitialls a Impediments to Secondary Market Trading buy-and-Fiold Iype iusestor atid dues tot engage ini The iusliitutiotual aotd policy limpedlitentus in the way of tiraitg, while Malaysia's EPF holds 50 perceit if Iutal rtibii.t senildilary tiar,ket trading are elaboraled uelt. outtatnuling bontds aud it s also a bti-auid-lihold investir. Social set ittil shlelmies anlit Penlsiont fuinsls (for exam- Insufficient Supply of Bonds. Lac k of a siufficienit ple. lie SSS andl (SIS i Ilie Philippinees and the Social ititiber vif is.sues aniil relatiselv siiiall issue sizes iiiake Securits Olganui-lition in Thailatdl also tend ti hl bILy- it difficuilt fir itiarket partitipaits t.) actiiely etgage in aral-hold tivestors due It their loug iiivestienit hun- sei:iundtars tiuarkki tradlitg. Iln secitndlarN bonld tiarkels zonits. )1 a i this sitiiatiiin ha.s. however, beei cbliag- of the indu-strial Countries. traldiug is farilitatedl. it ai lig atnd contractUial sa,inig insitutlions are beinig giveti large estetuL. Ity the availability if a crilical inass of piv- sore flesitilit8 iti their asset all ationi. For evaniuple. enitiietit se,itiiies ztis:l a coitiniiiuous supply pNf ie. underie totisutus >f the ne[E At.lie pripi secuLlities. In contrast,. lie East Asian gvterIltlielits of aunual iriiestible futnids requiredl io lie iniiested iii (es,eipt Chilia atid the Philipipities) are douisiSiing their Malaysiati (k-iernitieuit Seitnirilies was renluied firotii 70 borrowing priugramls slue toi fiscal surpluses. aiidl iti io 50 er e pir. - iddled Itat tlle itsltanlinug atnoitu of solile CoaLnivies like Thailanid. gilveriniiienit bomud MI;S does iiot fall bieltw 70 percestl f EPF's cumula- iSsliUance liastvas.el. The lack of giive r....euut securititis tine inuvestible fuinns. Iln Singapore, lhe gouveruiuuuetut has has benti substitited (Iy the intcreasing amount if tir- initiated effotrts 1tn open lhe uinassagenient of CPF fiiids puirate bimd issuies. bui they i have inot yet reached Ihe to prii ate urtflessional matiagers with i tcreased aulton- threshold required for seconudanr market trad itig. The onor in iiivestmeit ilecisdiinmakinig. siipplrVt coistrainit is riotted iii several relateil issues such Lis marrow defiiititiss if etitilies eligible t issuie Lack of Markel Makers. Market maknrs are essen- I(utIls. leiigtltv prvostpectius aoud issititg prOcedur-es. lie tial for slitie seconday mtarLket tiading. Twi issues are absensite if a stieattilitienl regi-glatmir frameivrork, ald vif illtp-rtatl e it (ilis regarl. First. liqtidily supports diseriminattrs tas,ation oni bouds. To fac(ilitate boilnd tmtust be prosirlel for market makers; antd seinild, itiar- issuiance atid iI eipatid tFle issuier base, it is Critical ket ntokers shltil lie reitiiredl tot maititaini a uminmimuim that these issuies be addressed sI part if the btud tutor- (apital base. BTpiallv. biuld ilealers niLit highly lever- ket de-eloiptittit plani of Ilese countries. Iln getieral, aged viperatioits anivd their iinentirN uIsuially represenuts the issuiatice ilelisiot shouilvd be left 1i lhe itusirkel par- a large ilitltiple if theilr tapital tase. To finanite these ticipaluIs as loIg a. tilhey i lieel ie ri..uplni ...e.e.l.uire- large itveuitries, deale-s rely oti reput-iiase ronit,alth utients. 1In several cilintines. lie titiitiber of issu,es aoi or REPO)S atid to a lesser eteiit en blorroiuings friti totau fitluds t vii call be raised atre cosntrlviled bv regidalbttrs. baniks at dealer rates. 1im inrdlitstrial rounitre bluindl mar- kets. titarket unitkers are providleil liquidilY Itltughi Itt anlnimou. btitdil issuers have tI follow tle saite REP)) miarkets or ceitral batik redisttIuntiug windiws. lnngthlt procerlures hun each tuew bstir issIe. s hichi But in aliost all East Asissit uttarket, Iliere has beeti a increases tIatisait t Siut , 1o t itidnustrial I'oitiltrieS, soid i Illiis regadrl as moust of (lie dealers ale riot mar- especially the United Stales. lie itrodueli:iin if shelf ket utakers Ilue to tie laik fdlealer fitatinig facilities. registratitt Fias greatly facilitated luid issutatuce. East Asiati regulsatiors shouilnh seriotusly iotsider adoptintg Clearing and Settlenuent Systems. Elfective boed stilci procendut-es. At Presentu. Koirea is the tunls East tradiutg dlepeutds on reliabsle and esperditious clearing. Asiasi tutunutrY with a shelf-registratiott facility. which settleutueit, aoud payttuent systeous. II some East Asian prov-ies blaniket approval fur tContiututnuuis issunatiie. ouiutries this marsket iufrasructuire is nut yel fulIly in 20 place anti traders uno a iariets if risks stall as ouln- ini iiii.iiltatji... with [lie Hung Kong Captital Marketl terparIs risk. fraud, ant i itiltipll trades of [lie ~anie ass...iaitiri. a secur-ities lending program furthe pril ale security. M iatsso tluc as ulelivers-ver,lts-pat- secto-r ientrtrnierilts bilged in [lile CMkU. This is intend- nienit. pa ei-indi-iei rp ;i central &ileisito- Ac i tinc-an,te[iemarket liuridiut if[ibepririatesector rie, rtli,li fiirii til iiipiirtaet eleiteint initilie settle'irirt CMtU inst-nifiin, tair this iill help atoLiIale seuondar% arraKengemen ar-e als esetial fur sell ritars' market irrarket transact ioes. Fitialls. filie CMU plans to) des eluip [ratding actiji i, Fitrulearinrg anti settlement ststrsoI a real lintle deliteri -tersis-papll,iiiit sten.,1 in, 1996. fiuiitioisnee filr it is essential thiat safeguirarls lie Th, is alIItger-terrin i LjcIie for eliminating settlerrerit in [Ilact- Safegoardis buLilt into alit Sxstrutl fur liatrullitig rik. wbiril,11 a be effeteu ..ittle rthe irter-barik paytie,rit iiin-tiirs seriirtiea. either iii tratisfer or stfekeepirg. s'tstei unites irtio a real-tiiie grios sett,lentir rsett are rirpnrtarit l tIre rir aintenarnceof11 n1lilicisiolfidlerCe ini lie tdebt rrarke-t. It in essential that iiitlrIier11n, lelit Malaysia lion sito learitng oxstrts--tire KLirla iArisrimerit hldifiuiigs lie segregates frionti ie, proprietat Lirrptir .Stio,k Escianage iKLSEI and SPEEDS. ahu,h hioldinig if tile finianiiial irntlitrtitiia. or dlealer- iiitli cosst f Inter-Bankl Finds Transfer Sx st,emt (iErSi wirum iten-toro tire diniirg uinistes-. It is also Imprrultanlt andlSruls Semirities Tradinig Sxsleiil hSSTSi. [FT'S thiat tire salekeepiiig arratngemerilsirate prol- er lok Is r Ineii transfer ftiirld i tilie iriter-iatnk riltuie minar- anid baliars- built into [ie, oNterin ,Le hsil, [LIt SSTS da-leelop-iet fur lhutrlolin book- ertrt ft's trarisferrinhg strips. Clealrantie on tIre Kl_HEF Several East Asiairltlitritries tatl e seenl takning ste [to opt rates i'l a lil)A Nwal d,li- rx~ isisis is,rer -rijts of estabilishi lrgatri-dcil neural ilearitiganditstletmeti sts- Joan1 tItiks , ir tds arie dm sPiltsn iil-n to ire ,ieairig [elis lIn Honig Konig, tIre liqririitN of [lie Estibarge hIouse tiri'Lgilgit lie hirolkies itt eser irte tire Cohen". Eunrid Bill nd Notes Petigrato oas aitdetd III [lilel eIll- Clear..ing aitu -tlet rie-it of g ero- rriei-it boldltll, Batik oprien of air ff'it-leirt systeitl Itr le-ranl-e anti settle- Ne,,ira Mlalat sia iBNM) idtlls, anti Cigarrnas luitudi rlierutli 1v tIhe, Mtoretars Aurlutiruts in 199h4. As ruf 0111 tirs iii SPEEDS. Tire 1f5S transfers lurtdslieie Sepiterr ere i994. 158 fiurarilal irmusttilius, h111d bue,tire banks as -n11 as hueweri. tanks and tire eruntral bank. mrembilers if [Ire Ceittral MiuueyN Marki- Lrliit SYsteiui The SSTS. lii lie other hand. trntpletes b110k entries (cmLI. Mentiberslhip iii tire CMILI iv topei t [ all mtembuier, eletroit lval tiltn tIle, tranfer of strips. The strips. if tire Hon~ig Kiurg Capital Markets Ans-iatllri. atti)iruedl liluint ee rettairi1115 Ph, n,lI, arkerd in tire teritra bank. inritiurtionri iii Hong Kuurg. anti eserpt diialers iii se,ni- With [ilie iritrodructiuir If tire SSTS, the lorigrmeirt. vh-01 ties urrluler tire SetLiritiesl Oirlirna ie. Tins oe,,iye ,as tolls, reru... inig. airui tratisferif go-erinriti- btutdl. extendetd [It otutier Hontg Kong diebt loller INs [lie Monueta,,, Barth, Nlegara lurIrtdl. anti Cagainas iboitdl all oCUrur itt Auitioriet isthi tire inrtrotbd-tiri If C IU. The CNIU tee - sIriple- forlen Each rinicipal d,eaher or appro-leu deal- furirutu [liemrle-tfa.-eutral Iuutodiatnantd heating ageurt for er tmainitaitn, 1lul seplarate atrouunit iithi FiNN-its o1101 H-otrg Konrgdilolardebiet inistrurtnenrts -issed I% Isolate se- setuirities accounurt andl air aggregate Itsu,ttier,s acciulli or1 issUers irucui litig certifticteS Of dele.11oi. t-oniorrer al fur se,iritie- lield li lueluall if its, tiru[. In atdditionr, pap,-v arid boisdlt airri is oll,rlttd isv rIte Muiletact a tasl settletert artorif is aLit tt-irtairuer ir [i BNAI ALuithitityI Flire tratisfer of title, III [lie irtrituerts is ii fute [lie settlei,rut if,selureities tratleu. inculudiing REPO iiouk-enrs Iona so that pliisi,ll diehiser us lot requiruedl trarisaoitit.urs Setl-enuert Isafe-tetd auttomiatiealhv iii uturul-uthtin ruf [uatde four SSTS tart icipsants. Tire transfier tf title is effected tihrouigh i comipurterizedh luiok-n-itry systeirn Transfer i~ effectedl iby lie mratchi- The adtIvotie noun iii Ie, ilearling a11d setlenliiiii area tig of iristntetions fruut box cro anti sellers. The C~NIU LI Iv [Ire i ntrodluct ioni of SPEEDS ailnd riIIs treadling registnr is upriatild with the receiput a Ju miatulilig uhf hoi Iritiistandinig. [hue aiieii of 'iii organizied atit tetl- transfer irrstrurLCtiuurus frulitj1i-latiCifuarul ill tIre systetti. tral bsontd uhearitig liluru- is raniperitg secotlodar liar- Pvolitiont repi)rto are issurev llirffiuurtt, anti rmemtbiers are Let tradnirg. It -soddu he adunianageLAurs [Ii huirrla -l ettral psrovideid inrfo rmiation cuirie-n ing thteir (lax -enld Ilearitig brn pusrd bN [lie ELSE or a perisate oculloUnits ii [lie e,enit that tileir Zitlliuiis late a [fits- oreganizationit. Altertautirelx. a privati-et SPEEDS actitun tint a parti tunlar ulax. PoxN rig agents of tIle, i-suer sinuturld he torsleru I mm-ummIFI [hisi f'uilnoulr. ore adlvisedl bt [lie CILJ of tire dletails of hoililers if its debt inlitrwltenits for- tile jiripulse of pat mmelt ouf interest Thailandi lias (Inselpedl dcripless clearing anti settle- a,ir ruuedemption (If priuncipal. In addcitioni toi e-talloin- merit stotetms file I fisti euliti aitrl lIotnd itradirtg. riig iriternirltilsial linkages, tine CMIU sAla [iivll deltuil. Settleirmeit is donte bx tIle, A-sociatitui (If Sevurrities, 21 Companies, whiiich acts as t[ie iiarkel venter thal liiks ciiotldiai. Maln foreign investors are, by statute, all dealer, rith it, rn-hie nprri,ia-ter-s Iii fri an hz Iron- arredl from in-sting iti phiNsical bearer seurities. tradi,rg network. Tire settlemenit is a T+2. secipless. ihile oiliestic investors larefull'V select a iistloiair rel-clearing balanLe systervi IIrroIgIl the SET's deposi- lor thei rearer papner: A niumber of cristodianis lave tIrry facility. PlICe-h e Ilnnrterl daily nil tIle seCiIi Jiary 'nor- takei, nit special mrsmararce agaiiist tIrie lss of bearer ket are iriterirledi lo reflect trtie deriianid airl sippilr rf bonid ( erlificates. Sich iirisirarice pror idIes inner frrr nj bonids oir tiiat dar t arr-allr IDR 2 billirnrr (abolit US$900,000) per trairs- at Lnand rei-qiri- rer-airi rrl)evlires [yr be followed Initonesia is ill the prrrrress rrf irtrdrlrci,ig a corrlpriter- dlriirg deli-es i-ed -learig amim settlemiienit snsterrr t. replace its rirair- ial svsteiir. The rriajorilr f blioids ace tradled ill Ille Secirrilies listed ri tlie Philippine Stock Exclrarge are C)TC Iiarkel, arid settlerrieri take Ire in a nro -tn- M.carera thlrrrigOlr tirir rlearinrg baiks. Brokers are oire basis betieeni LIe prr-ries ihrvrlserl rirl frlrrws a reqruired tr withierrre sitliii a fIIrr-dav settlemirerit period. par iirentl-versns-del i cci sy steni. Pavnert is rrad,e I.' In 1993. I ha31 k, rrpeated aIs trair-fel ageirto fur tIre -rer k -c Irairk traisfer. anid bargainrs va llire StrucI k frr issiance of certificates tr r,ey rrwersirirl Ihe rain-el- settleriierit aIrvlirere hrbetieer tlire day rf tradiling ard ter latiri nf certificales soul. Since 1989. g-seirimerrt dlaNs aftiel paly irnenit is rinardc ba sd a sen- rilies have hec- is soerl ini bonrk-enintr frrii bv tIle li tIne Par-sme il lle. hbi lie lack of cnrseintimr gives eutral hank. Starcmg ill 1996. all ernitv arn1d debL cise tin prrlens uslwhen orlders are filledi through muilti- irisirtiirerit traisactiois will Ie clearedi thrminighr a new ple traes. The delivery vf bearer paper for settlerineiit cleariiig s,sletii belig establishied wilit filnancial assis- enrtails two risks: tIe risk rf tlieft/1rnss nIhnirig tralls;prrl taiwic frrriii USAID. A cenitral depoisitorr will also be and tIle risk if firge. Market parti,-ipanits iavr hieli put ill place il the se- -r-ld half if 1995. anid air river- kinri,n i n hire re1litablC carriers I., enisur-e tIe safe sight -onriiriiitee. the Plililppirile Cental De1nrsitrrs,l1 delrie r of parcels of phrsi,al bearer secaritie,. recenIly frirmed hinsuranire is aoailable on ani r....ts it f arrfra iv US$1 ml- liori aisi is als]i ffleredi irnrrrnnjn-tionnn ith rlairkel Information Sourcen. RorbL-Lt seanndarY wiralrket banikinig brsiliess iurr.n liarci-e Irliie- trading hiiges ii h lie availabilty ,I r-eotralizeih iinfir- riratioii tin all miiarket parlicipaints so rliat brokers aTrd The hidnoncsian [Depnritorr and Clearinhg Agen-v seale,i rain prrrr i-le blind q1tmiles. Il iiiost East Asiai IKDEIt vanile intri e-slen,te e lo 1993 irirnler spo,rsorrlip -hinfonrnnilrtin infiastrtrnr0"'e is nv se-t in if tIe seI cri slate baniks and the Jakarta anld Sirabava place and, if ii existeince. is rundioneetaN. li idrlstri- stock cxr,larges. aiml liar beei practiiing nietted settle- al crUntries, ceintralized ilfnrinatioin soturces such as meet seriicees for shares sinice lie middle olf 1994. Reuters andI Blornriibecg ensure a ler el playing field ini Scripless tranliiig will be iritrrvrCell iii aite 1'95. ThIe lial all market parrit ir- irts hairve acess hr t[ie sariie sriime ageinvy is esper-eil tin start -eitrali-cd l-earing iinfr-,ratiri at the saaiie tuile East Asi- l ceglaltris andvh neller settler ntf lrlsy elnd-1995. hlnitiallr. shoulrd enciourage t[ie foriniatiosi of sLch neulralized IM issues rIinoled inn the BPI ,ill le includled and Miris sun ies Ldf itinfnnn atirirnnn ln far-ililtrte tiading atis ity. will serie aus a Stiilllis for issuer-s tin listl there. l 1i,e first inrslan-e. hbirid tadlig will slill rc based ire L-reg- Rener-e Remguireinentn on Banks. Commercirnal isterevl berare- ser-nrities. li they isrnln he i iiinnbi- batiks have heere a iiiajrr sestrir ilass in hbindnlr Iiad. iiieaniiing that to trade t[ie securities they rsae ton tlironngilnntnt t[Ie regioni as luey rall tise their boird hold- hIe lodged with lie KDEI. arid brokers vain tralde inigs tir satisfy rtatnntnn,v filirillitr reserse ieqiirereils. thirouigi their [;DEI arrnrrnritsr. Othelh matters that hare Thereforre. fanks d(l nit[ trade bridls for riehl inrai- tn ble adlderssed are sheltle- to adopt a registecedhbear- iiizationi. The inpaL-t rrf these irmpedimenits iiar abate er ssterit annd hurn tr settle off-es- hanuge riades. ill tIne future as Ern.t Asiail orintries rednrce their rnialndatrr requiirermenits on ianiks. Fo examiple. Safe ctnsltrd) sehrvies are offered lI roughly 15 large Trhaifarmi has redrlu urd its reserve requiremimeits to 7 per- haiks hat foumi parl flie vL-stldirlnIs rlssi- linltr i, nun cut, while i tIhe Pliilippirire rserse elireileits a unrulier of otlier hanks q1ertlirrg the seros i oru art were -crcreled frfiri 25 per-e rt in 199:3 ti 21 peireint in adllrc hbasis. Benkess dffer free safe curstIond services for 1994. Aiiolther relatenl factor is thrat sesetal East Asiaur their liertls, a service irairhsl rised h pivrate indhiid- counleiis do rot requirire franks to irnark-lo-inrarket their uals. All large inistittltiorial irsestors haue a desigiraled horndh pcnrtfilir-s As mi crinseqre uence. balirks are elucitanit 22 to trade boids, as trading niay incur realized losses that In the emerging borid miarkets of East Asia. horever. need to be booked as opposed to lioldioig bonds On a the devehlpoment of risk-free yiel(l vraes has been eost basis. If banks, were required to niark-to-miarket. somewhat limited in contrast to the situation in indu- they oulds more likely trade those ecuriries which trial cunotries. The prinirary reasiro fal tie ln k of mar- have declined in value. thereby rminimizirig tire alized ket-based g-reenirieirt veracity benchiniack. has beer losses arid investirig the pro--eel irr securities wili Arcl- the fart that rirost East Asiaoi gr-rerillenits, e-r:ept ativelv higih eapected vieldl. Chiula arid Irle Philippires. hrare not been ar tive isseiels rf lrolrrls. in view of thleir fiscal sirrplu.c-. Sirree mrrst Othler factrrrs ihat imrrpede se-irdary iriarket traiirig, bonds ate held to iriatutiy bv t[ie onitractiral savirg sri- such as the lack ofliqruid berrcmarks, ireffetise ied- tor arrd financial irrstitutioins serrrndarx iriackets have it rating agerrcies. anid discri m iratorv taxatiorr arr boinnl been slorw to deselrp. Anrotirer impediment lo estidilislhing trading, are exani ned in the enstuing sections. ben,rhrauk yield crlves has berrr the slrorl matririties of hoid issues For examrrple, Ire Philippirre brird rniarket is BENCHMARKS dominralter by 91-day treasury bills and corporate binds are priced off tlie 91-day T-bill rare. Figunre 2.4 illast,ates Benchruarks play a cnicial role in the efficienit fanr- hllerhomark vield ues in East Asian hond miarkets. tioninig of bolli tie primrar and tIre secoirdary bonin rirarkets. They serve a variety Of parposes. They are liaterest rate controls are alsi hamipering the efforlt tli uised as a bellwether to gaLage tIle prevailing inlelest establish benvlnirarks in Ciiiria and Korea. In Korea. rate striuture; the rrmarkets expectatioris of fatare tie Llse rf Nionetary Stabilizaln iroeiads (IlSBs) issueed interest rate miorvemenits, iiflatirr. and thie assio,iated by thie Barik if Korea Offers alternative benicilirarks. risk preiiiia; arid piovide lIedgirig vehicles fir sonie althoigih in a linited sense as tfie lualtarities of MISBs unldersriting arid tradirg risks. and tis idenrtifv that poi- dir iiot stretch besrurid tw ve,ars. It is expeteld trat lion of issouance yieldrs which pertain to credit or default Korea ill acceleruate its financial lrfrmis anid by 1997, risk. Investor, ins fixed incrun-e securitles are exprsed niarket-sased benchoiark-s hu-ld emerge with corin- to a aranev of potential risks' dependlirng vio [lie Ioal plete deregiulatirn of irterest rates. rI the assercLe of niarket cliiate. Tnie irrajor souries rf risk inirlde: (al governimirenit secuirities in Inldonresia moniey iriarket business risk (or risk if defalt): (bi interest rate risk: (I) i nstrarrrcut1Is i-iied by Bank Ilirdnesia, or bank deposit liquidity I iarket stability riskl: (dl puirciasi ng ower- rates are possible alterniative berhciirarks. Tire off- risk: annd (e) issire-specific risks (reinvestireit risk, rall shirie sWap ialre ih arnistler nidication Of fundirig cost rise, price riskl. GCi er the risks ir,slrvd nl fixear iicomire that criulvi ie tisei as .a b-lichir,ark. securities, tie availabilits of market-based bellrhiriarks is essential IO price these secLnities. In indulsutrial couilt Neertlieless. thIe g-iserririmenit, in East Asia hare ieer marakets suci as bhe lnited States. fised iicoie ecurities taking steps in recent years to deve-rp henicihmuark are prnced off US treasuar securities. which ar isonsid- securities. Fur examaple. ii Hong Krrng t[ie Monetary ered nsk-free. A margin to cover credit risks and other Auithority started the Exsharige Firund Bills anil Nirtes specific issue risks is added Z IO the prevailing yield iii program in 1990 to fi,ster tlie establrishlinrernt f da benicli- benchmark secLaities. Asailabilitv of a aiarket-based irrark yield cur-e These erlarities ace issaed rin a reg- berLcIiriiark also facilitalte developisrent of otier e risk Llar basis with up to 3-year mratirities andl are actively irrariagemerit instruments sich as futures anId Optiis. traded. ihe Monetari Authority is in the pji-ess of expanuding tire riraltaity sta 1 tareH f exchanige fand hills While benschmbarks do riot have to he risk-free, their arid nirtes is imo plarning tIr issue 5-year aritirs risk should he easily assessable. The definirng ciacar- Tlie GONI has helped sIrengthell tIe Caganias. whini teristic if beinchrmark se,urities i, their liviility lie.. row issuies 3-. 5- anin 7-yeac briids. narrow bid-ask spreads fiur large trades). which is- often associated with regular arid large issues. High lir;diiili- These huruuds are ar-tisely tradedl arid potelutially cani se ty enasles inuarket participantc to close Otut tlhei p(rsi- used as benchnuiarks. In Thailand. the slate enterprise tioais wilhout incarlirg large losses, whiclh make the in sector bounds rcnauld be asedl as henucihmarruks iyellur- ideal hedgirig vehlicles. Frr benchiniarks to le useful. aging a large entity sauh as ECAT to issue securities un, the sie of issLiance siould be large and cover the entire a regilar hasis across all suaturrities. Repackaging if nualtirity spectruim to create a yield i-ur e. IFCT (Industrial Finance Cortauratioan of Thailainl 23 loanis and [ihe oultstalnding govenirnent bonds illtO niew Figure 2.4: Yield Curves in Selected East Asian SeiLIri ties ou01d( also provide aijoihee avenue in the Markets devel,.pnienl of benlohiarks. In the Philippines. the governientli has been trying 1(1 lenglhen the matolrils Hong Kong: Exchange Fund Bills and Notes sirmcture in ani effor1 to develop benc 1hmarks. a hid: (November 1994) nay be aiked by the re,enl itridt dction of 3-year float- 0 ilg rale vltes. 8_ [l)/llO lF IR 1111T RI VHNGI'ING; FX [:IES." A key ingredienit vf bond niarkel develo1:ient is tl:e 6 establishment of a credit ratiiig hinlstrN Several Asiani coutnries have begun to lake slells In dvevel up domestic rati:ig agencies to Iv)st their bond miarkels adl ensilre 3-m4 h 2-mh 2-yr 3-yr 5-yr investor prolectior. Chii:a. Ilndonesio, Malaysia. the Philippines, atidi Thailand all have rating agencies. Malaysia: Bank Negara Bills The effeclive-ess of these ratii:g agencies tlu,s far h1. 8, e been. hwever. mised. With rapik grvwt h in is bonid rmarket. Ratii:g Agency Mala.svia (RAM) is well estab- lishevl and lias beeln aLIccessfll. The Thai Rating and 7 Infirmation Service (TRIS) is relatirelRy new, LIti has dlone well in stabilizing its presen,e in the rmarket. In 6 Korea asd hlie Philippines, lioaever. raliig agenicies have been relatirely less effe-lie despite being iII operation for imiore than a eraode. The liidonesian rcal- 5 t - ig agenicy was established orily in November 1994 and 3-ih 6-m-h I year its r-le is still evolving. The key issues facing thle rat- Malaysia: Cagamas Bonds ii:g indsirt i:i East Asia are dis,iissel below. A (((ore (December 17, 1993) cormprelienisi e review of credit roatiog agencies is pre- 8t senledl in a ciiipariiio repvrt. Issues in Emerging Market Rating Agencies Role of Government. The role of g-verilmeni is cm- 7 (cial in fosterinig the (e1-lopmeil of bn,,vl niarkets ati:., espec iallyv. relit rating ageilcies. Il the Unijted States, the governnienl facilitated llie development of vredit ratiiig agelicies. thiiugli in aui indirect aoV,, bV ioslil:il- 3-yr 5-yr 7-yr i:ig regidaliinis that lvse ratuigs as a n:easLilen:.eoit vf risk. The Unilbfim Net Capital Ride is aii exariiple l of China: Secondary MarketYield Curve slch a regilatioii 1I ernergilig niarkels, le rIle of go' - eniiienil in promoting credil tatiiiig ageo ies is even 20 i((ore c-rial. East Asian goveriimenls slioild iii( ve F deiisiRelR kto eliiriiale th ile iiing ilulpevhliiients. su,h as gliaran-les. to e-uilre :iinifoir accourniling anvl Is diiscl1sLIre reilifirenlleills- arld t esiablish pruldenlial regulations desigoevd to eII( OLurage [lie Luse (f ratiogs. ..... These issues are highliglited bela. IS 15 I n5 2 5 3 t4n5 24 Gutarantees. Prior lo tire stall of iredlil raliiog aigeoi- p17iidedl i n'icllise for' issLers to, he rated arid roin- cers, go-cri-rifests hiad reqiuiredl that Ifiori issues Ire tribateed Ii lire twe-re rif UI rainrig agercir-e. lin eneeg- guwanarleed. lo Keona. bonrde were requ1ired to lbe grarair- iirg nmarkets. roses er, ilie lark if eopihistri,aled 'ie ct- tced uniil rererilisv. Tlis, has had a .iginifieont irrspait ori rierit rirlltiss anrd ilie f,O-l iha[ nirirs ri-liltitoiralicet invseelric,nt coitire inii tat Korrain iin-liir, eel ori griar- iriirt ticirsl to lie ciaeiedeill [lie isiritear-lial avie rgs ece- arilees rallier, thlan inreasrUring aod rmanagirng ir-esij risks lor niecesitate tliar prirririfial regulatioire lie ini plase. a, ,eser though thriee ratiing agencies lhaie biecnill oi pera- lIlnioiesia lhas dime. iiv pa-inig [lie lea perisuiion fi1d la.ii lion for almilrsl a decade. i Ir idlin-ria, lIre abs,,nrc of ratings hias fireds lie BAPEPAM lio irrpio-e strir ti goaar- Prufitabrility. Credit rati rrg. user uiric. r-air lie a pro..f- amrle, arii sinking fluiridr(iin-iei Te, irerilt ir as that a tlable usies Th rrurrli, p rrhitit set for ratiing aril Iiriritesl rarigiof iiiiss was bririghrt lo tiremrarket. Regoilatiree finraneial irrfor,roiatiorn -rrs ice isi-ririelastl espaniurnilg ran accelerate lie dleselrprirrnt of eatinIg agenc ies bry eljis- sloe in growthr in adebt rn.rrkels. Hirre,er. urcer ratinlg iiraitirg giarastee r,q1uirerrrriit iii liirin sris ageiri-ir are sesic-orrieiited eriterp,risee. lirei orinrime- i-ial Stiiiiese ilper l i Ilie ilerriariri for thleiror- is-es Accouniting Procedures and( Disclosure man lie priwe risers aire iliiiiig toi par. lIn itdisuerial -ruin- Reqtuiremienits. Tire abseirr of a ariifnirrrr1 set if tries il eisaini fur raiting urgenrc ecri ice, isfisi eral, a-or-e iaruig prinrcipile an Iproper sdiscirisire requiire- lisircd and alrrmcst all rating age,ri-ir hlare lierr prri Merine prices a serir oe tirrat to [lie inirtgrii rrl rel ia- tlable. i ncicgrgrrre iiiirrci.lme rrt blility~ if sredit ratiirgs. Goris llcrrii lcraell.r far-ilitate tie rIng agenrieis farct ses alcr rhallcniges ati -tablihisiiig thleir r'atinig i'rocss is iiiarlaririlg three rcnlitircrirte. lIn i-irirmeri-iali sabilits. Tires irir-rir hi.sse ii their miniial Eaist A~siar, uri-riuritirig proredu-re are. ii general. rieli veare of ir[,cali-r urtic ioiighig start-rip, ainid irertirrg selesrirped anisi are broarll) in lrie wisthr irnterrratirnalliv se lark rrf,siffi-n-uit ricoandi fur rating. andi a Iiririterl a-rrpted etardoerl. Thirrirrig 0irrt tire regiOrir. listed ruInI- nuirrbrrr sif diebt sie Err -sarnriric ini -.ianr erriryirig piani-e arc rqsiired to com1rlv sithi tire lo,al code if riarket., inny Inn rati rg ag-weriis-CRISIL iCredlit accoiuniting iroL-erlree 1111,ann errdarrds if pras-tire. Ratinig irforrmrationi Scm rns si f Indria Lirritredi annc RANI Ars-011rritirig p)ruim ples a I tirie -ntent of their s.norifirni- of Nlalay-sia--iiae rcer - urirfitable, hi ile ih, Pihilrippinie ty with iwrteriatrirs. al standarsde if prartire, rosirer. ratring aigeirce 11:11111 pretel ite fir't year- of profit. ini dereris o sirtire stage of dc, lirpirrerr of their firran,ria 1994 aftre being iii es isterrec fire nIOrc luaul a-ricadlr- nriarkete. Hung Konig, Sirigaproc,. and hrlaias sia liar e tine miost dlesesppid aecorrirfirIg sVss1crrre. is 1nch arc rirlisil- Comipetition. Aitir tlire -septioir of Klera. crnrermgri tenit is ith Initerenairnira Ar--,.irrritillg Stairraride: ai-i-riirrt- East A,ianr ruarkete hair sirk uric ratinig agerri ii riper- ing liro0redlires ii Korera. the, Phrilippinres. arid Tliai[lairi( artiorn.Acrrrrpefiti,e rriloiriiirrrit inl tire rating inisd-sir arc basesd on rrlerrartiorral Ar-oirritir11g Stanrrards. sith s-ill hieir ensure ioijer-tire ratings and elirinirate recnt- sori- nisidifiratisiri ii saitlo,nal rrqaircrrrrnrt. Tlhe sekirig. Hir,i,re i this nra. nut be prarstic-al giveri tire eizc hridirrcsiarn ac-i-urirrting prarcli-cs are hases1 ii ILoal sif Ires- nrrar1kete. li Ilre abencrie ofi air aiicriatc arrirbier requi-irirerits. airnd as uar-II their rniforrir its h iinicer- of i-elicr annl irisesrir. [tir rrril-ailiorr if rating ageri- nationral standsardis is, sonersirat lionmcid. Reflecting tire r-ice riill nut ire icie-effe,-tire. The,re rmuist also Ire enough transition friorn a seiriallsv planrried to a rmarket es-s,n- riualifiedi rating anralysts a I inure, prorfsei...irial staff in Lhr riry. tire Clrirrr- acs-Luirirtrg pri ,rsdriee, airs starilarsie Ilisal labor mrioket to eriplir Inurloe than run- r.rinrg agerics. are still cunnIing. With regardl tOi dilslrie rr-sirir- Gurul three liririatirsir rnd tire costsa,,( esrut,rd ii h Merlit, Certainl rrlirrirrLrrrr staisdards liars to Fir nut to ire estabrlishirirg rating ageirr-ire. Orrrs e ,ir-rgiurg oriarkete listend sir etoick es-harigee. Fire brrndr is he , tie irirds for,us their atteritiru. at liri stage, inirstregthe-i pirospec-tuis rcriLriferieicrt ensurles that arlerulLate irifrirria- rtig -isting eating argerrieis arnr a,1i- in rg econorirrris OI lioni is, di-lediiss to tire artiket. sr-air 1), pinning r-esrcrses, both hrrraniann a Iflranrir-al. Howricc. ilr 'i-riirtric" sith iiiati rrcn rapidli' genii ig Pniulential Reguliationse. Bond esriere imurst ire con- isrnd imarkets. ires rartirrgagencies eold bi le esiciurrageh. sinisesd that ribtairririg a ratisg ii ll pr- idc a(--es, li a wider iris-stri Irae fo,iire itu eriurities and lielli resduce Mandlatorx Ratings. Feorai a iirarkt du...clohprrrert icr.- the isit Of ierring dieht. Tire Urritesi States iris prn- sper-hui. rranrrator-y euatirigs i-air hrchp jurnp start the eat- seleitia regtilaririrs goreerririg tire rurralitr of irns-trrrrrt rig ilidoetre. espes-iall, iimnaikssirdc emriarrd foe ired- of'asuch inisitatioirr as, biarks. irrsrmar- crnrrparni-e. andi it ratin,gs is iow. Hir-scre, riraindiatrr ratirige, iraN dis,- sasiruge ann( loan assorialirori. Thersc regurlatioirr liar-c eOrrirug is-ncr- fe..rirn raising furrid, ili deit iriarkete. lii 25 Malaysia. the ceritral bank ruled that all public debt agencies to establish a regionial ratinig company. Such securities rnust bh cated, and in Thailaid, the SEC has a company cil(ld brridge the gap by rating cross-border iistituted a requirement that all Lliusecurevi debt must isslies or offer second opinions (in the ratinlgs of a be raled. Indonesia adoptel a similar regulation in rational ageicy. Also. in countries where the brind 1994. Experience in Malaysia anid Thailanid suggests markets are tlhin. establishing a local ratilng agency that manidaltory -atiuigs cail help the ra(itig inldtiltr anrld may uil be economitciial. Regiunial ageii ies an uiti- contribute to the growth of bind markets. Howeser. it galt the issue of lack of breadth arid depth in national is essenitial that ratirg agenrcies further develop threir hbird miarket, and achiese ermmirornies if scale it rating techiuiquies and traini their staff to gain the ace ep- improvi ig the quiality anid efficienry of ratings. tance of niuarket participants. DERIVATIVES Rating Stanidards. It is geirerally per,eived that rat- lig processes and tIre analyses of emerging market rat- In Easl Asia, tIe iarket lo il derivative instmrumerits ha. iig ageicies are riot as rigorouIs as those of their inter- been uirsnily linited to crmmrdities. The development niatiounial counterparts. The lack of highly trained pro- of crrniinidity futures rirarkets was a ilatLiral piogressiur fessional anialysts. ilte absence of riniforrii acciruntirig in East Asia. giveir the legion's abundance in corm- airnl disclosrure requcirements. aord the ability of ani nidities suich as iopra. palmr oil. amid rice. Fiianicial agency to function as an iuidependenit entity free from ftitures have onli reiseuity begun to coolse airvl are dovlm- political influence all conitribute to this criticism. A iiiatel by foreigii exchange future criittracts. Thie open particular isuLe is that ageircies rate some domiiestic capital acirrunts ini iiarny East Asiaii iouitnries have fis- corporations above the crriiuitrs's sovereign risk liiiiit. tered active foreigi exchange irarkets arim inecessitated i'he indlow of foreign inve,stiment can hell) increase tIre the dexelopumenit (f i urienicy futires in recent years in breadth anli liqujidity of nascent Iornd markets, awim response to iucreasing demianid for effective risk mani- domestic rating agencies can facilitate ihis effort by agemeit produicts. The rapid grwth in FOIIEX futuiieu striving to eain credilbiitsy in the iirternati.rmial areria. can he. in part. attributed to funid mianage rs whi rise derivative instruimnits such as filutre s ariil iptions to Role of Iiistitutional Inivestors. Investors in bond gaiui access lo these countries without exposure to ilhe markels tendrl 1i be predonoiriar llv irstitutionial. TIre underlying financial assets. A recent Leinian Brother,' success of tIre credit ratirig indrstry hinges in their survey' of iiistitntioinal investors indicated tilha ctirren- demanid for ratings. Iideed, in the United States arid --orietedil derivatives are used Iy nmost irislitutiouural Japaii. tIre emergence of pension fuinds. biisuraice uconl- iuvestors with exposiure it East Asia. paniies, anid nuitimal funds hla had a strong positive inipact onm the use of ratiiigs. In East Asia. iistititional Although Hong Kiong Sligapore, Malaysia, the iuvestors such as penision funids, contractual sarin(gs Philippines. and China all have ftitures exchanges, institutions, auivl insuraire companies tend to be ii the active tradling has seen conifinred toi Si ngapre's public sector A natural tendency for these i trlhuit irs is SIMEX--Singapore iiternational Mlonelav Exchange IHiinvestin govenuirentsecmuilies. Witlitheexpectedichange (see Bvx 2.2). Chila's dolmestic miarket in treasury in their asset allocatioin policies. these institutions are bond future, grew srubstuantirlly in 1995. likely to provide a miajor impetus for thie rating indlustry. The deielopmeint (of interest rate futures aird swap mar- Cross-Border Rating. As the regirn's capital mam- kets hias been relatively slow dlie tn tie fact that the kets becioie innre arid imiore integrated with furtiler lib- uinderlying fixed imcmume niarkets are inl developmeirtal eralizatioii of capital flows. issuers will imirreasingly tap stages arid a5 s smch are riot active enough to simpport different niarkets of the regiuo in search of low-cost derivatises market. However. given Irie rapid pace of capital and investors will exparid their universe of grith experieicevd by lie regionr's hound markets over livestiment opportunities to maximize the returin oii the past five years. airy1 the expected acceleratioir in their investments. regardless of ihere the issviers aire grout h of these nmarkets over the, next decade. interest based. In such a scenarino ratiiig agenicies face air addi- rate-luiked derinalive instruaments will soon follow. The tinial challenige rif ratiiig issuers domiiiriled in othmer Lehnumaui BHrrther,' stuidy alsr shoised that insestors are connries and the imupact of sovereign risk oii their rat- i ncreasinigly becomiing interested in iuiterest rate swaps. ings. Credit ralitig on a reciprocal basi Iiay provide an For example. hrvestIierit managers indicriled a fivefold alternative. Anuothrer apprnrach is to encourage niatiolial surge in tineir intemtiun tin LIse interest rate swaps. Also, 26 the low corTelatioli between East Asian iiiterest rate Box 2.2: Singapore International Monetary rolntracts and the niajor interest rote contracts in lie Exchange (SIMEX) Uniterd States anid lie United Kingdomii has helped diat iI ilicrease foreigin inleret in th-ese products. >t.ltt.-p- Is- loath- 5.c-,-ttelit, 1h-1- oll t ticltic rTA\ATIO N "cit I r- ;, t J i iI iiiil-IhIIt alt t lit t "ictoj SNn iFr I aicgicits t fintiit-t all ithun ttiitti ,. s itti S liFi,.,-c u .t1at4 t..... The fiscal regine--taxet anidl relaled tIharges suoh at Il,e -. pl t-[ tctt li-k li:tiiigiisciit sci t it to stanims dut anid registratiion feet-lcon islently ranks as Iioiitt titttit. Till- Ioi- ta .t . t 1i iltiittd iltig li.- a priority soUo for eluergilug snd market participanits. lit 1.it-ago Nle atutilt Estisige itti sitiii i]ttcsict shalt A recent tuo-ev tf foreign iulftiiltilnlal ilirettr . liii tittirt itrll-lcl iil i - ii tt- tt hllisit t approlaches to these rliarkels plaoes taxatioil with rilarco- l1o t98ltidiiig liA- fd llri th iiiicglitl lie Ih tiilltgc tilt el0oilolic/ClArreilrxy siod interest rate/s ieiLl rctnideratio.ns Mli t s l i.ltlei. Ni- hi tt. N lt s, l EI-N t cit -it as a decitse eleinent in decitsitinitaking. A 1992 Wiorld Of-,,.[ Stil . ..... ..I l t tI - tint. ti-n- ad .lillt1 Bank working paper idelntified withhiildilg tax leeljs as Etc tdi, 11,r ,ititit b iia18Lt illttd ,l rittit ext tutuic itt 8L a ilnajor barrier to portfolitt alos-altiltl reluiring ilncreates littititlait-it l i, Ic aticii 1t, 1tt, hitr. gi t,ig 1lit -tt s1it - in pretax rales of returil to be profitable. Colnpliraling t it lt hL c 8 1-ftith i.t,Ltdtg Itttrt. IitiL t - the tax anialvsis are difereulles in treatmelits f re-l- itic .i..... -liti ci cutrit-ighi rik tutu ipt- itti cut-t- ii deitte ans inon-residenis, ilnstitutitnits ali d indidual t-tsut ttttt liti- t tt-,. r treaSUlrY alind coilporate inlttirlielis. aIlid iltitrest and ti ..tth ....t. i ..tgli ilt.rgIl iltlt itrc. tr a hilt lu-tilBu - capital gains. Disparities betlteeln dehit anid equitt ith- Ixi lit - ,It - 1i 1,t e . , tilild ,, -I.II I; hut 24 It- hildilig infWense tIle broad ralige of secrities chaises. liii itiltiu l )9t I iR- t--c It. as do ilterliatioilal acsrird.s a hict proidle fttr relief against dtLible taxatioll. Corporate taxatioll rail also weigh heasily iltrading arlisily, aoil limited dtediiltibil- Box Figure 1: Trading Activity on the SIMEX itt ltan raise tIle cost tf caryHing mond portfoliots. (Millions of Contracts) Emerging Markets Trends 25 A timpalisoln bs Iregiotl of a ithihtolsding rates on liter- est. disilends. alnd capital gains ser Llie past fise vears 2 shows that thiey hale fallenl iii Asia an1d el.ewhere lIt F authorities nl11e to silllulate seurities taLtisities. Witll the market bsodi Iiirilig tlhis period. a supplv-side t)Ipe IS - effect has oc-rurred. with lower rates generatinig increa-ed reselnilue. HIloes%er. buddet dsefirils ill seer- - L al colritliets Ialrl gri cIIronilnielistlrsalel). aoich sith 10 finanlcial ins titulion, tNpitai couletitiltinig a large pail of the tax baxe. new types of tralisactilln taxes have 5 breul iltrodtdIed to raise revense anld so cirporate tax _ obligations fitr selonldar) nadilig ha1e oftenl-eiaiie 0|n_nd_ -tiff' Thev also hale beeli topLe t elllpordri1v *urb stiff. Tier 0i5i1liar besl plilpoell to tluiptirails inch1985 1988 1994 roptlal linlo.st which linterfere witli nilolietarl andt exchalige rate polhiy by placilig upwarl pressure on 5us-- - It-osisit -tthtiulsfstsoshttcc. currencies aild -xspalldiing noney uppksl. Steep capital gailns taxes designed lo diss-Larage spec- tI.... .i. ....I i li1 isttllt tiltst it i ll/cO l iI F\ illatioln hlae leen slashed dilrilig the period as theN iilihidc itrce.-.l.ltti. ih E,Ul,d,dlI ts r i lucc lultlii li tended to slifle seciuritiet activity generallv and sa,-ted Nikkrt-225 au-k lot-hit. Ntkkei-: it s-k tili iiI 1()- wideIy friisi interest anid dividend itithhcilding. The ylcc-rllut lI tG l .. ....... -iitl FPt IL gil. l'tll-iii- fIat diiergenle was especiall1 pronounilced for foreignl ,il. ga .,I. 51St :IS:A li.g Fk...g i.,-k hiuttci,,, Itit lih -1ttli imlsest lIs wcho utlder doLible tax treatlies an Usually i titt . l iti iiictl, i . li I o l's,'i'tt- liii tilt only claimi doiiestic credit fur tle latter tax pa nuents. I S I.t.-.lt.-ht-l.ark. 27 Table 2.10: WithholdingTax for US-Based Indonesia. Willilolslirig lax is 15 percent for local Institutional Investors investors, soild raiges firo () to 20 percent for foreigin- era depending oni bilateral tLeaties. Fir US-based 1988 11993 11088 I((3 11t88 10c99 ii erlors [he rale is 15 percent. and(i for thoseI based in holsolesia t.8 tl0 35.0 15.0 35.1 0. co (triesw alldilebile tax iiirds- inclitiig Atustia. K,ea 12.9 12.1 16.1 IS0 0t.0 1.1 t Belgiarn. Canada, Fi,nla-l. Frmame, GermanYs. iidia, Motarsia 20.(0 20.11 4101.1 (1.1 1.11 (Iio Japain. tire Neliberlamiss. Singapore, Sooalt Korea, aird P1`1611bc. 0.0 201.0 5.0 25.0 01.3 0.t Thailand-the birden ail be frtlher redused.with the Tt d 15.0 11 t 25.01 1 (.1- 12.5 I' Tb.' late tir UK noeslotors for exaiiiple. beiig 10 perceot. L.... L,r,g-rss.ip.i... ... pa, L,i 1i,- Goseromeot paper-SBI arid state agely iloids-is .s,.s, tEl k.oe,gis' siaLast. Sit 585 Q54. riot subject to stailiij dIirtv ar]Id COTmmIiSSiOn, Ilnt regis- lered ciorporates iraile onr the er(hanlge inLmst ray a levs iif ().8 pier,eIt of transacrtioin lalile, Wil: a ceiling of I The shill triwarr greater uniformitvy in Ireatniierit if pel- onl ietollbloe a-il-rllblkerage charge. Bearer debeni- se-rrrities reflects aii eolhirg oriseniss ariroing rice arid OT issuees Lae exemip fro tilhe assessment. iiivestors allil psl ic mnakers alike for pani s to Ire extent possible in all fiinarlwial assets. ilrlialidg lbaok rleproits "I'le slatLaS of zerio ouiponi ilnstrainelts las received aid ri rriiiiiier-ial paaper, to mrlinilize norion-onrinii ercial c frili,tirng rninigs. linitialy the, were thougit lti distitrtii-s. It has allereri patterns cited ri tire 199)2 escape wilihhldilgerelitrel.hlut recenit bI.rif(iatio Iiii iis World Bank sirses ii rshih capilal gains le-fs Ir reaten] gaiis asL taxable interexs. CrOufusirn s tems Ieroin a%elragge ere 'ri higherthair rtller levies. tlie alireiice if capital gails tax at t[ie sotirce. Pre-miiiNsi hlocal ilaeslrrrs hld ti pbar a self-assessed 35 Clarificationr aird sirltpificatiorn lhaie also beei rajijiir percenit capital gains lev vn stscks arid bondils whuh lbjeclties as urlielrlailurt, riiiltiire lrlin>gs. aiidI fle- was ishlel aoinilesd thirorigl lruiasactions wilh foreign rIiiellI hiairgev hIa-Leo led as disi reirlics th erigage- -rr tiierprarls nil liable for lie ia,. New regtilatioirs rreiil aiid pray,lieir eilro -nenurt. Ad lis, bellinld-tihe- aibl ishi ira1pitrl gaiirs lx dorroe t1 blil l 111 i Oltsibigi cr0ipsri .-nes leterIiiiatioiir is gradsiialls being replacedl il i ririrrie rirar le taxes1 biriii heIevily thanrl epirsit trarlspareint sirlaiiied vLsirnmuillnrits iilh firaur-e milrl- rirsircoe. Fixei-reliriri i ross-cirrnci I irterest rLite istines aud ceintral baiks rdllishirig rri lisxerd i raiatig saps are irt liable for staripl) duit oi withhiolslirg tax. reieiirl mi-e ilars fur [he first time. These hlialiges have been acrompaiei [r rioi.alizaltio. If papriork Malaysia. A 20 percemit ailli..rillirig rile is applied ards1 filing rerIirrmdre|ii s. ariI the reatirii Ibi lf iriels, generallv iso blbhi doriiestis au lorergirgio 1estiris. ili fir appeali anid1 cbil1plaiiiI. hr se-errb irises.< sbiliple- nii ta.x n: sapital gainis vii slatil) r Itities on traslefr nliozii tax framilewibrks fir rrffshiore ceirters laie b reenl These ligrles lirlil iir M(I.S (iagainas. aind corpsorate s:inrluta,,eotj,sy cialbiaidae ilas e1(s i'eplll scire1t11 s run11 lbndiisls. hilile treasler I ills. z.... (op Iiiii ibpaper, asii( itto aicual iperation. rollsulta1l pljHirl,ase srf exchanige listed ad tsiillistel rrri,iirriny issues rates - by itse Ratiigs Agerics of Country Reviews Malassia are lax exe-rupl. Firr-rporale ij sirstriieiits. rio The oLilirlisies below address lax conicernis fiist fur tie cl, ollrissiorns are paid firr transfe-s ii Illre use-lthe- iperi riiarkeis of Iidoiresia, Malasiola. thie Philippiirres.. coulnter iiaraket. lint a I perceilt charge erIers il trraded aids1 Thailand, frllriisied is tle r-esirwied oires orf (Chia iii: t[ie KLSE. asii( Krirea. Thn ritrl-eoi-e-girg olarkelsi of Hong Kong arid Shiigasllnre. as well as Japall alid otlier illidlvstrial Tax positliors are rrftei asbiteagei llithrrugh the practlice coulntries are ilheir co)ered IalAhir 2.10). fhey briefly oif (cviipot washiirig: seilirig bronds before their paymeil highlighit ker aspects ilh a firs 1 bs wii airhhilili dal, to uts tiieiii bask afteniari. Criss-rurrerc vinter- dediucted at Source oll intereol. 'iil h1 fvipwal rImli- esf rate s,aips ciftert rioted Ihlrugh t(ie Labhiarl iffsihir, sales brrnld i-estires inure than capital gairls. Dividelsid euerllt esiCiie lax riud slarili dslls although domestic rates cale alsi cited for proposes of coilparison aInch ci, iiirlterparts are suirject to sIrict expr1sar, muils. imcbirptorate both sdoriresli, arnd foreign iliestr 1cr- spectives. [irclIner iinfrriiritironi cair be finrirn i hie Phiippines. The ilterest williirolIiirig rane for T-bills ias hudklls ial (OLHnItlrs Ilrplies. rei-nilY irel raised lioimn 20 I., 25 percent, alihouigh 28 transactions are free of capital gai,,s anid IhIe f'inial tcan- Korea. Bordin are exemirpt frIll a 0.35 percent tirasac- fer tax of 0.25 percent of tradiog salae. Ho.eseri there hion le,, which applies to eqoities. ard nonl-esidents pas in a corporate tax of 35 percent oL bhood dealers. As a interest arid capital gains of 25 perceet-climis ing to 27 renseilt there is rno ineetilse to car in-rentors To,o- percient for iisliltrlirln willt establisrinernt ins Korea- yeair goserir-entI paper juis introlduced fall, unlder, the bhii s-all be reILI-ell tsroogis sloUlse lax .agreermrensts. same cegiile. altiholIgh treatimrenit of the revamisped s-or- Residen-s pay at their restpective coirp7orate anid interest tIorate bld rniarket lisle tr start Iris sear i still uiider Irr slie lax lev , siitih a 20 pec-ecir rale applicable if res ew. To dalea private bond acti ity rab beers stifled eprately ilelmized fssr bolids air(l hark dsiposit.. Frosn by tIie 0.5 per-srt slanlip (luty. s"hi, II plases tIre iortm- 1995. applrosesl irt-rnaltioirssl organizatiisii will re aile inesrt at a di,ad,a,,Iag, Will, baak &I-si t ligs. told 1. isStll 1-alR fe whil II l eXelilptiri iN ei lec - ts1. bs the inabilits of finsancoial illrstittitiiis o t lesedct tile irtlellt Xepeirses ofCsaris Iirg secr:itie- plrtfolirO. Hoig Koig and Singapore. Hsng Kong iias nolwiit- holding tax biut a prefits tax of 17.5 percent and ntarrip Thailaind. DUsme,tic irvestiors pay 15 per-srit initel-est d LAty o HK$1.5 per HK$1,0)00. frssiss whirh exchasrge withhsoldiig. airy four-igriers I to 10 5 perceirt dsepesdiirg fishr illd 'goerirllsesrt h ids dairy irff..s.re/srprarsatiorr- on iietvanit tax treaties. wh hii-l apply is. amsrg other al istrie a-re exemlhpt. Sirigaprire dsies not tx, capital corntries-. Swesies. D)enrriark. Nsrssay. Jaipans Gernnra ,y. gaihs. altisrgliii ilerdvln are targeted at the nmarginarl the Netherlasids. Frasiee, Singapiore. Soirtlr Kirea. ItalA 27 p-erseit cirpe-ale ircole rate. Nrir--esider,tn arie Belgiuis, Pakistans, UK. Indsiesia. Ilie Philippisren. e-eilipL coin sitlhholdisg sill d,l isit irterest. asssd Polard, CaLaada. alahysia A,stria. India. Irelaind. approsved Asia-dI llar le s. wi alsii escape normal Finland, anid China. A sapilal gaiirs ax L,f 15 prrcernt starrip suty. isas jLsrst ha.resl ts O.i)5 perceirt ,f trarlsac- Isanr alsos le ridlucedi. sicirh sbin tile i-ase if sirsihore, i-Lill- tissil s silre. Fireigir sres-rrities fiemns .ac-tirg frsr treir owr L,, fusssls. wlhers it dsrps tsr 12.5 Isercet. Tlhere is inr ."avOkiirs arsl siselrean clients ill .rpplxsresei slonresti stamp dirly. bul a 0.1 percent ,f lrasat tiori valae-tt.3 ses uriies Lare taxed al is 10 pers-it soi scess.l.. irial rate. percent for unit lrliris-is implseld fire dibertsie arid ai,s free of starrils Hlarge. state eirterpiise Isuisd trairuol toiis lir-igl til he exchanige. Several of the latter are tax exenipl. and bill oI ex.esange Table 2.1 1: Indicative East Asian Bond Tax slealirg corrd t le(sl off-echiairge essapes traisas liir tax. Rates PrevVissly ILitCer-tailItN in lisnal lpornisiolrs led vs multipjle r i-2 I, . , taxation of indlis idiral, a, each trade -sas also elibjert to a k,i.r s-Osr 11.3.i 25 15 pert-enit levy ssiile -orporate ayLI iristiitirial ii.vestie. Osljisia' 20 t. t were r-eipl. Resent clarifiatiir niardlurtesthal irsdisis- Phsilspries 25 0.25 0 suals pat 15 perser oir only tNlire first trade. (Offlio,e Tlrai Tliaidlnd t0-1is 11 15 baink CD,s sfters tradlevi thisighs the BansgkhOk hirtensatisirial j To1s-1, vsJ111 .s11f, tisii . t...i... st g-f- is 5 " isit Barikisrg Facility are free of iL withilOldirig alrd omelsis- -LOw1r, . Ir tijl.L sioir. Thai bahfit-S dollir interesl rate s-saps Ilrirssrghi this meanls are also e-elilit. Wilt-iri diirg arid asss- iled ltaxes are air irrrportarrt dliwerision is) isir i rrrslket leveloproeri. Table 2.11 F,r he hirir crCaLntries. interest w ithiholdiig lax al-i applies shoriws diw r li- i e laxes on the bojnd hr Eant Asian olir- gerserally at the above rates for bank iepsists: haiwer er. for tries. Los al i nivestisen decisihsg betweete bisik dseposit.. banks and fiianci-ial inStitirtiillSs, thiese hoildhinsgs are siftesn equ1iiy airs debt ssill wa,nst is enisuire mat interest. dsii- exempt tos lie extest then fiori t[ie bass vif sailt a.ctisity. desnds. anusd r apital gains treatisrenit ds silt ndvlsrly favor assel croi-e. Highs interest witlshhlling s-ass reate a Ciina. Ten percenit interest sithihlrlsli eg anild 0.3 p rcesnt disi ienfis e is Isss.sd partisipatiin air(s (Ieeiesing sif lie sIamp elnit appit blat iflein are nol applies in prastice. sesirities r-,tor: Differei -s behsI etes gs errmenlt arid A nmoratsriumiio cu vapital gairsi has seem derl-red as least t-vrpiralte istrsrisent,s vass also ims1pede groswth of lie tlirotrgis 1995. lnteriatisinsal irsestlir treatmeint with par- lastte .anld preferred statirs is urenet-essarr isi ruanN lial opening of tire sisarket ha.s yet t be determinsell. Asian markits tiln low budisget dsesfiri t. Tacniovec lax althsssrgh it cldsiu piaralleliredir isleid, lest -r f 211 prs-er-i sass .also sanipiir) secririles unsirity genesljIt. irotis sr1s- for direct investisrs. many if whosn save been -eseirtly and ouff-exchansge. keepinrg auers inifisel is tradition- targetesl foe usudits by b eseese ,uautiorities. al bainkisng rrsohs1ctx. ishile - rpolrate lax arnsd 1iinit oin 29 deduetions van impede secoiicary trading and the pal- anid corporate bhods. Amonig the isstaer anuisierse. his- ticipation of i nterolediarins. toricall, niationial govemments have rloniiiiated the pri- roars macik,s. In the last five years, however, there has For iverseas investors, taxes joiii exchanige rate rtend, beeni a clear shift in ihiis trenvdi in muany East Asian anid regulations. custoldy. ally1 othr elemilents as prima- c ...tilrie.,. In the light of fiscal surpluses in all Eact e feattires in iniarket juldgment. They look lv, equal Asian countries except for Chlina and the Philippines, treatimienit with domestic countelpalrs both in cc fix the proililille ofhe itgoiernment bond sector has been rales antd paymlilenit conIdtolis. and alignm,ent with steavlil dechlinig while tlhe state enterprise anld vorpo- emerging arnkets elsewhere in the global perspective. rale segments hlave been growioig rapidly. This Irend is In br1arl un-ea,ire, A,ian taxation is competitive with expec ted to cntilnlLe zover tile next decade, vi iti infra- otliel developilig regions. sinicttire in' esinient alivi corporate expansion being lie main driving fore,. - li contrast. the bondl iiiarkets in The slow' develotiment of Asiani boiirl iiiarkets has traiis- Ciiina anid the Philippines atie doniliiiatevi by govern- lated iniit scant alleiitioii to tax definitiomi aliy1 interpre- iiient bonlis, anid it is expected l thal this segmemit of the tatioii. presenting both Ilim.enctid anid foreign inivestors hbodl miarket ill grow rapidly in the fillnoe. witli legal aliit administratixe uniiiertaiiit .1d cm iiliplex- ill. flLastratiiig engagement alivl spawning liopli ..es Aniiiig investirs, le n of the Philipptine's SEC: is [lie oldest in Asia, it has plaeed BAPEPANI Io transferritg iwllershil and adtliniilra- aitiN a miargiiial role in develptiig plie capital imiarket, mi- f the Jakarta Stock Exclanige fr1iii ilie govermnit whiHI ha. ieei llhamiilered hy iislitiltilal anid ecaitoni- fo the prisate sector and expandinig BAPEPAII'M regtt- i, impediiments. Ini rel(elit sears. tile gaVeoteoleli has lattic respon,iiilities. Indonesia 1o1 hio, two privalt takeii steps to imiprose lie eclmlilit tiltdel]rtitlilipgs of stuck esehlialgen tlIitie- tile l elsighl of BAPEPAM. tie capital itarket and the Asiaii De,loprolelit Batik has prnl tied let iiiiial assistalice ii, strentlihel the SEC. Ulili 1990q BAI'EPAMI wa respiousihie for flie topera- tine of thie Jakarta Stoc k Ex(clhnge (JSE). The Sturai)aa Korea. The Korean Secutrilies aiid Ex\canige Stock Exchantge uwas e-tablisheni unitldr pliate ilwilership Ciimmi-iiri {KSEC) anli its enetiie hi d). the il 1988. Bith JSE and the Suirabaya Stink Eslchainge Seeurities SUipervislrc Board ISSB), were establilsled perfoitr elf-regulators funtitini s ttiinder tile upiler%isin unlder the renised Secturities aitd Excthaige law in of BAPEPAM H. weon,it the MNiistr, of Finance. s1hich 1977. in Kire.a, the regpdita moel CemeolInsei trodi- fiiriitilnales calpital iiarkels pt,li, V. rellmaino ile ullimiate titinally has beeii one of glverlillielil adtlliiiitralioi atiid regLilatilr of tle capilal iiiarket. While BAPEPAM in t ot 0colitrIl oser the sect-rities lmlarkets. wilih elf-regulatoi ati indepeitilenit agelicy it has xtilstanitial respoiisibili- bodies plaviitg ait importantl ...lle ii tle regulatolr IV fir rdnitipg oils the dilay-l-dat slipenistot of the proces.s The KSEC anti Ihe SSB are rcsponttible fur iiiarketaliaid aters.aiiti fr I i5ipitilerwriters, brl- develiipinig antid reoglating the Kotreanl imiarkets at lie kec-dealers, altd inliestnenut nianiager. BAPEPAM liad directiiin of the Ministrw of Finance aind Eitiiiomn o NIE). blth rpgilatir antd investigative pntser antId aii tsike The SEC clhaiiiani serves, da. the gosecnos if the SSB. In legal actions thriunglh the MN inim of Finamille, Since the additiin tI reteglatliug the setraillen iorket, aisd related 1`t90 refiiriis. tIer-s lot bee-ii uoveelnt iaway froni iititaulions. iie MFE aiid [ie KSEC have traditioaiasN goserintiietit adiiinistratiin and iiitro oivel tlie niarket esercised ciiinideratilteimeec eltltrol o,e5r the market. toward a ~.istei hoaed ilire tin disehositre priiciples 37 and pruidenitial standards for intermiediaries. Further in Jily 1992 by the Slock Exchange Executive movemuent in this direction is expected Lnder a revised Council.'' In April 1993. the National Electronie securities law expected to be adopted ini the niear futLire. Trading System was lauinched by China Securities Trading Svstemii Corporation. whicil is owned by the T;aitand. Thc Securities a0i( Exchange Act of 1992 Peoples' Bank of Chiia, fiuLir other large banks. three established tihe Thai Secuiities anid Exchange securities conipaiiies, anyI tile Peoples Insurance Commission. Ini adlition to regulating the securities Clonlpaly Whllile CSRC ule making ean affectthe oper- busi ness. tIhe SEC has a ianidate 'to formlulate polivies ation of STAQS an l NETS, it (ioes not directly regillate to promote and develop. as well as to sLpervise. secli- the two eletrllonic trading systems whose tiading is rities markets. issilers. and relaterl enlities.' Before largely confined to debt instruments.2 Local reguilatory 1992. Ile securifies business supervised by the bodies have also beenl established bs mnicipal gov- Ministry of Fi nanlce. tile Banik of ThIailand. an(d the erninents in Shalnghai an1d Shenihen.' Stock Exchanige of Thailand (SET). The act gave the SET greater independence to serve as a self-regalatory Debt securities anid T-bond futures are traded on organization. As a result. the SEC doas not regulate the ChIina's two stock exchanges. Prior to the establishintenit day-to-day operatiotls of tle stock exchange; its role is of the CSRC. Shanlghai anid Shenihen had separate to establish overall policy aild appros e major stuck legal franleworks goverlling their securities miarkets. exchanige regIlationls. Before the establishment of tIne Eq1uit) seclurities most be liste(l anid traded oIl the SEC. tihe seciurities business was sljpervised bv two Shanghai Secllrities Exchanige or the Shenzhen Stock govcrnillielit milistries and the SET, resiltillg iri some Exchange. As is conllulon in the region. over-the- ilionsistelicv and ilefficienlcy ill lie elifrcenlelit of ciluriter trading ill listed erquities is lint pennitted. Both securities regulatiolls. " Tliailand appears to be ill trail- stink exchalnges perform self-regulatory functions liver sition to a systemmi thlat will rely pri ily ol, dis los,ure hei Illembers. Because Chiina's secllrities mnarkets are andl pru,deltial stalndards administered biy the SEC with relatively niew, sectirities laws and related legal framne- sub,staltial responsihilities for day-to-ilay market works are still being dlrafted.' In the absellce of a SapVer liviOn nlelegated to self-regulatry (Irgalnizatiols. natiolnal securities law, administrative mleasures govern lie operatioll if the seclcrities mlarkets. Chiina. The China Secliriuites Regulatory Chmlission ,CSRC) was created in October 1992 by the State Malaysia. The Malaysia Securities Coolmission was Council as ani executive agency of the Slate Council established in March 1993. In addition to the regula- Securities Policy Commiittee (SCSPCI. Under the direc - tion of the securities bilsiness. tIle securities commis- tion of tile SCSPC, the CSRC adillisnisters aild supervis- sion will have responlsibility for tIle admillistration of es the securities markets and illdustrv'. anld formulates the Fitures IndustrN Act of 1993 on1ce futiures tradilig regulatiois. TIne Peoples Banik of Chitia (PIIC) super- begin1 inl Malavsia. There are two inai n regulatory vised China s secuirities mlarkets befhre 1992. The agencies ini the financial system-Bank Negara (the CSRC is responsible fir regullating and monitorilig celntral bank) and the Securities Comimission. Prior to equity aild bon( niarkets. The PBC is il (harge of the c reation of the Seclirities Conilmission, thlere were licensilig seclirities companies and Ilutnial furds. In siv goivernmlelttal bodies involvel ini capital market Chilia, IlOst securities companies are operated by sulpervisio." Two private bodies-the Kuala Luanpur banks. The State Planiing Coninmissioni (SPCI also Stounk Exchanige aind the Rating Agenicy of 1MalaYsia plays an important role in poli y coordination, issuing (private bonds must receive a rating before being ann aliniial secuirities plani il coIjo netion v with the isOllCd)-are also inlvolvel in tile reguilatorY process. SC(SPC. Filially, the Securities Assuciation of China- whicl includes securities firis. trnist and investmenit Malaysiani corporate bond issues reqniire approval fronn coompanies, anid the Shanghai and Shenliheni sto k Baink Negara and the Securities Conmnission. Banlk exchaniges--serves as a self-regUlatory body. Negara siuperisees anid regulates the banking system, includinng lie momney markets. The Securities In additiont to the twx stock exchanges that were Comimiissioin is respoinsible for regulatinig atid develop- approved by the State Cin1incil to operate onl an experi- hig the securities industry and markets, derivatives, mental basis, two cinnputerized electrininic over-the- Uinit and property trust. anlI takeoverv. It is a self-finnd- coinniter iarkets tiade bonds. The Securiti-s 7rading ed statutory hody with regulatiry. investigative. amnd Automated Qniotation Sn stern (STAQS) was establishd emnfoircemenit polee_s. The nomnmissiomi has established a 38 Securities Industry Developnierit Ceniter to educate the and four associate cormrnibsioners, all full-time, whIS decide insestinig publi,, directors, arid sharelholders; prnulote regiulatory niiatters on the basis of fiajorily votes. The chair- professionalisiii rn research, fuaid rnanagerient. stork- mau sene cs a, the Chief cerUatilve oijieer of the rn-rirursion, hroking. and the unrerwriltig hAlsinesn; anld proruote andI each of th, foir a issialte a rri.uiiisioners lia, certair trarioirg progranru for regrilator inl Malaysia and other line responiliiilities for mianiage-ent. Tire Philippine coin- Asian countries. Although incti regulaotion is till practiced Inissious miarket desclo1pninei rtole dries riot apea,r to be ab ini Malay sia, a ruajor goal of tire Secarities Co rissi rin is stiorig an ill Krrrea. Thailauid, or Mialaysia. to riove tou%arvl dis,iosuire-hased seauritlic offerings. A, asi eeaLItive agenrrr) created b) the Stale Cirirrliil. Governance of Securities Commissions China's (:SRC adirrinisters arid souper,i.es the reruB- Securities Colrli-isnirrir goiverniance. whirh ir illrLelies ties scarkets rilder the dirertoraihip annd supiriisr of the quality of regulation, ha s aried aeross East Asia. thie SCSPC. The CSRC is riiprsed of a chairnan. tu o Asian securities regulators hare spit beer as iidepei- rire chairtir-. a e-cretary ge-eral, any1 ncerd cr lin- dent as those in Insire develorped roristries such as the urissiriners.' The CSRC ar a,zs ani eXcrutL,e ageires fr, Urilted Stales and the Unit-e Kirigdiorn. Must East tire SCSPC. vhich is cnirprised if ilte lirads ill 14 iuin- Asian regulatorn brlies play iriportanil rules iii foririr- istries arid rrirnirisioin, illvlLldivig tire Miri,try of laing strategy for tire develrpnireit vif securities ivar- Fina-e, t[ie Stale Plarir g Criririninion. tihe Mlinisln kets aid lrelatesd inslitulions,. GCverinrirect represe-lta- if l'reigii Trarle ru1d E,rronurnir Crooperatiourr. aid tIre turn by the ministry of finanice, central hank, arid other Slate Corirririssiro fi, Rest tulrretririg the E,irrnoruir mirristrie., inivolked ill financial secor delerprirerni. System. The SCSPC is re.pirr.sible for 'broad piliry fri- law, and regulation ran ii inprrve eoordirialiori arriririg iulaLiori wvitlh respet Ito tire securities rirarkets. arile tire policysiakers arid help alslare Ihlat s- Lritic,s inarkets CSRC frrr nialiket supers chioi. There is air inuterlcekinrg get the attention tlley require ini the early slages if niar- arrangenient letiseei tilhe gilreruirig indies of the ket develrporest. Only in [ihe Philippinies are grive,rn- SCSPC adu thie CSRC. iti the CSRC chairunae serviig nient riniristries not represented oi tire goivernirg Iurardl as Fi-mt depots dIrecltrr of the SCSPC. of the serirrities regulatorn brin. Indonesia's BAPEPAI is riot arm inidependent agency 'lire Korean SEC lias nine onrirn-sniorners-si, bit firrtionis inure as air adjiUliLt to tie Mlinislrt of apptiiited bv the president oni the recvicimeidlativoi of Finrnce. tlud its chairmari reports diretIly to trhe nli.is- tIre niririster of finance arid e-omirormy and three ex-offi- ter While BAI'EPAM car, rirake polic. recl iriroeslda- cio comnrissir.uers-the governor ,f the Balik of KEiea. iloss. tire irinstin is the uliiralte regulator oif t[ie (api- the chairman of t[ie Kiurea Stuck Erihanige. asd t[ie r ice tal rirarket arrul is respvirnsible fur poliry forilndatirn for iririster of finranre. Three of the appoinuted r onrniis- the capital nrarkel. IAPEPAM does rvtol have an idrie- sinners. including t[ie chainiari. are fnill-tirire standing perident giserriig bids. comnrii,in.ner, asid three serve on a part-tisre ldSi. The griveriririg body if the Thai SEC is coipspsed if Onie if the importatil far tor iii eslahblishlrig thI ride- five ex-officio inernbers-the urirrister of firarl-, e ho penidenice if the SEC5 is the degree of finrancrial inde- serves as clrainmai. tIre gosernirr of tIre central bank. penrlcidre. The Thai anld Mtala nsiar securities conmisi- tire permanienit serretlares of tlhe Mrfuiliries of Finance s ion. are self-fnsded (i.e.. trallsa:lioll fees sni seuririies. and Conrinrerce, and tire genieral secreltac of tIre oiffice A, a resull. liec have been able lo oiperate inrore like of the SEC--and fouir io si. rire,irhers apprirted by I the lrivale iristitritivni and liare breer abile ii attrart andl rabinet on the recornirtrenldatiorr of thIe Minsister if retain hIiglily qialifievi slaff. CoiLser1-iitlly, tIrestaffhis Finance. Onl) tlie general secretary is a fall-lime prst.' prorided leader-hip ii intraducinug nre-essarn refirrurs to fister deelrluuennt if their finanrcial rirarkets. Thli Thie Malaysiant Sec-urilies Courri-ssiorm has air esecr- is a rirovlel h Ii h shouvid b. l f interest to oiter SECis in tive chairruan. firnir public sierirbers, arid friur prbate the regioni. sectoir members. all appoisted fur three-year terins. The piblic bector nrembers represent the Minisiry if Role of Self-Regulation Finanre. Bank Negara. Nishistri mf Priuian Indsitries. Developed Markels. In i-Lmt industrial e-runtre arid the Ecinoinic Plarrinig Lriiit. The privale sector seCLaitieill niakets. indlnudrig lit Uhnited Stalte, nited mirernubrs are coniirrised of uno liawyesr. one aerouanlait, Ki nrgdrrnr. andil japas. InUl Mh ilie day-to-dav regulationl arid rue bankerI The Philippine SEC hias a 'chainras if tie rackets is indiwteudib lit scif-regulaltory orgarniza- 39 tions, suich as stock exchanges and clearinig organiiza- regolation. Onie of the importanit basic tasks for cotin- tions, oincier the oversight of a government regulatory tries witlh new and emerging securities markets is to body. US stock exch1anges were already regLilatinig their develop flare fully tlie potential of stock exchanges and members when thle SEC was created. Indeed. it i.s not other pri,ate seclor organizations to serve as self-regu- possiile to operate an organized secuirities market with- latmiis. While this reqtlires the delegationi of responsi- out agreed niles, and it is in thle interest of market prac- bilities ti, market practitioners lo a-ct as front line regu- titioners to ensure tliat rules of conduct are obeyed so lators, it also alls for strong goveriniren,t oversight. that sesurities transactionls are conducled in a fair and honiest maninev With the passage of the Securities and Thailand. Korea. and MalaYsia relv laigelv on, delega- Exchange Act of 1934, mtich of the responsibility fur tion of aualiorily fur Illar ket siiperision as a part tif self- regulating the US securities niarkets was left to the regulation. lndoiiesias BAPEPAM permits the two stock exchanges and other self-regulacns organiza- slock exchangee n1ow in private hands to regulale iltem- tions, suibject to strung oversight I y the SEC. US self- selves. The Philippines is ani exceptioii. but this appar- regulatiiig organizatioiis are requnired to register with en weakness in its regulator miechanisma may be cr- tile SEC anid obtaini approval of tlleir rules. In general, rected w-il tlie recent establiishnieot of a urn snified stock exchanges are responsible fir iiiarket suirveil- stock exchange. China's Se,arities Illdalste larice the day-to-day scpervision of heir members. aid Association. in which all secrities firuits anid tlle two role enforcement with respect t) their niembers. Even stuck exclariges are niembers. fun,tions as a self-regu- briiker-dealer registered withl [lie SEC mnist joili a self- latoy bo>dy. China's securities miarkets and regulatury regulatory irgainizatioin. Self-regulation also plays an, bodlies are relatively new, anil effort is sfill needed to importanit role in the Uniited Kingdoni anid Japami. anid build [lie infrastru,ture necessary to support themii. anyoiie coinlucti ng securities iir investmenit buisiness in Given China's size and its potential for a laige and diverse Britain aMost belonig to a self-legulatory ourganiization. iir secirities market withl a wide ranige of fiiancial iistnu- be regulated dinectly by the SIB. 'ileiits, it cooldl benefit giratle fr'mil a systeiil iif self-regu- latioii lo supplemiienit governiient regulatoly ovelrsight. Self-regulatory- orgaoiizalioiis in bothl developed and emerging secuirities niarkets can play aii important rule Enforcement of Securities Regulations it, arhitratiig and resiilving disputes among market lpar- Enforcemenit of securities regalations is essential lo licipants. Arbitration, which is a cuntractual, non-judi- protect investors aiid preserve the integrity. fairiiessv cial methiod oi resolvinig disputes, is tisevl extensivels atidi efficienvcy f the securities niarkets. If, for exaniple, by US orgaiiizations, and cami be a fair and efficienit a ountr- dies iiot have tIme legal aiil accountfiiig infra- nieanis of resolviig disputes anyd avoiding lie costs of structure for a dischIsIre-based systenil at the early litigalion. which is pervasive in countries with coliplex stage of market developiment. tihis should be recognized legal systenis such as tlhe United States. US arbitratiomi at the nutsI. hiliie lie econoomi, benefits of allocatlie proceediings are administrated by the self-regulatory efficiency aim best be aphiesed through a disclnsure- organizatiiins themselves, amid, while the SEC oversees based systeni that relies til niarket dhiscipline to deter- Lhe process. it cannol interene oii hbehmahf of r directly miiine tlie meriIs of securities Ifferings. siuch a system represent iidividual investors, iir vam-ate iir niodifs all canuot be relied uplo withioat the trainued acconiritauts, arbitrationm decisioni. The groands for judicial review of lawyers. arm1 analysts essemutial to the proper functimiit- arbitration decisions are qiuite limiled.?" irg of ilte riarket. TIme develupmnentl if infrastructure ne-essalr lo make a dischisure-baved systeni effective In emiierging securilies malkets, arhitratiuon ffers shrould be given-higli priority. Tle shorl term iilbjectives prnmise as a vehicle fior enhianicinig investor confidenice. sucli as l istiiig staudaisds cadl le rel ied pipom tlo control This would especially appear to be the case in ciiuntries the qualitiv of padblicly traded isspes. where tlhe court syste is nlot well developed, or where judges iiiay miot be well tiainied in securities law. This is Developed Countries. The enhsr-emnent inechanism miot uncomimon. Ini most countries in the region, lie is the must highly dleveloped in tlie Uiiited States, seatirities laws are relatively new. or have ieen suib- whose legal infrastructiiue has eviilved over mans stamitially nmdified in recent years. decades. The principal areas in shich eoforverimemut actions have been instituted imiclude insider tradlimg: East Asian Cointries. Each if the eight East Asiani imiarket nmatipulationm viilations ii connetioni witi markets covered in this stidvhv has sonie iegree of self- secirifies oflerinigs; violatiopis in commnectiomi with 40 changes in corporate control; anid fiilaianlal (ioclosirre of lie issler or a particular security. The regulation, arid reporting. Eniiorcerirent actions initiaited h! t(ie cointaini detailed diselo0r. rcvlequireriiefits. anid a gener- SEC generally are preceded by on eaiininationi prir- al requiremiient ihat the rnatenals tise in ronnectionr suant to the commiissioie is iiinpectui i p.nerr. or by an, with ani offering ot contlain an', material irri,slatenietiLs insiestigation. The SEC is anthorized to file injunctive or omnissions. Undi-er iis fall-di,closuore approacht, indi- actions in federal iourt arid proceed adnineostrativei1 vidual investors, rather mlan regulators, loae rerponisi- against regilated entitier anid certain other persons arid hility for evalualing the moerits if an inrve,toineti As ri entities, It ib atlthorized. aniong other things, tur .eek practical matter. howeser. ino,tilurtionr anni iridiivdual fines and duisgorgeieini of ill-gotten, gaiis. The staff niay in teslirs often depenId on pIrale analysts, ratiiig agen- also provide subsltatial assistane to crirtinial authii- rie. brirkers. investmienl adtisorns or other -eurities tier for crilinial proscuition of securities violation. prfessinials io evaltate thie available infrirmalion International cooperation liar becirine important with the about an issier ir the rerun 1ties being oflerel. W'itliout iiireared v lvlurne if rro-s-brrrder reulnrities transartsiois. adeq1uate arcourntinug. audi tirig. atirr Financial reprrt ig. it is nut pussible For tie recurilies irrarkets tnr properly East Asian Markets. East Asian mrrarkets hare grrwin value a Lvrrpany. Investor-s ran re rneisled and fuinil,s rapidil withoirt striet enforcemient, arid there have beer miisallo,ated in tire ecoirotir. Serruritie. issaers are sonic iriajor secunities frauil case, iti counrtries ouch aO rer1rired to iinc...porate finan-ial iifoirniatiril in their tlie Philippiries and Thailand. I-esNer, East Aoian regisitation staterelnlis, periolir neportr. andiother slo- counaries have inade nolable progress in iniprsoring uroente filed with the SEC a in made available to the enforcement in recent years. Thailani&s enfircemient public. Greater emiphasis ir row leinig placerd our the mechiarrism inopr-vel drnamatically with the establish- adequnacy of accouniting arid disclosure etarlrards ill mrrent of the SEC in 1992. Before the adiption if thIe both inrdusirial aud emergirig -eciuritier iriarket, Or dis- SEC Art, ins enligatiorr into uifair praictices ini the etri k closrire-ba-ed systenir replace gin errirnent crontrol Over niarkel was ocluiilreted by the Strrrk E-rhanige of t[ie ieanarci- rrf securities. Thailand bult prrcedures far enfrrremenrt covul le prir- trartevd. insly ing personnel frrm tire SET, Bank if Merit regolatirn in nirirre common in East Asia markets Thailatid. anid Mrivtrs of Finance. Eniforenireunt than ini inure deseloiped markets. Eveni the United responreibilities are nrw clearlY within the dornain rf States. hloseser. las inierit regnilatiriri under tihe recri- the Thai SEC.: Ir Malaysia. tlhe SEC las important tier lan.e orf erlain state,.-` Several of Aeia'r eniergi.ng iruertigatiye arid enuforcement prwers and server as tire - rirkets are now uin tranisitiro from a ryrtenir Of nlrerit foral point fsr securities market enfrrrcemrenrt, r while the regulat ion Ir osie based primardiy on tile pli iLriple of proseuntioni rrf cases is referred to the Juistire Miniotir. frill and fair HisCiorare. The Secarities Coniunission of Ii the Philippinies. the SEC lias direct enforeneirt. Malay,ia. fr e-anip,le. las set a niajor goal of evolviig powers. arid it, onnie isitanices, it riras even act aO a frinnun merit regulation tin disclosurt-based regulalion.: quasi-jurdiicial agenic. Il lndonrera. althoLughl BAPEPAM has ins etigative poso,re. it ran take legal W'illt tire eetablisihmenit if nrev recurrities crnirmissrions action onily iltrotugh tire Mirnistis if Finance. HBing in the region. uisel tire etanidarie are in-ilos wig h Konig has als irmuproved its entorecenilent rapaibility. greater entirlasi o now beirig plar ei our tire qualits oif informationl disclosed to mnsestoro. Thailand's SEC REGULATION OF SECURITIES MARKETS. Art had a mrajor impact by inreneasiig tire emphasis on PRIVATE ISSUERS, AND INtERMEDIARIES discrronre tandarnd in the public offering ofsoe-cirrer It also liberalized the requiremnreuits for public boud Private Issuers of Securities fferinge. Prior tin tire passage of the SEC Act. crnnupa- Disrlosuire arid arcolinlting stanulairvis that ennable riie riot lirted inn tie SET were riot permitted to isseue investors ti make infolRIned j adgmecnts abouat the tirir- bonod il the pubili marhket. In a puriblic offering, tire chare anin sale of new issuren of securilies are air nipor- isserl maIst satisfy tire SEC that tire ieerer hao esperi- taint elemirent of securities market regalation. Efficieni eirce in the hauiless aninu that tire bliairiele is hinlaircial- operation of secindars nuarkets also depends run a enui- Iy viable. The is,uer maurl File with the SEC hfr permissiun tirnous fllBw of infornmation abount comrpanies ibhore to isrsue the unreld The inrruing prvrcess takes aboLit 60 days. securities are biing travied. The (IS securities regula- Brnds riay also be offered plirately if old to urn more tionl, t[ie iirnirt adsanued in thi- regard. generoallus focus than 35 i-vestors ntluotigi tlie nrnmber iriav e-eed 35 if our tire disclonnure of infnrmatirnnr rather than tire inneril.e oure u iniore rf the iin,esltrr are unninonug 17 irnstitutionns 41 specified by the SEC). In Thailand. a prisale placemeni lic offerings. As in most Colntries. goverirei t ecuri- requires SEC permission. bht tile issning pro cess takes lies are exeript serurities and Are iiot required lto be osily about two weeks. For ani unsecured debentiure. per- registered with tire SEC. OUssion to issae is automatic niece the bond is regis- tered with the SEC anid regulations fur sellinig antd Issuance reqirirenments fol' pabl ic 5ecu,rilies offerirgs in trarsrferriig ilie is-rie are ornpilied wili. For a secrired Indonesia are nut cosered uaider Indornesian Law, arid srubordinated ilebentirre, permissirrr is aatoIratil if tirooghi the re quirements for offering se'cirities are like- tire SEC does rot object witlirn seseln bLasiress( days. Iv tip e set forth Pl a revised securities lawi. Ihe basic definition rrf a public offering is conitainied in a 1990 Il Korea. t(ie issuabaire of Ip.itlds is liiihited to liised com- miinisterial decree, arid BAPEPAM is respolisible for paolies or cormipanies registeresi witl the Securities anrd pleterminring t[ie onditipons and prirredlires for puallic Eachange Commirssion, arid a compan) thol is rIot list- offerings. spe-ification of liscl-urore standards, anid bi r ed lii tIre stock exchange mioirst register with the SEC deterririrririg the effet iveness if registrationi state- before it call issue aonids. To issue bipeds, a conepany inreots. BAPEPA4M can reqluire tlial certain standarris be must meet registration and disclosure reqoireno-rets iniet for debt secuaitie,. incluelling guarantees Pr collat- administered by the SEC. The issiing rorlpaniP Ilist eral, or requlire tIha tire leverage ratio of anr isstier nut file a registratiin statenieeit or a sielf registration, along es-eed la certairi leel. 11 is Atiticipated Iliat these witli other docurments sourih as tile guarantee oenprtract for requ iremirents will change oiucre a ratin)g agenicy becomes tlle paymenit ol pri icipal Alind interest and a copy of the irperatioinral. Thie regualatiois appear tip corer iorily listed underwriting agreenierrt.2 ' The lead inia,ager mrust sili- issues aitI prisate placenments are not clearly defined. nlut air underw ritinig plani tip the SEC anid the Korean This ilnay be a probleni for shlort-termri coprmmerc:ial paper Secirrities Dealers Assocliatior. whirl are auitlhorized to that is conrsidered a mopper rirarkel irsinstruent covered reconmimrenld that ibe lead irianuiager rcranige tIre vionume by banking regalatiolrs, annd tiere is a preec tor develop and linre schedule for the pirublic offeril)g if neressaro to a definition if pritate placemirents ihal includes the coil- plotect ins estors. After the registratiosi becomres effep- -ept of air a- redited instittiornal in-estor. The riw tire, t[ie issuinig coqlorationr rirrist enter into a ceointract Thai securities law, the Malaysian Comrpaniies Act. or with a transfer agent for tie pulrli(ationi apil disiribir- the US cincept of a privale placenreirt ire air riffering tion of bond certificates. Also, opiecs of the registralion uinder Rule 144a: couldr ser,e as a basis for ilefirnirig staternent apil prospectus puist be available tin tire pub- privale placemerints. lie before receivinig applicatioris fur surbscriirtiirrs frrir inrvestors. A performrance report-atailable to the pilb- Bonid issues ill China must be apprioved by ilte lic-mast be filed witlh tie SEC opice sirbseriqtioni pay- Securaties Adirriipistratipr Departimrent of the State ienirs are cemipeleted.2 (Cotiricil. While boprds offe-ed to pullei irivestors must be listed. current regulations aoe unclear olin where they In tlie Philippinies. diiclosure reqruirerimenits are shi..ild le listed. The Corirpanry Law sets fiorth basic dis- adimrinistrated by tlie SEC through the registration ciolare provisiins for irformiation merirpranda thal process. Ho%ever. there is an element of adoinristrationi accompanvy bond isriues. pocuimenits that mirust be pro- and control user the issiuanice process. anid prisate itled to tire State Corncil til obtaini apprralrl, ain tire issuers mast disiliose informrrration to irrevstorsepicncern- fbrni arid contenit of bonii certificates. IssIoers are ing the business histort of tie compaeoy. tire qiualifica- reqriried to msiutaini a registrar of bond hiliders. tirins of direclors. alonig with audited financial state- Chlia's Coimpiany Law praso ciintainis provicionis estab- merits arld itldepeniderit v aluations of assels. Issuers lishinig criteria socIk as iiiPrmpanry asset size, earrings erntst also file sworn statemrent.s wilth regard tip infoima- histor,. anid use of proiceeds frour, the offerinig that must tion required to ie disclosed uipler tire Securities Act be niet ini issuing bonds.2" Three types if conirpaPnies arid tIre roles ain r-egulaotirnrs of tihe SEC. Corponrale are atiuhorized to issiIe bonids: oregnpanies (imiteui ry bordlsr are nut listen urr tiadeul our the Philippines Stock shares: courpanies witip Ii iitedi liabilily with at least Exchanlge (PSE. htbt borild tradinig is plaannred. The PSE two shareholders that aoe state-owsned enjtities; antd is ih the proeess of developing listin,g etanriarnis. whicir comipanies whoilly ownedi by tire state. Listed comnupanies must Ie appruted hby the SEC.^ For the future, it would must issue finaulcial anid a-ccorinitinig reprirts u very six plipear appropriate to rel) up1on a conebinatiori of SEC loaths and prepare fi nanucial reports aL the eiii of each disclosure stanudards aird PSE bound listing requrire- fical year ilhat are exaimniled Anid verified.? Unider reg- perics as the criteria fur dleternininrg eligibility for pub- urlatiprns administeredi the CSRC, listed rirompanies 42 miuist provide thiem the stock exlhanige interinr reports market surveillance iR a responsibilits of the stork withinf (lays of the eid of the first six mooths 0f each exchange vith oversight by the SEC. In Korea. the fiscal year and audited annual reportm within 120 days Korea,n Stock Exchange i.s reoponsible for the dat-to- of the end of the fiscal rear day uiper, i,ion of the market for listed secturities. .hile the Korean Sscarities Dealer Association furction, as C(hinia offers an ijrterebtizig example of the diverse isou- the self-regolalon authorilt fio he is er-tIhe-coUIIter tutiois that carp 6be invoed i regaIlatitig and supervi- market. in Indonesia, ther too stock exchanges ace irig tlhe issuance of bonds. For hbods issued hy financial responiselI for nopenising listlig arid trading reqaUire- institulionis and investmetnt funds. the Peoples' Bark of imeeits: th,N ear take action against a member or the Chlina ib in charge of inspc tion and app,r,oal. vhile the trading staff. Il Chiina. tie PBC has a role ii thie own- State Planirling Commission has resprinhil)ility for bonds ership li.e., the NETS tradintg systeni. operation. and offered by state investment companies. Both agencies regulation of secondary market trading facilitie'. iaust inspect and appro-e central entecprise (i.e., cor- porate) boods. Regioinal enterprise (sorporate) handy Regulation of Securities Firms and bondls issued by regional itvestment companies A nomber of interitediaries and market professionals most obtainp approval by prlvilrcial o1r InUnitcipal got - are essential to the operation, of a securities nearket. erninent, ohereas the Financle Ministrs R iv charge of These include brokers. dealers. and uiodensriters of the issuance of state treasLAIr bonidsl. secarities. The functions if a lr) ker. deialer. or hinder- writer maty be periornited bh specialiaed securitie.s Secondary Market Regulation firms, ieseitment batiks. or diversified finarcial firms Secondary market trading plaNs a ver, important role ir -sucli as bni'versal bahks or merchant banks-ipffer- lie capital piobilizationi process. AWhile bondis are tar- itig wivle anrayv of financial prodoacts tiL investors alid itiall' listevi in lhe stock exchange. tradiing gerieralls issliers. Stmre citunlries p-enmit veurcities firntis aitd occurs in the over-the-couinter miarket because of the Universal hanks tip coimpete in pro viding capital market unique featlires of bhitds. Unlike storks. bonld bhyrr ven ices. Ciipetitiot itt tlie finaincial vector i-at) con- are itnterestedl it several variables (Itield. price. ratinlg) tribimte tiL market efficienc y anid foster lie developoent chich hase tL le factired int the trade. Stattlacad qlo- of a n ite arrat of fitt.apiial iptstruinpentv for inneers attd lations are jtust tlte begioning of the trade. Fiirthrrzte re. inivestitrs. Soute courttries it East Asia resIrict lie type tie toiliuehe in.e.ied in hbond tmavditg gerieilly tettds to be of entities that can perliiru imtestherit banukiitg ser- niuah larger and pistitutitotal in nature. An effi riet sec- tires. 'itch a' uiderori tiig or reqpti re differert lwiie- oslhavr market erables i roetors to trade securities after es fur hroikers aniy dealers in securitiei even if the saute ani initial teffering to thetLlblic. The availaliilitovvif liq1uid- etity is pe,rfiiviuing each fuinction. Olhers reqUire ihe its is extrereiel important for d(live-ihnit of the tinnd separalion ofthe lietioi,sofhi,krr il dealr. whi,h m arket. Secoitlars mitarket traditg, if( oitdtd in ai effi- r ar impede the d-eslopimcirpt ol lie dealer tuurCtiMi1. cietit aitd tranisparent mapipter. allo-s securities to be priced b) market supply aitd demand f-rces. MLarket snr- lIt regulating 'ecaoritie' firpt. it is essetitial tip dev ise veillance is ntormally the frinti-line respioitsibilitv of lie registraLio. entrv. adli fippat(pial vesptnsllibility stait- stvck exchatige as a self-regvilaton orgatnizatioin ivithi the dards. andtvl rriortiitg veilitemritt-.. 11 is also importanit sCiclitHtiltl LOTIiiissioi acting it at] iiersighlt apacilN. t o itonititr the fittaittial iiiitdition of sectirities firiti aild inspect and exanaiete firitis tIp eitsure coimplianice East Asian Markets. lit Malaysia. secondary imiarket witl capital aned other regalato,'y requaremeitis. Thle stipen isvini is arried ouit bh ile Se-tirities Co mission tIype it bhisine-s coindtuctedl has a direcl imiipact ont tlie ati(I the Kniala Litipur Stock Exchliage as a self-rego- level of risk aniivled bhy firtits deliveriig sen ies to lie lators organization. The stock excrhatige lIas on-goinig Itittney and capital ilrkets and raisex iniportanlt irsues responisibloity as the froent-lite regalator with oversight willi respect to tle preeectiotn of inve Cstotmters of b! the xecu iritie. rsnio isioni. Tip, Market S,penci,ito, secarities finn, bapiks. and otiher temarket professiorials D ivision of the Se,uritiex Coentiosiein cotiducts ,ar- mnist be protected froni fratldv er otiher eiisiordalt, or ir veillanre aii(I conipliatce. It monoitiirs trailing til dete,t the event vif a fi rnipp itsokle ni. untisual price and slunte roitveni-ens, market IIaeIipU- latinit, (r instider tralinig. It al[st o0rvdarts ems-estigationi In Korea, secarities finms registered iilh tthe FiraiLte aped collects eviden,re tee sulpport preesecittitoes for seru- Minisin are the print ipal inte,rnediaries in the private rities lao violations. Likewise, in Thailamtd. seCotldar bonld eitarket. actiitg as Unlders-riters. brokers. and deal- 43 ers in corporate bonds tinder tlie Serorilies and comipanies perform [lie furnction of broker, dealer. and Exchange Act. Securities firms are suipervised by ilhe underwriter. Foreign sectirities firmi, participation in the SEC anid the SSB, ajid by the KSE and Korean securities business is restricted by a retauirenient that Secarifies Dealer, Asstciation IKSDA) as self-regulato- imiore ihaii 50 percent of paid-in capital be owned by a ri iodies unlder the oernsight of the SEC. The SEC and Korean individtual or corporation. Inz China. all fiiani- tie SSB are responsible for regilating securities firms, tial instlilaions. i cladiog securitie companies. are monitoring their financial contlilion, anti -tonditting licenned by the PBC. The CSRC has nit-going regulatit- 'tn -site inspei:tittns. (..iniiercial tank parlitipatiti in r, responsibilifies ftr the actisities of sealnrities firins, the bontd market is lintited tinder the General Banking while lie principal sell-regulatiry body tier secaLlrities Act anti regilatittis issLim e by lie MNi inelarv Botard aitI fiims is China's Securities Intlustrs Assit iattion. the Bank of Korea. Commercial atint tIeseltpipenit bIanks itiay participate in the primary gttnernimitenit bonid markel RE(,LILATION OF GOVERNMENT SECI.:RI- as members of the Gotserinietit Bontd Unlderwritinig TIES AND IN'I'ERMEDIARIES Synidicate. attn in the secondary market for cotrporate bOtils for their tot antI their aLJstouiers7 accounts w ith- Go;veriniieit securities are nitrinially exemlipt fromt regis- in presc:ribetl limits. Irationi antd disclostire reqtirementis with the securities regulattry btdy. The seconldars market for government ti lie Phiilippinies, broker-dealers in securities miutito be securities ani(I issunig protreduren ini the primiary market regislered with [lie SEC and nieet capital atid financial are normally the respotisitility of the ceittrai banik. or respositibility reqtuiretinents. Broker-dealers thal are sitil far iinstittutioii. Interniediaruies in giierniment secit- also ineinibers of lhe Philippinies Stock E-liatige are cilies May le regulated IiY the cenlral btank or securilies stibject it regalatory itoersight by the stock exichantge. A commtission depentlinig tin the type of listituition tilat SecLirities Investors Prttection Fuand pretlects piublic acts as irtker ti lrealer in go-erniiienit seciurities. iivetsors irl the event of the isiolvenicy if a broker-deal- Coimmnercial banks, deposit-taking ctompaniies, autd simi- erv il addiition to bit-ker-dealers, Llaiversal tanks antd la i intitutions are niorinially regulated by the government insestiiient hotises provitle capital market ser ices to authority responsible for the regilalioni of baniks antd prinale issters anid investotrs in securities. The udtler- linatwcial institiutions. while necurilies finits oti invest- wriling activities of cominnieriial batiks sotay be caiTied meint fianks aIctinig an ititeritiediaries in gosernmeni secti- tiut i n-house by sellinig uip a departlinenut within ilie bank, rtifen are regulated by the securities regutaloi) boldy. or bv establishing a separate subsidiary. In adlditititi it utidewritting ailivhies, nii,iersal baniks maa prItivote Government Securities Dealers kuid ntantage uuatual ftiiids. Brokers play a nrle in distiribting Developed Countries. Supersisinin of niist miajtr secLrities as uuemibers of uidemriniting syt iticates. Most firiiis inivol'ed in the sect.nda,y muarket for goveriniiienit dealers ih governminent securities are conimtiercial banks,. securities ih the Uinited States is pail of [lie overall As sucth, they are regulated by the l enitral bank. Bretker- supervision of these eiitities. Ore of lie federal lanik- tlealers reginteretl with the SEC itiay also participtite ih itg suiperi isors-Laslially the C itiptroller of the the government set unties markel. Carrency-supersises batiks involved in the iniarket. whit-h irut hides a nttiumber if primary dealers. T'le miaimi Indoniesia i i'iiancial in,t itutiotis are regulated b5 the focus of Ihiis supervision is to enosre these bauks' Finaice Minisiry, except fur licensedl btks, wlilh are financial slitai1tluess. SecUrities firis inmutolted in the eguilated by ilie central baihk. The minintry ha,i dele- market fall autder the jurisdictioni of the SEC. This gatevl BAPEPAM the power t nssLe licenses for under- supervisioti fociuses t1i fiianicial sountdness antd cus- writers, broker-delers, aiid i nestiient maniagers in tomrr protectitin. although it dues tiot exoetnl to sub- sectirities. These entities are also, subject to supervisioni sitliaries of registered broker-dealers, which in niany by the stock exchalnges. In Korea. Thailaiid, Malaysia, tases are atuaLlper-ised. atid Chiia, -eurities firms are subject to prudential stauttlardis anId oither reguilatitis imposedl by regUlatotV Pritir to 1986. LIS baiiks eingaged in gosernment seLeri- hobdies aittl self-regLaltioii by the stock eochauige or, in ties t1aiisactions were subject to regulatioit by the the case of Korea. lie exchliage anid the Koreati appropriate bank regulatory authority. Brokers aiid Secuirities Dealers Associationi. lIi Korea, ony a coiii- dealers registered wilh the US SEC (that niiay also hate patty that has obtaiied a litciuse frttm 1li Ministry of engaged iri tle goieriiiienit seicurities buisinessl itcre Fiiance cani operate as a securities compass. Securities subject to its supervision. Howeve-, firnis that were mto 44 financial inistitutioIIs anid conducted a business Solelv customlers' government securities held by dealers in is goserniment seculities anid other exemlpt securities behalf of ilteir customers were not adequale. Finally, (other tlhanl mLIlnicipal securities) were largely tinregoi- there were iladequLale cheeks a(li balanices built itito lated at the federal lexel becaLIse they were not the systeilns to reduce the pIotelitial risk eXposLire to reqi(ire(l ts register with aniy regulatorv agency as a customers. result of their a,tkixties. Subsequent to thie pa'sage of tlie Goiernment Securities Act of 1986 (GSA), it The miarket for goxernirent securities in tlhe United became necessary for pre-llish LIoregistered brokers Kingdom centers around Gilt-Edged Malket Makers and dealers ini government secuLrities to) be registered (GEMMS1, firiits approved by the Bauik of England, with all approplriale regulatory hbod. The GSA gave wlicil also acts a.s the supervisory agency. aoui autho- authority to the UIS Secrelary of the TleasuLlry to promul- rizes aiid supervises two special types of institutiiins. gate rules aiid regulatiois coneerniiug fi nancial respon- the inter-dealer-broker anid stlok exchange rimoniey brii- sibilit. protectioi of investiirs, ecuirities amid fUIlS, kers who traInsact busiseSS With Ih GEMMs. OthIer par- record keePiing. reporting.0 an1d uilditing iof gov.erumelt ticipants in the gilts market fall under genieral invest- securities brokers aid hdealers. Folmerly iiimregiilated inienit regnlatiols, aidi "'LISt be authorized by the go'eriimenit ecU rities dealers were requ ired to (oilipllI Seeurities and Iiivestmirit B,.ard and joinl a self-reguila- with capital reqtdiiesuents aidI other regnlotir) Safe- tory organizatioi. This does not apply to firiiis operating guards for Lhe first tiilie. Hoise-er firills in(ved is tle offshore. but coer0s fhreigni firimi operatilig in the eouni- niiarket but nut brokering or dealing mlay be exempl try. It also does nit apply to investors in gilts aidI other from supe,sision. Firmsl. operating in g-0erinmeiit sectl- setlirities. ritie, oultide lie Uls'ttd States are also ni,t covered by lhe supervisory regime. Firms iperatilig in the market for treasuries fall unlder the ilmneicy market silpersisil systeem. Pmls coniducting Publication of huiite. price. aiid trade inforniationi had wholesale transactionis in the stelilig money oiarket or in beenm iiconiiplete until receitly, but the Fedleral Reserve the foreign exchange or bullion markets mujst be listed by Banik of New York has desehlped a better iiiarket sur- the Baink of Enigland uiider its wholesale iiiarket supeivi- veillance ost,enii in the last Its y ears thal mses ecollim- sioim svsteum. This listiig e-telids a xYrterii of checks in i price data ti detect ailoliialies that m.u be asociaed finil iianiagerlini,i repiitaltilii. aiiid financial positions. with iiiarket manipuilatiumi. UlS alitlii.riticy receiitly Finms coiiduictiig liiimi-wholesale money market tranisac- received atitliorizatiin tli redluest reports of large povi- ti(iims fall Liilder the general securities regulation,/supervi- lion ini securities where pri,ing amnomalies exist. sion of the SIB andl its self-regidatory iganmizationm. The US offers examples of problems thal call arise in The UK auithori ties inoiiilor market participants 1inen- the superision of giovernmemnt Securities inuternedli- sixely. GEMMs submnit daily electroinic reports of their arie,. In the US, the failure of several tiinregiilaterh gov- position in each gilt issue to [lie Bauik of Eniglanrl. For enmlnelnt securiLies dealers between 1975 aiid 1985 imiolley -niarket fimiis the Baiik requires fortinightly cau.eed a numiiber of savings anid luau iiistilutiions, reports Sn risk e-lOSures aiid capital positions except iunicipalities, ansd xhiol hoards to incLr. inable fiiiaii- ful pure broker,, which stihmil iiionthly repourts. The cial losses. It is estimated that between 1982 aiid Bank cin also spot-check finnS to ensure coitinusiis 1986. investuirs losl $900 immilli.i. d-te to the failuires 'If i vipliance with its capital lreqnireuuuemit. UK secuIrilies uiiregulaterl gieixenm tient secLrities dealer-. The losses firimis also are sulbject to detaileil iivestiir protectioni resuilied primarily bum repurchiase agreeluent (REPOI riles. Most securities firms. inclhudiig GEMMs, are transactions with the failed go-nenhmhment secirities cleal- subject Il [lie rates of the Securities aiid Future ers." In the US. all of tlie funiis that failed were outside Authority. a self-regulatuiry orgaiiizatioin unider SIB. tlie ferleral regslatory structure which led to the passage Wholesale mbnevy market firuis are subject li a lighter of the Go,eriiiiient Securities Act of 1986.. regulator system uriler the Bank of Eiiglanih. There appear to be at least three faCtors involsed in thie Japaiese baiiks and sec rities firrus altiug as market US experience iH the early 1980,. First, there was a iiiakers fur go,ermument bhnds umiust receive permisshun lack of regulatory Supervision filn an iniportant segment to operate fronii the Finance Ministry, -hich examines of the secondary itiarket in guisernmenut securities ini their capital levels anisI mianagermeiit befire grantinig hoth instanues. Second, safeguards fur the protectioni of licenses:e- it also authorizes hriikers in the markets. 45 Trading ii go- nernwert securities (ranl take place eilher safekeepiog receipt, arid iris exposes investors to sub- OTC or ri the Toirto Slock Exchange, where all domires- stalitial risks. This exposure will be (Iratilatically tic boods. jielilding goverirmenit securities other irian reduced with tlie planned implemerrtation of filly auto- short-term bills. arrr tradedr. nated sbrok-erilry elearanoe and settlerireirt of all pri- vate arid gosvernirrenrt secrrities. Most dealers airri brokers in securrilier markets in Gerimianiy are banks. Ir rorrtrast t tihe ULnited Slates REGULATION OF INN ESTMENT COMPANIES ari(i Jaliai,, tirere is no legal distiirtionr in Geririally betweeri securities firiirs arid cormermial banks. Banks An i rivestarent corumparry (referred to as urrit trusts in are lirenised arid sirpercised h!tfie Federal Banikirig marry coulrrries) is esserltialli an orgariizaatirr thal is Sapercisors Office. Soniie lsrkers. however. fall outside prinraily engaged ir investiig in, securities. It offers this sipervirsor systemr arid are liensed and super- irvesltrs diversifiratioir f risk arrd pofessiorral iriest- visedi by orre of tlre eight regiorrl1 slock exchariges. The irreot rrranagenrent. Tirere are several types of invest- irrrplerrrenrtationr rrf a new regire iith a federal serrirri- rrierit comparries: the rrrIrrs crmnrmon are open-etid ties suipervisrrr is irriver may.'" (Imiurtuali firrds arid clised-erid funds with a variety orf inrvestnrerrt rrbjeeti,es. Broth types f founds are promi- East Asian Markets rrenrt in, irdustrial arid erimergirng securities markets. Il Horig Konig, realern ini grrverrrrrent sectirilies Alsi. miarivy cirsed-end crrunrtrv friirds are listen orr ircluide baniks alid rideperident securities dealers. rimajor stock exchanges aroiriud the wrrrld lhat invest in Trlese entities are lregilate-i by the Monelary Authorilr y thie erieigirg secririties mrrkets of specific cormotries. (baniks an r deposit-lakirig rcrrm1panrriesi rird the SFC (securities dealers. In Krrrea. rotir hanks ireguilated by Ilnvestinent crrmpanrr regulatiorr shiruld reqruire that: tire the cerrtru balrrik arim securLilies firmns sirpervisend r 1i prrurpose, firrir. arid mariagerrrent rf inestrrrerrts be tire KSEC anid Miniiltrsri Firraurrre partiipalte as brrr- clearly sper:ified; iiscrsLire tr itrvestors be acerirale kers and dealers in rihe gaserrrrrrerrt secririties nrarket. aln cromplete: pricing accrurately reflect nrarket crronli- All firrarrcial irstitrutirrirs ir Sirrgaprre are regulated fy tioris: aurd irigi stanidar,is fir rirariagernerit and firranrvial tie Mrirelars Autirrits. respulisiility be rairrtai ned. Irnvestrirment cornpariy reg- ulatirrnts shirilnd prorvide fvr the registration with the reg- In tire Philippires, t[ie cenlral hank is resporsisile frr ulatory body rhargedi wiltl super ising inrvestmrert corl - regLirtiifIg rorrmrrercial ran,ks dealinrg in gocernimrienti paries tire filirg if regulators reports. moinitoririg secUrilies anin tire activities rf prirriary dealers ini such inrspesetiols, and exarinialionms. It is also desiraisle to securities, isiile tlie SEC regirlates deailers irL govern- hare checks osri aruragenteir throuugh indeperndenit mneni securities tr t[ie extent thirat lirev are registered diretolrs. sharehrolder elections, arid rrLrtside auditors. Isroker-clealers in irii-exenipt serurities. Accredited It worldn also appear usefill tur ave reasorrable restric- gouernalenit sec LIrities dealers, csmirrercial bauiks. and lionlS Our the rise if fur!d assets to primrrote distribtlion-, investrrert lihruses are sirlijeCt tIr regulation rrer their anin Iiints rrrr tire 1,corpernsatiori paid to irivestrirerit gn ecrinrierit secuerities znticvities: hon-er, it appsears advissire. FiraIls. comrnpetitiorn arilc innovatiort in the that seconrdarr market dealers rrrrt falliig irinti orre rrf prrvisirrn of isestirerit uprrrarry services io investors these categrrries rira, riot he siruject trr sinpersisionrr shirunl ire eriro,rraged. Lliinler the regulalors regirne. Ini tire spring rf 1994. t[ie failurr off a secoririary dealer iii gisvelirlreeli set Lrri- Iln East Asia, irvestrirent cuirlipanies are becoririig ties-appareiinly i rivolving t[ie srale of onrr-existenit gov- iricreasingly iniportant. Their role ii capital markets in ernimerit sec urities for future deli er-broughl rito general armd i bonidi markets ini particular is e.pected (ILres.tirn [lie rnievllracsy of regulator s uperiision. This to inrr-ease in tlie corinirig years. Tlierefore. it is essen- failurr waspaiarenrtly aided bv the Philippine practire (ial that tires arie prrperly regkrlateri. lire investment rrf rising crrfirratinrrs rf saule under whicch securities rrrrrparries iii East Asia arte normally regurlatedi by tire are experted tr ire bdeli-cernf , ed trr se rir trir rinriritis in se urities eomrissirr, tire Mirristre of Firairune. or rirt. tile fuiture. These rorifilratitiOnrs are risen by serurrirdary In Thailarid, ninder lovisirrnrs of tire 1992 SecLurilies market dealers in govenrnrrenrt ser:urities dtce tri iopera- and Exchange Ar. a currinpany niust be liceised by ,tie tional construrirmis iris riing the delisers oi securities at SEC as a securities cemrirparry and receive apprurval tir tire central hank. Most irinestors do mrt receive i seCLuri- rianage a illittual fund. Before rrffering securities rrf tire ties purcrasdh rut 1inIsead receiv e a crifirnmatlirr arid a fuinid, a prospeetnls rmrurst be prepared ini accordance 46 with SEC rules and thle iianiagemenit company mtist Finance aulhorizes liceaises, while BAPEPAM is rmspon- appoint a custodian. All of the fund's assets must be vible for regilationis coftlsiling the operations of the funid deposited with [le cuntodian, who is required to be a and its relationship Ill its sharellolders. Up tlo now, onlv commercial iank or qualified financial instilition closed-eod fiunds have heel] permitted. H-welels r,eglila- unider the Securities and Excthanjge Act. Tile custodlian. tiolns are b,eilg amended 1to pennil open-end nuatual funds. commilonly refereed to ab tihe mutoal fuod supervisor. muist ufeet financial responsibility and other regulatlor SUNIM(1 tl NNtl CONC:ii SlON'i requireneiis relatinig to internal controls and the rela- tioniship between, the cufstodiani aiil the sponisoring An effective regulators systeom ohould consider both ill, secirities company. The custodian iiiist alsol file costs aoid beniefits of regulatioln. Al the initial stage of reports with ihe Thai Securilies anid Exchange market development, regulations hould iot be complex Conmmission. UlJitil 1992. unIv t[ie Mutual Fund anud burdenisome, lest Iile) impede the development if Compaiy, which was partially owned by the govern- t[ie capital narket. This is espectally true in new n'ar merit. was authorized to sponsor mutual funds ill kets without a large nuiiber of trained lawyers anid Thailand. With the establishmnefit of the Securities and accountants or all appropriate isittlfiilal framework. Exchanige Commission. the iiutual fund industr Wllas deregtlated and nlew licenses wvere granted to sevenl Regitfators bodies inl few anII emergiog seiities niar- fianageineil ioipanies. The niuiilser of Mutual fulnd ket5 noriiially haie two functionis: lo foster market floated rose fronii about 10 in 1992 to 87 in 1995. developtliehit anyL to regkuate it. The developlmental role should focus on hiitrducinlg anld eneouraging a fiil Malaysia arid the Philippiiies are trsig to encourage range of capital riiarket aiid ilaley niarket instaunients. development of the irlivesmeil colpany indusltr tiICe flew totrUllmeils enlerge. the regulatory body ithroughi legal anid regulatory reforms tliat will expand siould take center stage to see Iliat the rules are the ranige of collective illve ntmelit structures allowed b! observed fatrly adi transparenln, so tha[ the public law. Indofnesia is in the process if changinig its law to colifidelnce in the bonvd market is enhanced anidl Usa- permit priiale ini,estllelit companies. lit foiltrast. tained. Securities l'frnifsiolls have onli recently been Korea has an establisheil securilies investment tnist estahlivhed in Malaysia, Thailafid. and Chinia. bul indrustly. Korean securities iliebiv l es l t irusts and their Ciiia ilas not yet adolpted a natioifal securities law. In lmlamlagemlent companies are regulated by the Minitry Malaysla anid Thailand. the securities coninlissifoIls lire of Finaiice. There are two types If ins estment trvsts: l [lie process vff implpenleting flew regUlator regimes. uiiit anld ope0 inestmfenlt trusts." A trust Iolilpanly Iin vindonesia. thi respfnisibilities of tile indonesiani fmiust obtaii a license from the Finance Ministry. aild Capital Market Spervisor Ageiicy were ignificaiilly ilie mlaliagement cnflirpally is relouired to illsest fuid Mlodified ii 1990, afirl a revised capital ilfarket, law ix assets primarily in lisled securities. Utnder the 1993 expected If be adlpted inl ihe nea fluture. Thailanld Malaysiaii Securities Commission Aft, unit trusts houst Malaysia. and firifdonesia appear to be comlmnitted to file a registratioll statenilent afid a prospeft,s luflmst le greater reliafice oi disclosure arifI miarket niechanisms, filed witli the Securities Commlfuissioif. The uninilageffieili rather thao ill miierit regulalion aid goverfment control compafly must mileet etrtain finafcial respff.iibility over the isslulance offsecurities. Although Kfrea is ilhe requiremefits and appoinit a trust comffipany as anli ide- pr..ce,s of lilieralizing market acless. the general timust pendenit ads ison Prior to the establihmhient of the secu- of regulatifln has been to rely lin regulatory controls and rities comnmfissiofln, loot investment trusts were regldated nierit reglulaion. Tahle 3.1 provides a prolile of the reg- by an ififormal Cofiuilfittee on Uniit Trusts established bI ulatorn system] in the East Asian coliitries. the central batik. ODue goal If the Malaysian Securities (:Colmission is to expanid opportunities for investosN o Regulalro systems carl be expected to evolve. Clearly invest in ufiit trusts by diversifying the range of collef - ilie exteiit and type of regulations needed will change as tlie investment structures allowed by law' the securities markel infrastrctire aid institlutliolal fraffuework are pot il pIlace aild the market evolves. It is The 1990 Indoflesian Capital Markets Decree openied the important to decide whlf will performi the essefitial reg- Indoiiesian investmefit company business to the private ulatorv functinlfs. Ofieii this will involve nio1re thani one sector. Before 1990, PT Dallareksa. a govefifrnenlt-ownled goserlnenft biody and utile fIr fiore practitioner-based itvestment cofimpalny was tie onl) c ifpany permilitted to self-regulatory organfizatiofis. The United Stateb, for establish an iiivestiitent coflipaiy. The Ministry ff example. has relied 1o1 a system of self-regulatioii since 47 Table 3.1: Asian Bond Markets: A Profile of Regulatory Systems China IndoeM-ia Malavoia Thailand Korea Philippi-eu Singapore Hony Kong Regulator CSRC BAlEPAM Se...i.ti SEC SEC SETC N MAS SFC Coiori is-i,o ELoabtiolnhl 1992 1'i70 t'i92 1992 1977 19:16 1989 Regoeto ii/ Snate MOF MOF MO'F MJOF MOF MOIF Finimee Crunc if beertar Funding Cormi-ew (nt -ov-etinl SelFl-fuled Self-Fondest Conerirsotw 17o,ero,oeot SeIf-Fos-1eil Largeh & Fee, & Fee & Feco .elf-FusSed Pispeto-s CSRC BAlPElAMl SEC SEC SEC SE. Shnk SFC Filed 8ith RO( Eochui-ge SElIK RNMN App-Is Vanie. 5 5 2 1 1 1 I Merit Rneni, Yen Ye N, Yes Ys N,, N. Nlaii,atIrs Rating No .e Ye, Yes Ni No, No, No 1934 with strong governimienit oversight itver tie secoiri- od of tliiie as market onidilionis dictate. Designiated rng- lies mrarkets. The US model, with appropriale morlifi,a- ulatorv aulitorities atid i-eqttireoieitts for money irtarket aiors. could be emrrployed effectively li rttaity ermterging inistrmeits mOoust be c lear. Regilations shioild also allow secturilies narkets. noi-listed comntpaniies to issute delt paper priosvied lthey niect the diselostire anld boid-listing staidards applied The legal infrastrmcture for bmid markets is also limpon- lo publi, conippaniis and listeil bdotrls. taiut. Well-conicei er atld clearly refited contract arid properly right laws are esseirtial to tle rlevelopmerit of In several East Asian touraries. ovrer-the-counuter trad- borndf rutarkets. as are laws Iltat permit conrpolatiions to ing in eqildies is riot periiiterl. which rliay hare hanri- issue bonds witliotit requitinig banik guareiureeo ior otier fil spillov er effi-t,t intiti the bonld iiiarkeis i whic il trad- ion-essenttial engulatury reqrairetiienit Ital add lo lie itig is niorimally over-the-couitler, witl dealers playiing a ost of issuanice. Uniless bonin market ctiittracts r,ant fe promiinientl role. IThe absentce of ant over-the-couiiter einforcerl. itonestors caniiiot le expecledl to partiLipate in market iiiay have iontlibiledf t tLhe lack rif dereloptoent the niiaket. Also, exscessiseregulalirin or admntiiistralive nif a dealer funs-tioni whicl is of vital iiportnlace for procedires can impedle the deinelopiien of i ienmarkel, bondl ntmarket dlerelopiioeitt iniany .Asian markets. as will a lack of clarily as ti wliat is espected to ,btali Another factor that has retanrlel developmeiit f idcalec approvals for the issuiance of borids or other fimiamicial fu(ttioens aind secondlamy irarkel tratding it, governiment instrumimets. Also, the lite of denarecation hetween the delbt secuirities is t[ie itnminlo ilizatiumi of signififlanit ioitey anid botid miarkets should be clear partictlarlv amouaits iof goivernmentt debt Iliriigh reqtiremiients fliat when isstuamnice reqtiireoments or pro:edures are itiore bitr- fiiaruncial instilutions aid pro, irdenit fLRids told signifi- densoniie for biirds tlsais for rooneY niarket iistruntetits. ( att portionis of their asseto ini the forim of those sec urities. Ihere is ai clear mieed to deflire the corditionms innder s A.more sophiisticaterl iitotrsitents-stmch us deriva- whici private placenreirt if debt instriments will be tiues-are itnirdtCed iito the defrt omarketo. or the ose permitted. Private placenients-nrfferings to a limited of reporchase agirceilents is pennitied to filance posi- nunilier of inveslons ol to sophisticated Iistitutionial lioss in securities, it is ilierative lo develop appropri- iovestors-van reduce the cost of riebt filancing. The ate reguhatry safegUards aild Programos lo educate concept of shielf-registratioit siiourld be considtlerel for investors about Llie risks anti rewards of investinig in pftillic offeriing of dthbt securities to allow segniierts of such transarctionis. Also. witl respect to repuirchase asi issuie 1i fe besought io inarket over a spe,ified penri- agreenmienits. or similar fiinaniciing techniques. Iheme is a 48 clear reed to eniure Irat cirstoier fairds arid securities Finially .he soLICcess of a lledgliirg bond miarkel is pred- are adequiatelN prolected illroighi prudenlial olandarils icated or the e,i,terice of ,ell-i iformed iiivestors. rirar- record-keeping, clearance. settler rent, and Cuslods0 ket prole-sionals. aod regrlatrrcs. Each of iliese kes procedures that adequalely prroter,I irveslors. parlicipaols hasi to liar t a sou1 - lideu slairndirg of new firianreial ir,strnoreilat arid their characleristics, tra(irig Govenments should elr..ose regrilatirr models appropri- rieishaiuisrims. and proced(lre- lor tire rcearace, settle- ate lthie slaug of de,elopieni of their baod markels. It merit. and salekeepiirg of Lecurities. As lIre market ihe regilatory framiiework clirseir calls for investors to becorimes iiore sophislicated with ilie eiiergeiice if decide onj the mrieits of a particular iivealrrenilljbased on fiiraricirig tscrliiques oelih as iepurchase agreeiierits. the prillCiple of full and fair discl-rsue, the nernssarv or herLgilig stralegies tli..rrugli [lie uise of leri'ati,es, it pre-rciditinirs for such a syslem mus 1) in rplace. Mar ket is importaii hal bollr go, erirreils arldthe private see- efficien,cy is diminishedl by creatirig roe regrlatrir trr develop traininig programs that enable nrarkel pair- regirrre oai paper (i.e.. disclrsuore-based stanidarls) bIrt tiripanis and regrlatorrr to rinderslaird tle intriCacies employing iuerit regulation in actual imipleiirenitatirni. annd coiilplesilies of these firiaircial prrrdLicl. 49 Blo ua-eiiNm,r - it 4 INTERNATIONALIZATION OF THE EMERGING ASIAN BOND MARKET ROLE OF FOREIGN PORTFFOLIO heing facilitated by stra,tural and secular (as opposed INV ESTMENT to cyclical) developments. includinig thy global integra- lion of productlion: (d) the shift from pred(lminantly son- Introduction ernigh to viiainly private flows--privaic-lo-private flows now represent roughly 7(0 percent of the 199:3 nel flows D his ciapter reviews the patterns of prisate port- lo developirig corunrtries, roripare,d to 47 perenit in folis inovestmrent in East Asian corlrirei against 1990; anld (e) the predominlance of recipierits of imid- trends in international portfolio nflws. Analysiv dle-incomie oauntries. whiclh rave eitlrer avoided tire of t[ie underlyirig fact,cs, the retains. and tIre ptolic dlebt problerm or dalt witli their debli -seriarg. auI are iirtiatives. in parti:lalar ii t[ie domestic boindl rinarkeLs. rIoW experie-iing a swrge orf prisale investimerict liows. clearly indiirates that East Asia is well poisevl for fur- tlier increases hr its s.hare of glrbal inseolable capital Table 4.1: Private Capital Flows to All througli p o0tfilis 110ws bolrl in erlaity alrui bonds. Developing Countries, 1989-93 Overview 1S- ',3 ,;s;LI9 %i 'tP 103 vIne Prisale capital firm s to d-eeloping counirtries have tLlha PrisaLe shown a speetacirlar increase in recent 'ears Thlese Caipital Ftow. 412.2 1.9 102.7 2.3 159.2 3.5 flows icireased by foar tire- during the 1990)-93 peri- Ii2ri n 20.9 t9 47. It t. 60.6 .h od. In 1993, total private capilal ilvws tim leseloping tYmotim, V1PEIly Cioaries ariorilued to US$159.2 billion, a 55 percenir Fltsn 76.0 0.3 14.2 0.3 46.9 1.0 inrcrease over 1992. OatI of this amouirnt foireigni portfolio tebr-crrairirg investmnierits. both evluity and debit-crealing flOws. Etowo aninounled to US$45.7 billioi, onr 58.2 percent (Table Lmrv sit iT .2 0.3 12.5 0.3 42.1 t.t 4.1). Sparred by strong g-rwth ini portfolios inisestiriell - - florws as well as foreigin direct inuvestoreirt (FDI). private s, Thn n5ald Bsmk. surce financing inow accounits for thiee-quarters if aggregate resoiurce flows to the devehiping world. The share mmf private capital a.s less thiani one-tliirvl if lie In 1993, total private capital flows tro the East Asian tutal until tire late 1980s. couinitries arirruoited to US$63.1 billiol, of whicil US$28.7 billion, ir 45.5 percent. was in portfolio flow's. The strikinig grnrwth in prisale capilal flows hias several Sixts-ltiree pereeit ouf the porrtfolio flows were in equity key characterislies: (a) the growin,g donmiiance of noin- flows. Portfolio investment in bonids of the East Asial lebht fw-s-eqait s iniestiruet flows accountel for two- countries aniorurited to US$8.2 hillionir ini 1993 (Table thirds of private capital flows in 1993; (b) within inns -.2). Unlike Latini America, portfolio flows io the East fromi private sonr-ces t[ie shift frow lianik tir nronbank Asiani brmlin markets have beo,m limrited becauise the somurees in the furorm f securitizevd lo.s siuch as bond major markets in the region have been closed tin foreign issues; let struig and surltainred growth irr FDI. which is portolio i-i r e-lmer1is. 50 Table 4.2: Capital Flows to East Asia, 1985-94 trie' share of equity iostles has grown fromil 25.1 per- (US$ billion) cent to 44.3 percent over the saame period. The share of 1985 1990 1991 1992 1993 1994 East Asia li both cases has gor-ni at a mire rapi(l rate. Pahtiel Ssusrces 7.29. 3 8.4 8.8 11.0 7.9 as Table 4.3 illasirates. The fiuldaureual causes of this Offciatl Desi. charge are largely siructural. Major contribUting fac- Assisda-ce .5.2 8.3 5.7 5.6 6.6 6.2 tors hase jeer]: (at liw real interest rates. (particalarle Othe,r Offiu ija it kes sOIrere iiltantries). leading to i mproved ieselop- FPiri,-e 2.0 1.0 2.7 3.2 4.4 1.6 hng cuntrs credilworthine-s: ()I the sea change in Pet'-ale ftH. 10.9 2t/.5 25.6 42.1 63.1 82.5 de elopirig coutintt policies. inclsling fitraiucial andi C iii --i1t Basok. t.1) 4.5 5.1 7.6 -2.1 - t . d Bon,ds 4.3 0.5 3.6 3.10 8.2 - rade l)blalizati fi-al olidation. and dereguda- Otl-e Prisate 2.2 2 2 1. 1 6.2 2.4 Iio; (l t StacLICtural changes in glibal financial imarkets. Foreign DirecL itrltiditig increased filiani,ial iLtegrationr of developirtg irrestIn]erit 3.2 11.0 14.0 20.9 36.5 42.7 ciurmities. giiwinrg ilternational diversificatiot of Piietfditii Equiats iestment fiunds. aid easter access i deseloping FlHos () 2.3 1.0 5.1 18.1 17.6 ountri- to industrial osiuritreapial yIlket.c (d) Toal 18.0 291.8 _34.t 51.6 74.1 90.4 sItICtural factors stcth as dereguilahfii of the peivate S- -: -..qo,~g Cp -,d P.- - E-, 1-. Th- he Bssk. - sector, tIe gro-iiuI of reglitolisro in trade and incesl- meit. disinoterrrredialioir fromr the batikigsg,,stern sitelnce tIre onset of lie debt icisi. and lower costs in linais- Table 4.3: Share of Developing Country Bond Iriation and cmmuniation. and tel privatizatirr of and Equity Issues tate wsed 1992 t993 QI-Q3 INTERNVHIONAI. RBINI) MARKET ACCESS 1t994 11 EAST %SIAN lDEN ElOPING COUNTRIES Dr eloting c-oiair, I iii i-sues Bo iol-r-eiatio-aIa e W hile beitig tIre recipient irf prirtfolio buird fl0ovs,' the tin tills of LtSSB 24.1 53 1 38.6 % of iienitiiiaal t Iii i -sres 7.2, 11.0%7G 12.2% countries irt this study have alsio linen acces,iog ititer- nationial bind iriarkets directly for pur po.es of fi narte- Ealt Asia iig hrietmerits. Tis peri ises an alterrtative iue,ha- tin htotiassf aISS) 5 2 12.1 15.7 rilsnt for in-sestrrhent for I ntertnationral ins,estoss. The of 4)llerilatzo,ail I. I-d i-ileW l.to% 2.5% S-(IC4S trends in inutertrational bortdl i.ssles. iri mer. of nuarkets. currencies. iiaturities. arid other factors. can give (in b,hiIon ,,i fSS) 5-9 11.5 15.6 importatnt insighlts rita thr leel of access atid iritegra- %, ifiit-ulion1Watrqsii issues 25.1 t% 28.3% 44.3% tirn tlial the individuIal contries in East Asia uave. Fronm arti ivestor's poilt of vies. this has isiiportant East Asia impli,attionis in teruis of assessitg irisesturent Irtlential tin hilli-s oa US$S I.S 3 2 5.7 in aurs partir-ilar courntrsu %, of inteiaotiioa equitsi,i, r r 6.4% 7.45S 16.2% Ntei-iisaiis Im It,s lt rio-ns if US$) Country Trends Tol.1 tnieniatii-itat Btsiil Issues 334 481 .1 7 The irn-lvettientt Of lhe East Asian countries iii this T..al turesnatianat Eql.t1 ts.sries 23.5 40.7 35.2 tulsd in Int erthatiosial bond iriarkets has growir. with lie , bhilhn.,r of JSS) exsCeptiiiir rif Singapore. at a spectacular rate. Table 4.4 sa.ues: 1ssdd Busd. trEL 9. ,s,a E-rossc Basi/. i.illustrates the mlein.ts in Lerrs of' boid isu,aes fsr sele,t- ed iruntries in the period 1989 to 1994. The nmodest BOND AND EOLUITY Xl RKET OPENINC IN parti,ipatiotn of Singapore in this period (US$530 mil- EAST hSI \ lioni in 19941 reflects its litihitesi reed for fiuiancinig triiough internaliontal botnd markets for its thrn purposes. The share of deselopirig coanitro eqluity arid bonad issuLes has growth significantlly ill tIle last seseral pears. Of the Of tlhe total bond i-sses in the period 1989 to 1994. the InItal iteniationial issues, bond issuies y ldeseloping Republic ol Korea took t[ie single largest share wilh 44 countries grew from 7.2 percent iH 1992 to 12.2 percent per- eun of the carulalive total. China anid Thailaiid in tire first three qutartees of 1994. Developinog -uin-- had 18 percent ansd 10 percetit shares of the total. 51 respectively. Each of the other countries had a share Korea is the major borrower in international miarket. less thani 10 perceot. Given the sharp inicrease in the Duaing 1994. tortal bond issues by Korea amotinted to grow th rate of bond issues in the countries with smaller USS6.1 billion. Korean companies have had access to proportions. it is likely that the country composition will foreign bhod imiarkets since 1985. There has been a chanige over time toward a moare balanced represenla- recent trenrd loward significanti liberalizationi of [he lion by all countries. domneslic capital markets. Tradilionally. however. the Korrean domestic miiarkets have been restricted to for- Table 4.4: International Bond Issues by eign participation. Given the stronig growth in tIle Selected East Asian Countries Korean econonrv aod the insestment nieeds of donrestic (US$ million) corporations, international bond issuies were the single 19ts t190 19to 1992 1993 1994 firost importanti channel for investing in Korea. TIre Chiaa 1 51 0 258 1,355 2.85- 3- - growth in international bonid iSsLIeS is likelv to be sus- kIdo.e-ia 50 5(r 33 244 stO 683 tairievl. but with alternative chairnels such as participatirin Kn-a. R,psbIHL cC 288 1.507 2.t 2.8785s22 soso in Irie doriestic nqoiPv and debt markels, it is conrei8- lalamNia 429 20 19oo o 958 2.345 able that the enolmoLIs growtsl rate-s hr interoational Philippion 0 1r 0 20 LtOt 11.34 bo10( issLIeS will slow dvwn. Singaporo 921 115 ( 117 o 530 Ttorts,ot 21r10 v rr 522 t.5 22.52 36 Ti-d 200 52215122 Malaysia's bond issuance ini international markets Trot 2.039 1.872 .351 st 156 12. I1.560 deilitred from UIS$429 million ini 1989 to 0 in 1992 ( where there were rno issoiancen), hut in 1994 it issued SomE: Eso,o 3-e: Osodor,e on5d n,td B,nO mroffrsrmn.orUS$2.3 millior ii boirds. Malaynia is considered tI he a highly crerlitworthy criuntry and th,reforre has leen As the evidencve indicates, Cliirras internationial bond able to acceos international markets on vese fasorarle issues have griown twentyfold ii this period in spile of lerms. The Malaysian financial markets are very well its absenice fronii bond issuance in 1990. While China developed. Malaysia has had a strong foreign presenice has beeir the single largest recipient of foreigni direct in its financial narkets botlh ii eqiity and domestic insestroenit avrring developing countries. it is ircreasinig birid markets. its rise of interiratirniral mond issuance ii a najor way. This renects the fact thal inesetrnent opportLIlities in The Philippines didi not haoe any issuance until 1992 Chinia are perceived as beirrg extreiely favorable. As when it raised USS20 millioni. but that grew to $1,134 Clrina has not allowed foreign portfolir investnment in its millioii by the end of 1994. The recent wave of eco- doorestic debt market, international iSSLIeS are the only nomic reforms and the relasatiron of pvrtfolio anid doireit miajor claiiiiel for debt financing LiSilg foreigrt capital investment have opened the domestic iiiarket to foireign by Chiiiese enterprises. This. io-wever. makes it miiore inivestor participation. Sone international investors difficult for sriialler enterprises to) asail of debt fiiatrc- renain conicerned about the macroeconornio perfor- ing in China. It is expected thal international bornd mance of the Philippines any1 tIle sustairability of the issues by China will continsie to play an imuprirtant role curreent accorunt. There have also been pressrires on the in the furture. particularly Llltil its domnrestic debt rnarket euchalnge rate rf late. which have fuirther addred to the has been cefurrired arid is rpen to foreigin ticolsios. genieral senrsitiiv of f .ireigit irvestrrs. HDrwever; the goserionent is taking measures to restore insestir con- tindonresia has seen a steady inrcrease in birnd issues in fidence inr macroerotirniric sLIstairalbility. intecnatiorral nrrarkets. In teorro of absoolite atitrutuits. however, Indonesia's involoem,ent has beeni relatively Thailand did rut issue boirds orverseas during 1990-93. modest at US$683 nuilliort in 1994. Anronig developing but in 1994 it raised US$2.326 million through bond countries in general, and East Asiasi corintries in par- issues. Similar tr Malaysia, Thailand is considered a ticular, Indonesia has tIle most liberal capital account highlly creditworthy coantr). and it has relatively easy policy, suggesting that its capital miarket is well inte- access In internratiortnal boirvi itiarkets. Furthermore. tire grated with world markets. Given the size and gniwth Thai boird market has beeni open toi foreign investors potenitial of its economy, the relatively stable pailicipa- since 1986. ion of lnrlonesia in intenrationral bonid issoes is more reflective of a fuirdamental coriier-tration hr equity- As disnoussed above. while sorime cross-country differ- lirikeol finanrcing and less so in rhebt finrncinrig. ences in trenids renrairi, it is still true that botiri 52 issuance has grown by large anmounts in cavh of the US$300n million in 1994. As nientioned before, abose countries. In particular: the last few Nears (1993 Malaysiani parti,ipatioi in international bond markets aoid 1994) lave seen .peetacilar growth of bond grew largely in 1993 and 1994. In 1994. 55 percenit of issuance. This shoull be uidersio-r in lie cont-es of the bonds issued were by the private corporate sector the internationln environmelit. While cerainlNy 1993 Prisate uitilities accontted for 26 percent of the bond1 .a. a sear when intierest rates Ti indusirial counlitlies issues. but they had no presence at all in presvious aiid particularly in tIle Ii sited State, were low relatiBe years. The Philippinies. too. had a ue y recenti expan- to the eyele, they had started lcimbing through 1994. sPin in terimis of its participation in ithe iniernatiolial The retiurins on US Treasnr, securities are a reasonable bonid markets. In 1994, bond issues were divided prsxy fur alterinative return s for interllatiolnal ini stor,. between public banks ind utilities. aiid private corpo- The fart that all the countrie-es in iis sutidy Isere able to rate and Lit ilities. The largest proportion O.f blion. issues ilicrease their sonld i-suance in 1994. and usuall, hy is 1994 by Thailand la., bhy p,i,ate halks t35 percent large anlsillts. piiillts to lie potential that the ilterila- of total) bIut prisate corporate. the celitral goe-rnreinl tiortal fiti.tircial tttarkets have to supply ii euttImenlt 1ap- pibli titilities. Other priBate fittanitial in,titutions, and ital to coutitries even tlthe face if rising itierest rate utilities w eve all cluile active. il ilie indilstrialized ctutitries. It muist be kept iti mitld hiwever. thial exteriial hocks. slch as le recent tiu- Table 4.5: Bond Issues in International Markets nll Mesico. can have effects it markets which are by IssuerType in Selected EastAsian Countries seemitgly unrelated, an1dl soitte riteass re of caution Ita, (US$ million) to be exercised in judgin,g stabilily of flows. Portfolio flows di telend to e sinirewhal vithieralile to externial far- - - 19- Pubti, B-tihisg'Fin-sc -4466 5.335 tars in the shoot ILill. while icilig Iilce highly co.0elated Pittilic 3urtiutite .393 .3t2 with recipietnt -tuntlry littdamentals in tile tiig un. G:enonat f;0tvmisetit 50, 2.(99 Prto-te Biaskis,isanr- 760 5,796 As the business cycle progresses anid inlerest rates in Pritate Corportie 2.91 2.019 thej Unitnd States rise, tltere isiay be a slowudown it ltlie - Tutat 12467 1,6 rale at whicl hbourd issuaince frstm the Asiati Coitintries T- - will be su-cesftul. The t-ntids si far seern to itirlicate Vi e Pr-,si.,Psth6t F,sss,r (shir.) ris Piisi!PslAivh Vu mn-k tlte resilience of this miarket. alsd bond issuance in fin,- ,, s ititernational markets is likely to cntititue to cre rapid I ..E..... - Bon/u ,,id W1,t V r k f,,- giowth in the fuititre. Ini -uinittarY. thle types of borrowers who have issued IssuerTypes botids in eatlh of thlese countries have varied a great The es-iden,e suggests sigtnificant dlifferetreus in the deal. With the exceptititi of ChiTia. tIme celitral goues m- ,rotss-,ttitntrs clasuificatiott of international bond issues iietit lhas i...tt ieen the priliiary borroiser in any of these by issuer trpe. The ralssifi,ation if bond isuies by contitries. Btit there is ignificant disperlitti of burrow- issuel tlpe 5irisvitlerid i Table 4.5. ho (Cihtia, for er typie bets.eert pilblic arid Irrate emtiLties ainoig all instailee. 47 perceit of tital interiralisuial bomuds were tle coitutries. i,sued by tle vericral governiiment aund 32 percent by puiblic banks. The share of other pitbllc fitanvial insti- Major Instruments tLtiotns de,limned il China bet-seen 1993 aiiil 1994. Ini Il broad terms. bonid insttiietits calt he classified as Indlttesia 57 per,eit of tlhe bond issues ii 1994 were fised rate iisirutneTits floating rate i,stTiurents, and by publi iatks atTd the rest hy tile private ctirPorate crn,ertible instruments. There is sigiiificant variatiun sector lowes-er. the prriate corporate secttur it in tlhe types of iistriulitints that countries hare rised in Itldonesia wac the major- brist issuer in iiternatirOnal Ile tourse of theiri iitetinational bond issues. Table 4.6 itarkets utitil elid-1993. The Repuiblic of Korea has preenits s tlititinary inforntmation oti botid isuites by tadi a wirIer grotlp of issuers. The largest single class Of iistrumet. In Cluitia in 1994 the predomiTiant type of issuers in 1994 wa tihe public banks with a 44 percen,t icsue was the fised rate bond, accounting for 88 percent sliare Of t[le otal. Prisate corlporate issuiers aiud prisate of tital dillar vale. In ITndtoinesia 57 percetit of the batiks acouslited for 30 percent aitd 17 percent. respec- total salte was floating iate is,iues 37 percent of the tiely. of total bonid issues. Sigilificalitl,. Korea also 1994 issies were fixerl rate issies, and tite rest oniTi- usitltessed the first local authority biind i-sue, ttf ertible. Iti the Republic df Korea. fio 1994. fisred rate 53 issues were 46 per-cent of the total dollar value anid Currency of Denomination floating rate issuies were 44 percen1t of the total. Iln In each of the countries, the currency of issue for the Malaysia, two-thirds of the value of issuies was convert- bonds gives ant indication of the type of market and ible. In thie Philippines, the proportions of fixed rate, investor base that it is Laigetin)g. A striking feature oIf floauinig rate, and convertible isstues were 46 percent, the cross-country coiparison is tlial in each of these 24 percent. and 30 percent, reslpectively. Singapore's countries. the US dollar and occasionally also the yen bond issues in 1994 were eqiually divided hetween have been, tIhe major currency of issue of the bonds. In fixed and floating rate issues. For Thailanid, 8e largest the case of dollar-denominated issues, the markels subgroup ih) terms of the value of isstues was on floating would have been tlhe Yankee. Eurodollar. or the Asia rate terms (43 percent of the total). Fixedi anid convert- dollar amarket. in genieral. In the case of the yen, the ible issuies were 30 percent and 27 percent of the total market of bonid placement may have been the Saomiurai dollar value in 1994. or the Etinoyen miiarkel. The breakdown of inteniationial bond issues hy currency is presented in FigLure 4.1. Table 4.6: International Bond Issues by Selected East Asian Countries by Instruments Figure 4.1: International Bond Issues in (US$ million) Selected East Asian Countries 1990 1991 P192 1993 1994 (By Currency; 1989-94) Chi-a Fixed 144 985 1,R59 3,02R Fl.vilmg 114 37t) 970 424 2 Co-iier0l1 23 Indooce ia Fined 485 250 15000 Fltating 50 25 388 GCoo irible 393 244 45 Kr-e. Repdatli. of Fined 827 1,356 2.285 4.501 2.791 10000 Fltvodg 5.30 57, 320 580 2.6It _ L Con.erihtc 15t) 591 272 541 618 Fined 200 958 600 5000 Floaling 200 01-B Co--coible 190 1,545 P'hilip)pi.-e O _ _ I _ Fined 970 519 CHN IDN KOR MYS PHL SGP THA Floaling 265 CU-veeible 20 44 t351 us$ Y.. * Ca$ U Otoer Fined 75 75 265 Floatiog 40 63 26v5 t:on-l-liblhe 65 N: Choo,; tIlN: tldoo-,w; KOR: Are,-: tIS: M,d-,tn. PHL: Thaita I Philtppi-ez *. S,ogoj.rs: THA: Th,doMd dl drl ~~~~~~~~~~~~~Sever e; Thr Wield Oont. Fined 3()0 169 696 - Floolimg 222 110 t ,(t00 CIoov-oihle t.233 630 --- In 1994. 57 percenit of total bomnd issues by China were So.--; ELvn,ov-oyv Onod, re nod 9orleld ,1O ist-soaff-ui-o- denomninaled ini dollars and 38 percent of issues were in yell. The choice of currency for Korea in 1994 was sim- As tine above data suggest, there ib significtant variation ilar to thal of China, with 59 percent of international arroiig counnties in the types of issues that they under- hoiid issued in dollaro ali1d 36 pecceemt in yell. The rest take. As the table illustrates, even across line couiotries of the East Asiani countries have a strong preference for have chaoiged titeir relative shares if altenmati-e instri- dollars since their currencies are linked to the dollar ments. Suich choices niiay reflecl coniparatine cost In 1994, t[le share of the dollar in international boed advantages amivl also expectations about the futiure issues mof liese uoulltries ranges from 100 percent for prospects and environment that counmotries amid the liter- Indonesia to 76 percent for Thailainl. natlional nmarket inlay luave. 54 Table 4.7: Average Maturity lenigthening across both dollar- and yeni-denominated (Years) instrumenits. The trend in China, therefore, has been 1990 1991 1092 t993 1994 for the leoigthening of nmaturities of bond instrumients. Ottio. 1990_- t22L. i22~ 9~93 1994 Indonesia's miaturity profile has remained more or less us$ - - 5.0 7.0 9.( stable in the last few years. Il Korea, too, the maturi- Yen - 5.0 5.2 4.5 6.8 ties across currencies have beeni roughly stable. While Otthir - - - 5it Sit Malaysia's involvement on a large scale is relatively Iodatesia recent. the malurity of bonids in Malaysia is very long uss 5.0 12.6 5.8 5.9 6.1 (9-10 years) auod has remained in that ranige. The rela- 5ev - - tively stable maturity trenid appears to be true of Oth-r - s.o 49 _ - Thailanid as well. 0s$ 8.8 7.9 8.3 9.3 6.8 Information on the spreads on ilnteniationual bond issues Yen 5.0 6.4 5.0 4.9 4.4 bared oi, a limited samfple of recent borrowings by the Other, 5.8 5.9 4.6 4.7 s t East Asiaji coioitries shown that thie spread over the benchmarks generally reflect the relative credit ratinogs Malaysa 10.0 10.0 9.8 of these couintries (Table 4.8). The spreads paid by Ye., - - 10. 0 Korea, Malaysia. and Thailanid are the lowest (less than Othtot - - - - - oile hundred basis points). while iltose in respect of Indonesia asid the Philippines are amortg the highest l$S - - 7.0 5.7 6.3 (200-350 basis poSits). China is somewhere in 1e .n- - _ between and Chinese issuers also seem to have bene- Other- - - 3.6 fited frito relatively favorable terms. Singal,-e USs 6.0 5.0 - - 10.8 Table 4.8: Ratings of Sovereign Foreign Yea _ _ Currency Debt, March 1995- Othe- - - - - 3.0 C(uoet Moodly a Stad tat-- & Paar' Thadiand In-teimeni grade USS - -- 7.9 9.3 7.6 China A3 BBB/A-2 Yea - - - 7.0 5.0 Indaoen- B-a3 BBB-2 Ottew - 7 0 5.0 7.7 6.6 Kora Rep. Al A+2 Malayaia-- Al A+/AA+-t ' Ian avepena dew,wnaetdyerpeiaat oar a t5m3. Thadiand 42 Al .Saurce tart5l Sank atafellsmil(ta. Betota wivevtoient grade Phitippi-a3 BuS 8B-/B3B-2 Terms of New Issues Table 4.7 presetis data o] the average iliaturity of bolnid a; Rav..ngsvat . far .irvi.:r-de . oaS ee a.f.glluan issues by currency for each of the coultries i this suer- 1-df: 4naa .al 4.,2 A.3 41 S 2 43 Bal n a-2 B-a3 .taadd & P-,ne .4M 44+A4 44- 4+ 4 A- BBB+ BBB BBB- vesy. The data in this table give some insight into the 5,s,aawd type of fi lancing that these rouintries are availing thett- * Thfirut vnng apple- vrto n --crea dIeb, the Oad1 oIttag selves of. This qtiestion is important for several rea- atnidito ta, llnl8nwrlnarrvmv delt '' T .. SnatnaJ .-r - st 1aenen lel61 o atkb sons. One of tiemii which staidn out is that Ilnger- t.atnatIonS. maturity borans iniply a snialler tieed for refinatleing or 2,. P..e... l .... "rolliiig oer" of bonds. Shiort-tern instrvttents need li Soar--laa, td Sta,d-ed-d Pmoe .s be rolled over frequently, especially if they are used to finance long-terei itiveltmnent. This means that thr abil- SUMMARY AND CONCLUSIONS ity of the coautry to borrow agaill at favorable terms is significantly affected by shbrt-termn fluctuations ini the There hlas been a nLurge in the internalioiial issuance of econiotty auid the interiiatisnal eltsirinment and by its bonds by East Asian countries. which suggests that the owni liquidity consideratioin. lined miiarkets in East Asia are likely lo play asi impor- taint ole in the capital inflvwv to East Asia in the The average maturity of bonds for Chiia has beeii future. The succens in ititernational boitd istiuance by 55 East Asiani countries is reflective of their past ecoioni- ing linkages betweeni domiestic and global markets. ic perfonianee. good track records is servicing estenial Filth, givenl that domneslic markets are greatly iRilu- debt. and tle growth potential they offer lo internation- enced by domestic factors. access to these markets al portfolio investors. The economies of East Asia are, would allow better risk management for investors while io genieral, ehihbiting high growth combined with benefiting bood issuers. Finally, the opening up of macroec( ioilic stability anid strong fundamnentials. The dorme,sic bond markets resilts in greater sophistication growth in private capital flows is important to further of the rimarkets due to the transfer of itermiediation growtlh in, these economies. techmluogN. International bohd issuanice has been rising rapidly. Allowing access to domnestic bond iiarkets isan impor- enabling isSoers to access invesiient capital in eslab- tani policy initiative in the East Asian coLiaitries. lished bond markets. The oallook for tIle East Asiani However. this will require additional reforms of the issaLers is generally positive. subject lo thie continuiation domiestic secorilies mimarkets. To function efficiently, the of sound macroeconomic policies. Access to doniestic market mechanisms have to be strenigthenied. In terimis bond markets in the East Asian couintries has been mli- of the bond rimarket, this means that yields have to be ited in lie major markets (Inc to the policies of the determiniiedb yb iarket f,rces of supply aiid demand and authorities in these markets. Thai lan1d. lndonesia. anid miot bh a(lmi iiistrat ive fial. Also. access to domestic Malaysia allow relatively easy access to thieir domestic markets hy a diversified group of interniationial liorrow- bond riialkets (which are also expected to develop els anld investors mieeds lo be encoaraged. There is a rapidlyl. The bond miarket in Korea is not openi to for- need lo build miarket-based benchmarks to facilitate eig)) inveslors to any significant degree, and China.s secoondary mnarket tradinig. The legal. regulalory. anid bon0d markel is currently c losed to foreign investolrs. clearing and settlement systemis shouild be tranisparenit and efficient. The Iinkages to otlier miarkets (oich as International participation il loomestic bond miarkets repurchase anid inoterbank markets) need to be strong. should he allowed and enicouiraged for several reasons. This also implies silIlLtianeous reforml of oller markets First. it would broaden tlhe investor base, whiich would in addition, to the debl itiarket. Country-specific sag- facilitate tradiing. Second. the domeslic miarket is omore geslions are given in Chapter 2. diversified in tenmis of borrowers from a particular conutlry; anid therefore presenits better portfolii mnaliage- Because of time strong fuoidanimenitals and bright eco- meiit capabilities for fireign investors who vish to nonmic prospects of the East Asian couaitries, tire will diversifv amon)g different seclors cithin lie salie comn- conlinue to attract foreign portfilio in estlIleIlts. 11I try. Wlmile improvilng fond i ng possibilities. this would order ti iiianiage volatility of these flows, conservative also presenti a greater degree of stabilitv to aggregate fiscal and monetary policies should continue to be fol- fows since portfolio reallocation call be done amonig lowed. Givell thie sensitivity of miarkets to current bouids if the samie ciunlry. Third, nilaly smiialler eliti- acollIlt ploispects, special care should be given to lies will have difficully il accessiIlg internalional bind miaiiltain external viability. 1mI addition. the authorities nmarkets because of the lack of informatiomi about them shotld publish regLiarly accurate data oni the genieral in the global niarkets. FoLirth, foreigin participation healih of the ecolnonly anid oim the viability of the bal- would imipart greater depth amiih liquidity to tie diimiies- ance of paymniemuts. tic financial narket as a whole. amid help in establishi- 56 --~~~pp~Ifwh ffiA "M 5 BOND MARKETS AND MONETARY POLICY INTRODUCTION W hile the financial dereguiatioii becomes a mlajor facil- itator of the bond market deseloporent, in regarvi It bohi D liis chapter (leals witlh the indirect nimoelar its size anid diversity, the lailer in turn provirles differ- policy procedures in the East Asian, ciuntries enit kinds of market-based ilisbililenls .f monetary pol- c..vered in Ihis sludy: As a prelade. inldustrial icy to suWitule for those direct iistriurlents ihicih gel coiintry experiences in operating monelary policy Iou of Ltime witli a liberalized financial *ssstem. Inrdlirect iistrunieits are discussed, as these coLlitries are likely monetary polic is exercised through transactions in Io be the iiiodels used by the emeiging miarket short-term mroney miarkel iistrorilelris anti government economies in desigiring ilonelar polices, bonds of variolis natnurities, and rediscounit operationri at the central baik. Central bank byilrig and sellig or f Erirergeiree of bond iiiarkets is essentially a pierirome- guiveruiriment blinds auid nioney market insirsurniento non of finiancial lii bealization which creates extenisive affects banik reses ns, which ichaliges interest rates aird incentises for investois anid borroiers in t[ie firrairrial t[ie availability of credit. Thii aon also be achieved rs iriarkets. Until the early 1980s fiiiarrcial iriarkets iii tarting the cost and as adability if oni-demanid redlis- East Asiaii cooitries were donviriated by baniking sys- couiiting facilities arid c1ariginig reserve reqLdiirilellts tems rhich stiffered fi-on extensi,e controls on initerest imposed sri the bankirig systemi. Thiough the initial rates olr banok deposits. loalis. and credit allonatior. iilpact of these actiins is felt by banks thiroa.gil changes Investors hal vesiy liuiied choices of firiaricial assels in prires of goverisient bonids aniI nrmoney market fur ilteir savings. aurd horrorers hadi luirrited choices in instirimirets. it is transmitted, s irner on later. to tire flirancirig their irives-Irleuil req1uirenuerits. The onsel of prices of prirale sector boiinds, changing the whole fiianicial reforms in recent sears has dranatically spentrumn of iiiarket interest rales. changed the finianicial ens ironmenit in these co.iritries. providing a wide ranige of finaircial assets anid types uI INDIRECT MO)NETARX CONTROLS IN instrumeints available to iivestors arid borrowers anid SEIECTED) INDL STl RIAI. (COUNTRIES forging trhe links of their firiariiial ysteui with interna- tsoial firianiial iniarkets. Monetary policy basically refers lo iinechlairisrns uised bh ceniral baniks tii iilnflencie shol-Ltern interest rales aiid Deregulating financial asset prices lias allowed rew ba[ik re-erves. Unlil tIle mid-19707s central hanks ill iristrunients. froiii short-term money nsarket insttrl- the indusirial countries relield in mixes of direct anyd imients-treasuor lills. comimiercial papers. certificates indirect methods for this pirpose. in recent years. Irw- of deposits-lo loaig-tenor giivenmient anid corporate eser, their eniphasis has shifted strongly toward inilirect bonu s, to flourish ins conipetitire conrditions where niethihsds that impart greater flexibility to iiionetary pol- rewards are conisisteit with lthe risks involved. icy. The basic idea uinderlying indiretl mionelary coin- Govemment bonds. for whicil pries anid subhocniiplion mlol prloedures is that a central hank cal illf nlo e ainoints had ofteir bees manidaterd befiire dereguilatioin shurt-lers initerest rales ii the interbanik miarket- onommeurced. siow face instreaoi ng crmpetitionr fromn givent tie deriandiv for central barl k hlibilities ii lthe forirn donmestic anid external financial instrumoenits. of banik isoles and reser,e deposits heldf h b banks for 57 clearing purposes or meeting reserve reqtirements-by adjtusted weekly as reqtiired reserves deviated from the varying ihe supply of reserves. ,ver which it has almost projected level to achieve the desired degree of mone- total couilrol. Transactions by inldividual banks to tacy restraint or ease, but also with a view to permitinig secure reserves from other sources niet out in the inter- imiore short-raun stability in bank borrowings at the banik clearing process anid imierely redistriblmte reserves Federal Reserve. provided by the central hank. The central bank's abili- ty to conitrl short-term interest rates depends. under After the 1987 stock market ciash, the Federal Reserve indirect imionelary control procedures, oni how it can supplied liquidity generously throu0gh open market induce banks to seek central bank accommodation at operations targeted at the normi of the federal funlds the miargin. A preconslitiion for effective cenitral bank rate. Against the background of an apparent rise in the control over bank reserves is the presstire exerted oni demand for reqUired anid excess reserves anid a stronig baniks by changes in other items in the central bank disincentive on the part of haniks to uise the disCoant balance sheets so thal banks are left with no altermalice window, the Federal Reserve made no attempt to acoid but to be dependenti on central banik acconmmodationi. all unexpected steep decline in adjustment and season- al borrowing. By early 1988 non-borrowed reserve Figuire 5.1 pIresents the main instrulnents ised in indi- operaling procediures were again broughlt into play to recl control procedures in fotir selecled inadustrial colmii- encourage a rise in the federal funids rate.' tries-flse ULited States. Gennany. Japan, and the United Kingdom. A brief description of how they are In the United Kinigdom, the Banik of England's practice tised is given below. of announoincg minimiLm leiding rates ended with the 1981 moniey market ref-ris. This change was part of an Central Bank Credit Facilities effort to overcome a propensity to delay iliaking In [lse United States a distinction, is drawn betweeni a changes in official postedl rates by pennittimig market systemim in which time central banik makes extensive ase judgimients-fouied oni the basis, among other thiings. of outrighlt purchases of securities on tlhe open, market of developments in the nsoley stock-to exert more to supply reserves to banks anid osnes in which the liq- influence on, interest rates. At the same tine, the uidity of individual basiks and the banking system as a autlhorilies did away with the practise of deliberately who(le is more dependent on direct central banik lend- creatillg reserve shortages by issIiiig treasury bills in lig. Ims tile latter, inoney miarket rates hlave beels seell to excess of espected treasury cash needs at the weekly be more closely influenmced by rates on credit provided auctionm and of relieving them subsequently-either by by the cenitral bank. In the Utmited States credit aisade purchasing treasurv bills at posted dealing rates or by available through discounting is rationed by adnuiimis- lending Is the discount smarket to miake effective the trative constraints on banik use of the Federal Reseive's mflllillnmumm leading rate chosen by the authorities. The discount wimsow Ithat perummit thie discoumit rate to be Ba0ik sontinmues to operate all iliterest rote-based mins- maimntainmed below the daI-to-dav niterbank rate (the etary control systeaim. Earlier, it triedi to coimfine thiese federal funds rate) by a variable margin. The innuemice operations to very short-termn market transactionis in of the discount rate osn money market rates has bills at initerest rales quioted by the discount houlses at increased il recent years, unlike during the period prior the initiative of the Bamik of Enigland. but iltese arrange- to 1979. whemi open nisarket operations were geared to nests were not suIccessfuil il disengaginig longer-term keepimmg the federal funds rate withmlsm a niarow ranige. itoney vmarket rates from direct oifiucial influences. It canine to be recogninze( that im certain circumstances, TIme 1979 adoptiosm of operating objectimes for bank procedures that would pernmit a clearer official lead in reserves chaniged this situIatioum by permiittinig banik formimg interest rates were needed. Since 1985 the demanid for reserves to influeicme aimarket interest rates. Baiik of Englanid has invited discount houses to borrow The operatitmg target has been non-borrowed reserves, from it at a minimumum lending rate posted in the mirn- whmich is derived by deductimig the estimated level of ing for one day anid osm maliy occasions later in the day. bonrowed reserves of bammks frosm) tlhe forecast demamid Simch leimding is effec ted iit all imterest rate and for peri- for total bank reserves which is arrived at on the basis ods chosen by t[ie authionlies.2 of the Federal Open-uinarket Conimittee's judgriiemit about the level of iluerest rates likely to be consistent In Germamiy, under arrangenments prevailing Lintil 1985, with the amomnetary growtl target-usually Ml. Since tile day-to-day nionev msarket rate oftets tenlded to nsid-1982. non-borrowed reserve objectives have beems remail just above thie Buidesbank's Lombard rate at 58 Figure 5.1: Instrument Mix and Operation for Selected Countries Mkctel opgeati.tn Rener.. Staodieg Operating ReqtiiremnelIls Fanilitin- leateneteoto Marbe-ia Peiceduree G-rmani Reoeqe,reeqioeite Th-h-ll ot Goieetieieeuniiee Petionan -d Thlee type-iilie-ent dfl-eretiarieda eiirilig oeellorei-iiei a, ioliidiog iltiiit ..i.ed .e.ord-r atte-iide-oe-nhe- ti the type . odegpoi.t- phiy o hcbaeged bh g-oo-inie.it-o-ned nirke-. th, ainoi.l 1n lRned de-a-idll . aitel lod fi d eeiclleeoig c -tiico far otilnghl aed the e .er-i rate in oie-gae -d ),oi Iil eligible ae-olf I ..urcha-e. -oeneiit lo U. nine if eep-oni. 'I'he i-it-eii ti-iiili1i-io. .er tli-e..aitd ceA-te-l A iiluie leler- hei Fh-Ii rate i iticalle aiib bill. f inghi lhi- tnlealnt, in net ntile o-o d--d aild l-e tliaiinhi-teno lale. MIlo gi-ie o,ieotl lthe-aiioo-iit i deiei lbtr 12. l-erenL. oi-aketnater. Lke,haed h-od fi refio-Ii ,ng -aoableha,l aI iinue, onl-eln o dnp-io. 4 95 rate i o ra'ei elge d aiiilfabreeienglia e-ge i ilih. Th-e -a eeBy1,- - antd "einaiogn ft liiollateie-dl Ao- nI-s file -eooagiig ally ,oiliieel eo &le1toni- 4.1 Slcr-ent. li--ia hqol,ioalieial qiti, lot tt fli - eck. Ree II.la.e. arc -.iillieo- dile.igeia,l iiitlneno-iigilie no Ileieeeitenlbe na,ef t,, bridge letlg,pr.l- cci hiaoge tile. ch-n.-,ole ,-easo tenene deitetitten. b,ll, lireigo e- harge -wat1111 til nbi ol gildsel aiiilioeiiieo ii)Oll Irlr celra batik in haoh, and Unialed 035 p-e-aol ofeigablo lo,emighil n1opp- gineit Pt-hehac.n ard -ales Mano-ie tu al bank us-al1' Kingdom. lialililj- 1o li depo,deil At d- -e--ieie leelceeni unnally e.iiinghl -lnt iiiaiiagenieii dealI, tice- a dIay: at -etinal bank eale to elInel onentighi ni,ine,iten REPO ci itni-gh additonal ilculing a1 honage: alilMeo-dee elgbleir-n p linteola-. net rennpei fLied tte I- of-Lal rec.n , la ilh toilMoiioIg go-nnioieiiiioaetnin to lan I oei, e--n. fIon hanko lIqoildito neeao,ie. nod pn-i,e Strong aoooo ..nee.... diffcolli-e, pa1een. 'o-t Initluenll clffIet of lineo,g of leal- lean bai- thog, It1 eatiteili- toil 15 d.ayn -atolir. ofleatsofdea-lg. Japan Inl-rino-d in 1957: Discount Ii tIle C-ootoee lull,. No -oletielac Miltlaliie iilen rreunen- nated:; moIe, ntofon hebee- -l-nleolal pagee. otat-iageIol depedoilig on tlpe o oh-oged donog 1an fo,oli,h, lf loae-ieg g-ee,io-eot filonin-g lh-ugh pnioaea --entn. REPO, a-d le- oar3. "I barking ,yaini-: bill,. eaeae kidk. i-naie t. -eier-e REPF'D gene-all di,ae ....IeaIe beleo go-eeeoim bood,. P-rch..e...bo Ii- oiode th-aghaoeiinn; -neoi latkeiea,; -d CD,.dC s I. Ienn -111 111 I onnelal fluanerl inieidual bill, held be Wlka Il bill, at kil -ate b-lk ccilg. blo iheo-gh oooeo deieee-ioedindoe tenea1 hbak detee- tanbet dealer. io,erlaok bil ,iaeke. -inoeceoce dan oalc.o- ni a - "lo-1 naloght toenhuo- od the ani--ot each billM dea ono gilennien- l-nd book -ao one aId Ban-k I J,pao ti offened bh BRan ai Japan ee-er .e,le ngbthtl ioo, ia -it I t lI..m.tiled nonilie-nf -all batak d-aaee deale-r- fi-oaniald ia hali ',lol Repooiha- and ao iia-al laaa a eoennee.eli .a go,-ailoig oaekeitate. iainein iii gaper. -h f-inan .al -totllono-. no1d Ouleight p-rchane. &i goie-eoin- boneld 59 Figure S. 1: Instrument Mix and Operation for Selected Countries (continued) Market I pera-tislrs Rescese >tarsslsrsp OGierasisre Reqtiireini-- F-eirlirm It-stnoserst- Markets Procedures United iFeee . r.. uireients Adj-snieIr lr-msssinig dOiM-dinrg teed-sin n.e.ne.are w Ien parirwipailing States ae rarneirti assessed F -r Ir-ierrrs as. d Federal agen' ssarsagemcrri through in ri,e se. .rrnt.. market. d--l-,anl delild liq,sidils sees'- a-ced s , ecrities h.ills. -ss. pri-rtan rrk,t. the irianagerot the Fers stepssiirrl d ot,her .,Reilsritnis a Fed; and nisto t. statrighit suer ha.,- Stsle-is Open Market rhlr'katiiesi r1wirs-io lii.-rrant r;te reins ssirdaie-lsstneerie 'ic- A iris sirs ha. leessIas a hs she iaa aliss shrsti-trrnrb m erki-es inI .erirrdi.s. irsariet r.. sheeiio . irrrpu..ii rs- aisis Seassssa ILorrrsg. --k,tarn krtrises. pnai,irity. lin.irrg. shiher depsrsiir aiepIreic: Estessdsol senr.Cil lHrseosirs ttepssr'harc ageeslerlist.- surtospIIItt. asil t-e rLLerlb are rrrMel tolrile1ssssirers intitistirrrr ins.euntieMsup oFl repsrehase eharrgedass1 larc at rntti ru .lts;inltee tn*lriso 1s1igLSL reenrenis. present.l3 percet lire ralesirnl dt ise r IdaTtO Fralanee. i tuSh's$5 r are snssrk s elssts.ieI szIRlic amd lit persre sit nr risor-e-stgh- hilascees ahistid i mat let-l whiich bamik reserve dleficienicies are rnet. These Open Market Operations arrangemerts tlieta ttndersentt a basic cliaige as the Open riearket operations as consdsected by ositrigist purr- Baisislesbasik raised the Losisbard rate to a level above rihases asisa sales are sin a modest scale in Germanv aiid that applied in its temporary operation. These changes Japan. but are well eritrettchled is tlhe Uinited States and provided a strosng diisicentive to the use of Lonmbars Uinited v Kigdost. The siain acceist is oni developing new fatcilities except it exceptiosial sircsiistantsnces. This alss tehasiqiuses andi instriments. stich as purlthase/lepur- freesi noney mtarket rates fronit their dependence rt tlie shlase agreemssents or reverse operations, directed at L.smbard rates. Tr prevelt excess liqsiiit y its the nsar- effe-titg temporary changes in a bank's reserve posi- ket frost caosing ins steel) a fall in namasey snarket rales, tioos it the directionst desires by tle cesital banks. the Buntdesbsank has ntade asailable a facilits ssunder whiils it offers batiks Ireastity bills-rsormall witls Outright Market Transactionis in Secuirities and three-day taltirilies-to inest their sutrplus fusnds. Bills. The itistinmetiis ased in these operations in tile UlJited States are eiltier long-term governtneiit securi- Japan's basis official liscontat e lies well below tlse ties tr neasLars bills: no private pape[ is Used. call msoney atnf bill sates it the irterbanak starket. Tranisa,lions are hansl led "sser-the-Cointer." with the Cetatral bank cre(lil is ratiosted by credit lilaes estalb- falnk of orders beintg placed witit o-called primary lisbed uander the baaik's c redil-cotntrol systenlt. dlealers in treasury ser urities some of which are spe- Fuirthermore, decisions abouit the daily allocatison to cialized departmenst of ntoney-ceirter batnks. Nornally. banks are iniavie entirely at the di-sretios ohf te Batik of dlealers are required to tender for seunrities of a partic- Japatr. which may zit arty littie w itlhdratw re-di granted ular typue atnd sratairiti. Allocationts take place at ihe previouasly to impose "repay naent presstsre.r The effee- tnost favorable old price uattil ilte desired amount is live ruosL of using Bank of Japan reledit rises as the peri- pircrlased or placed. The nolain characteristic if tIhis od of uitilization falls. BiaLIS, central bastk letdistg lias oaperatirsta lies its a sharp distinrctiosn drawn betweess become a flexibie anyd powerftil instrumasent that is still debt-asianagettetn operations lconrducted by the arsed, in coIsjLHatCtiotr wila Ile. ttarkel itastrti nieris. to Treassurvs and tsostetsar policy operatlions consintiaig of offset daily flaetuatiss ins bank reserse positivts or taer pLurefhases in the secorrdarV starket fcoitdacted by tighlte or ease these positiois. The diecr-etis exercised (ie Federal Reserve). The Federal Reserse does tot by the Batik of Japans creates too ertainty asiatostg hanasks 05iq uire goasernsment securities in the primary' starket, albout hosw fLitrire reserve needs sill be nlet. Ill ress tt tIa.ougla it may in effect redeeta secaLrities direcily. atld years. ilte deregulalioss of ilte meircy nmarket has often does so, sfhest a large rednctiot in bank reserves allowed titese r;stes to mose somstewhat mrvore fwrel y irs ia s atranted. In getteral there are thiee to fsmror otriglit respssnse to changintg pressures ran reserve positions. purchase operaliotts ins notes anid bonds each year. anid 60 not imiore thani two openi miarket sales. Transactionis are bill markets Of self-addressed aiid self-accepted bills inostly in the treasLiry bill market anid are carried not in drawn by the Bank of Japan with imiatur ities ranigiig such a way that their impact am the sIrUcIUre of yields froiii several days to a few months have also been made is ininiimal.4 from time to timile. These instrimnenits are used to sup- plement clhalige, in leniding in day-to-day or hoer-to- The 1981 reforms in time Uniled Kingdom were liner aljustments hi hank reserve positions, and to off- designed to miake transactions in treasury bills by the set ceasonal swings. Most of the treasulry bill issues are Bank of England the principal instnimient filr regulating still normially takeni tip direitly by the Bank of Japan. the money market. Against a backgroulnd of strong but tIle Baiik since 1981 ha- sold Iiiiiited aniioumits of pressures on money market liquivlity anid a depleted s,Ii..t-terin treasuro bill, to absorb seasonal surplases of supily of treasIn bills in the market that followed pel- banik reverses. The ilegree of freedonii in detemnimiimig sistent oserfuiidi ng of the gosernni,enrts borrowinig the timiiig ansd amonunt if the sales has increased grad- reqairemients. purehases of treasury lills became a aally.v1 but lie miarket has nIt. eI palided eniiugh to per- ahiiia and conitiinuing source of baiik re.verse. The e i- ritit hIying oni any ignificant scale. 1In 1986 the Banik tral bank's effort to lenigtheni the short average valoaity of Japall pLIurhased ue -tifi ates of depiisits for Llie first of its bill hildings to reduce the luge vohliuue Of pu,- time. anid it started tranisactionos i commnercial paper in chases necessitated by redemiiptioin a le iiiiplied hat 1984. Market uoperations at different mataritu,ew an inl dif- tlie determiinatioin of term-niiiiiey rates could nutl be left ferent papers allow the Banik of Japan to imiltlaeice the tenii to the market. Though the market could initiate decliiies struictre of moiiev market interest rates and helpl ensure in interest raes, the responsibility olir iiakiiig nicreases Iliat interest rate policy impulses are effe,tively transinmit- was clearly passed back to lie auahlities. After the ten fmon the interbanik miarket to miarkeLs that have been decision to cease overfending was takeii i iiniid-1985, open to participatiun by nonlianks uace 1988, when open the stock of treasury bills in the miarket, by theu harly miarket rates moied well above intelesl rales in iite call enough to keep the niarket in e.islelice, rose, and tlhe aiid bill markets. The Bank of Japaii anniilnced that it Elank of Eniglanid's holdiiigs of comni-er,ial bills fell.1 w-iidd fmiii then in ilirectly influence only shoir-ternm rates at maturities of up Io seven days, leaving long-tenmi Gemrmany' Bumidesbanik has engaged since thie early rates to he deternniied by market filrces 1980s in major open niarket paurhases. Only sporadi- cally aiid rarely has it held a large portfuliio if baniks for Reversed Transaetions in Securities anid BiEEs. aiiy lemigih of time. It ucinliducts vperatiolis iesigiied tv Re-iersed transactiiins are resortedl to increasingly in ensure a steady iiiarket fur fined interest securitie- by the indast-ial couiitries hecauise they are flexible aiid the federal govenimenit aiid its fends. The Binideshanik can le iniplemenited quickly a ithomit significant effect mas occasiiially svld "mobilizatimi" paper-treasiry in [lie prices Of the umiderl leig sectrities. Unider hIis bills aeil treasury discount iiotes-to abiirli bank pri,edare, purchases eald sales of securilies are effect- reserves.' ed nith a conitract to reverse ilhem at specified prices aiid a futare date. Usually the cenitral bank relains the For miany !ears the Baiik of Japan fiillOwed a poliev if iiltiatise in settling [lie aimnit. liming, alia du ratioii of gradually increasing its holdinigs of se,iurities, iiuclid- cmuntraclts aiid ii rhecivlng whether IO renlew themi, iir lo ing 10-year gsermmieit bli lnds, to miieet risimig denuaid let thieni uawiid omi maturitb. This in,iitrsi.ent is u.sed tii for central bank credit. These pur,hases are made from coamiter movenmenis in the supply of banmk reserves foioui dealers anid hankb through a teiider prmseeure that ili- ither souirces. 0Oi sieme occasions, private riarkels are lially took fiiur io fi e days to complete. hat was siii- alsii usedv: i others, special proicedures enidow tlhe plified to peritil day-ti-day transactioiis. Tenlders have tramisactions with ianyv of [lie characteristics of a beciime sinialler in aiiiouimt and iirire frequeiit, bti Itle secured luau. SLICh reversed security trailsactions are operations are still iiot noriially used for short-term iir now sieed to implenielt miuielarc policies in all foLur seasonal reserve adiljstmnents. For suuuoothinmg seasonal itudustrial ci iuntries. nariatliois in reserses, the Bamik of Japaui has followed a novel metliod since the early 1970s of bhiaing and sell- In the Urnited States, where tlhe privale market for ing first-class corpmerate bills anid sills of financial inisti- re ersed traniiaclionis in gus eriniietii securities has liimg tutions with corporate bills as coullateral in the niiarket. been large anld active tihe Federal Reserve regilarvl flowever; tlhe average stock of conimercial bills it sells ses. resersed security transactions foI adding to anid has grown little over Inie. Sales in the call-mone)u auish ithdrawing froiii hank reserses it large amiouius fur a 61 very short period. While the scale of reverse transac- policy stanice. Repurchase agreements tranisactions tions has been geared maitily to objectives for bask were conduicted at approxirirately monthly intervals reserves, their timing has bees, influenced by aware- between 1983 aml 1985, but have since become more ness that the federal funds rate could record large nfe- frequent, typically even week. Securities repurchase tuations is tire absence of offsettinig Federal Reserve operationis take place under a teuder systetu. There! are operations. Reverse purchase tranisactions can ou- three types of terider. For volume tenders, the central tribute directly to stabilizing interest rates in that they bank presets the interest rate (repurchase rate) anid the ofteni serve to finanice dealer positionls that might otlier- amoLilut is open for bid. The total amount of fuods pro- wise have to be liquidated. The dealers normally have vided by the central banik is generally a portion of the all option to terminiate repurchase agreements in total bids niade by baniks (usuially 50 percenit). Under advanice of maturity, and tenid to do so if market cmidi- interest rate tenders, both the anotint arid the repur- tiosis turn out to be easier than expected: they can also chase rate are openi for bids fnom banks. Funtids are allot- at timries help to moderate fluc tuations in inltrest rates. ted at a unifons repuirchase rate equal to the rate at Most operationls are in governmient bonds.' which Iliarginal bid is accepted (Dutch auction imiethod). The third tenider methrrd is a inix of both. The repurchase The Bank of Enigland has in recent years periodically rates, especially those set unider an initerest rate tendeg carried ouIt purchase anid resale tranlsactionrs with are closely related tol prevailirng mloney miarket rates- banks in government securities (and paper relatirrg to typically between the discounit rate of the Bundesbank at governinent-guaranteed. fined interest rate. shipbuild- the bottoorr alid the Lombard rate at the lop. ing arid export credits) outside the uiarket on market- related terms propirsed by the central bank. These The Bank of Japan's puirchase of long-term goveniment transactiolis. originially tised only for irieeinig peak sea- bonds urrder resale agreemenits begani in December sonal liquidity needs in the market in the main tax col- 1987. The purpose of these operations is to increase lection period, caslte to be employed inore ofteni to flexibility in maniaginig the supply of bank reserves anid redirce the burdeni of providing cash to the baniking sys- permil better control over interest rales in nmarkets that lenil for nrornial day-to-day operations. The use of the are open to participation by nornbanks.'' teclinique remained restricted by the availability of sitiable collateral in the basking systeur. Purchase arid Reverse Foreign Cuirrency OperaLions. Official resale transactions in cormuer,ial bills with the dis- spot purchases and sales of foreign exchanige are nor- counit houses have been conducted iniore frequently. irally linked to exchanige rate considerations. though also our terms proposed by thie central batik. eithler to the) have incidenital effects orr bank reserves. However, mobilize long-teriii bills riot eligible for purchase by it. they have implications for monetary policies siurilar to or when enlpectations of declininrg interest rates riiade the open unarket operations descrilred above. Central the mnarket unwilling to offer hou g-teriir bills for sale osi banks in maniy industrial countries regard spot foreigin tenns acceptable to the ventral banik. Neither type of exclianrge tranisactionis as ani irstrumenrt of money mar- purchase or sale operatiron directly conitributes trr ket policy desigined to affect thie foreign euchange rate. establishinig the official view tf interest rates agairist Otitrighlt fonvard purchases or sales of foreign exchanige that of the niaarket. that have a delayed impact our bask reserves cani also be rised as ani instrument of money market policy. Swap The Geriiiaur Bundesbarik announces tIre terms to operations in the foreigin enchanrge market, made under whicil it is prepared to purchase ertain types of contracts to buy anid sell foreign cunrency in the niuarket domurestic bills fnom banks tinder repurclase agree- at too different value dates, are seen in a number of niuents. Reversed purchase from the Biundesbanuk of counitries as being Inore clearly a staridarul iristruitrieit secirities eligibie as collateral for Lombard loanis of moneey market policy. However, amonig the couiltries began in 1979. The timing and frequrency of these oper- discussed here, orly tlhe United Kingdoni arid Gemnany atiions, tlie duraLion of reptirchaln periods, the amorint arranged foreigin exchange swaps between the autliori- of fund, to be prr,vided to tire banking systemr, and the ties and bairks on a few occasions in the early 1980s.N rate of interest charged on the ftinds are decided under liqridlitv considerations and policy guidelines set by Transfers of Nonbank Deposits Between t[ie Central Bank Cournrcil. The decisirnir is generally Central Banks and Banks based our tlhe Bundesbank's estinmation of banlk reserve Irt countries whose treasuries niorriially hold cash bal- positions over the niext several months, given its curent ancers in excess of innnsediate nieeds with the cenitral 62 banik. shifting funds to accounts with the banks may be demanid for banik reserves in ways intended to be con- a convenient way of dealing with distribution of banik duicive to achieving money market objectives. reserves, especially when their timing and expected short duration make it difficullt to counteract thenm The period of holding reserves and other technical throLigh security transactions. Conceptujally. the sim- details related to it have implications for the nmanage- plest and quickest procediure for managing batik ment of short-lenn money markel rates. Is the tUitied reserves-transferring government deposits from the States, Gennaniy. and Japan), reserve holdings are semi- cenitral banik to baniks aitd hack-ran often be nicon- lagged, while they are lagged in the United Kingdom. spicuously effected with little direct inmpact on, short- In fact, there is nio contemporaneous accouniting in any terni interest rates. If the intention is to affect interest of the G-10 countries. These holding arrangements are rates, these transfers shotild be airade conspictiously to considered good for facilitating interest rate-oriented have an "announcement" effect. However, a framework soney market policies. The lenigth of reserve holdinig is agreentent covering the distributioni of funds anmong highest in the United Kingdom 1180 days) and the low- banks. coniditions of remtunerationi, anid collateral est in the United States 14 days): in Japan, the period reqnirements is often necessary. This m))de of moinelary is 30 days. In German y and Jaipan, the penalty rate for control procedure is used widely in Germanry, buit not in reserve deficiencies above thie respecftive discount rales the United Kingdom and Japan " is 3 and 3.75 percent.' The US Federal Reserve's management of treasury bal- Indirect Monetary Control Procedures- ances, though not seen as a policy instriarenit. is suib- Divergence and Convergence ject to close consuiltation between the two organiza- Procedures for implementing monetary policies in the tions. On occasion, the Federal Reserve asks the trea- four countries are sinilar in imianiy respects anid diver- surv to build up, or draw down, its balances to assist in genires are of ninor importance. dictated by the speci- managnig reseres. Under a 1978 agreemenit, the trea- ficity of institutional stnuclures in each of these coun- suoy unidertook to keep the balances oni its aceounts at tries anid their histories. The broad contours of indirect the Federal Reserve (which are used for makinig pay- monetary policy are alike, except in details. menlts) reasonably steady arounid a specified level, leaving its recurritg balanices with comniercial banks In view of the prominence giveln to short-tenn interest in "Treasury Tax and Loan" accounts into which mrost rates inl the money markets in these countries, chaniges taxes are paid. Large short-ron and tax-season swings in monetary policy stanice are representevi by changes in the treasury's balanice at the Fed continue. ineverthe- in the cent[ral bank rates charged oni their refinancing less. partly because the collateral requirements made facilities. In Germany. the discount and the Lombard commercial bariks unwilling to accept more than a rate set the tone for call iomoney rates. The Baunk of negotiated riaximum amount of treasuiry deposits. In Eogland generally supplies reserve shortages or recent years increased ariabilits in treasury balances absorbs reserve surpluses oni a day-to-day basis at the at the Federal Reserve due to major changes in the tax prevailing interest rate. Whenr it altem its policy pos- laws. the high level of treasury borrowing, arid congres- tuoe. it adjusts the dealing rate below wlich it refuses siorral dlelays in increasing tile federal debt ceilinig have to buy bills. anid if sufficienit bills are not offered at that reduced the precision with which the open market desk rate, the discount houses are obliged to borrow from the can forecast factors influencing reserve devehlp- Bank of Enigland at an interest rate different from thal ments." prevailing in the interbank market. Practices in the United States and Japan vary at the margin. Their mooi- Reserve Requirements etan authorities administer discount ranes, but do not Reserve requirements, though not strictly ani indirect chanige them freqiently. Inistead, policy directioni is monetary instnrument, have beert a part of monetary pol- in(dicated throtigh nmovements in market-determined icy procedures since the 198)s. The difference rates--the call rate in Japan and the federal futids rate between the use of reserve requirements then and niow in the United States-that are influeniced through mar- is that their level has been considerably r-educed in ket operations. these couitries. aniore or less to a level tlhat enables banks to meet their nieeds for reseres for clearing pnir- The mronetary authorities is these four countries irnple- poses. Reserve requirenments are also resorted to, under ment mnonetary policies by acting on the supply of bank indirect monetary coinrol proc edures, to influence the reserves. which in turn influences short-term interest 63 rates. Each of the authorities employs either open nliac- exchange markets. both of which impart flexibility to ket or interbank iiiarket operalions as its miajopr iistr- interest rate determrination and effectisely integrate ment of resers-e management. Repurchases or miatched doltmestic money markets with foreigin finatncial miarkeLs. sale-1Iarcliase agreements are often used for these pur- poses in Gerimany and the United States. In Gennani, lii the foutr industrial counotries diis,issed alive, central tile same procedure is followed bau the B1idesubank baniks do riot, in practire, extend loanis to ilteir trea- uises reversed transactions in longer-term secacities. suries. However. the central baniks in these coiuintries while the Fed relies oni shlrit-teriri maluritvy bli(is. ifee exteinil credit irndiectly to their goverinimrents by Reverseil security transactions do tiot play a rirajor rule acvlairi ng girverinmernt paper in the seconidary markel in in Japain or lhe U rited Kirgdom. The Bank rrf Japan pitrsnist if the objective if iraliagiig market interest entered ino repurchase agreeimiernts ii tIhe late 1980s, eites-or in thleir capacity as managers of public debt. while the Banik if E[gland resorts to repurchase agree- Aurtioir procedures ace prevalent iii all fibur countries. iririets pririnaiily 1. iiieet peak seasonal reserve in general. the holdiligs fceinral anks ii these coon- deniaids: ini both couniatries tIre emiphasis has been - tries, throghl dsbt rianagenmernt policies arid other tire outright parchase rir sale of securities. operatinis. have ieenr sirrall arid stable. Debt irranage- nirenir policy was used in the Urritell Kirigdorir iin the The role of discoeant wiidoiws for shrrt-teri reserve early 1980s as ani isirument fir directly moderatlig rianiagenentr (led icined in all firer covuntrirs dirin ng the tihe grrwitlh of the bankirig system's balauice sheets to 1980s. Il Japani. the discount riale is usually hebriw the nieet targeLs for a bruad rinnelarn aggregate (M3). Debt rirarket rate, arid tIle Bank of Japan rationis refiranc rig mranragenent ini this olilext luok tIle fiiron of large riet on uses it at its diseretion. In Gei-riariry the effective rate saies of giirerrnrrrenit paper (mirainly lorig-terrii bonds) is a Lrnihbarid rate-a rate charged oil 5- to 10-day that were rortirIally unrrattra,f ive o huanks. Oxerfundirng repurchase agreemierits. Il the United States. the redlis- was assrrr:ialed with a niet redaclion ihi the bairkinug sys- errunt rate is typically tIre short-term mriarket rate and. tei's holdiigs of treasury bills ariil a iiet imipirovemiienit for that reason. sannous iron-price nmethods are used Itr in lie governmeriets pi)sitioni vis-Zr-vis the Bank 4f raise tihe cost of disiosunits. The U niteild Kingdomri Ias nii England-refle,ted botl in a biuildp of gorvermrient (official discouilt wirindh, hIlougil it lerivis occasionally ti depirsits at the Bank ariil a reduction ini its holdinigs of discoLilut liurses at rates ilifferent frioi lhose prevailing gir ernrirent securities as tire ienilral bank acted to ease in lie inrarket. hank reserve positions hy progressively adding to ils stlork if private bills. The resucv iuig diowirward pressLare Learning from the Industrial Countries' on bill rates fin relatioin to interest rales in tlhe intechnarik Experience imiarket arid sir bank ileposits at lines has iniade it diffi- CoLluntries tlhinkinig if emulating the idirect irimonetary :Irlt tv imiplemient changes in interest rate policvy. csutrol procedurres tised by these industrial countries Interest rates* on short-lerm treasunry hills in Japan liuae shounl first uinderstand Ilre ciindilitis uinder wlinlc been kept so far helow mirarket level that. althoiugh bills each prorcilUre is uised. Two kinds if corilexitial oeiidi- are in prin riple mrarketable. feiv could actually be snild Ituns slroLili be kept ini irinld. The first is t[ie ability irf ti thie public. Banik of Japani purclhases have niot given a ienrtral bank tii control iliher itenirs on its balauuce rise to lig-leni baik reserve contrI because the gou- sheet. such as tIre currency issued. float, ret prsitiim ernirenti issmtes this paper inly for the purpose A` cov- vis-a-vis the government, arid net foreigin assets. This is eriirg seasonal fii1ndily needs. For irsLanice. issuie secaLnSe changes in these itenils can neutralize or iffuet yields oil gosverinrmrentt rin(vs sild ti t[ie syndicates of tie itiairgiral adjSIuItrlenrts in hank reserves that its inri- financial institutionus have in recent years seen brought rect nilorietar prceleduires bring abouit. Iln tIis coninec- closer In irrarket yields. Establisuinig an ripen orarket for tion. the relaionushir betweeni gosner ne fErnanin e arid shol-lerr gunerrurnuent paper in which tiie Banik of illlonetars iriy is vf eucmrial importarnce to the effectie Japan ucsuld uitnerie w-rldl widen thIe range aninu effec- funructiorri,ng of irrorietars procidviaes: if goveranrents tiveness of its nones nuarket iintervention instrumuernts. incur liabilities to central bainks to monnnetize fiscal deficits, ironerary procedures will be comisiderabily The secorid v (nirtextual cnaidition is represented by weakened as they will be unalible tur nirake the reserve domnrestic money asld foreign exchange muarkets. adjrustnuenrts needed to achieve the intleided impact oni changes ii which have enihanicedl flexisility in interest riiarket interest rates. The secoirid is the instilutional rare deternnirratiori arid enrsured greater inuregratinn of arid behavfiral aspects of tihe rnroney arim fireign dvrrmestic arid initernational rinneY mnrarkets. However. 64 the first of these two effects, interest rate flexibility, has in interpreting developmu,ents in monetary aggregates. beeni distinelly beneficial in providing scope for cori- The aarangemenits in place for official bill transactions plex policy strategies; market integration lhas tended to have beeni effective in allowing interest rate declines in place constraints on monetary policy oisofar as it response to changes in exchange imarket conditions, bht strengthens thie i Lfluenice of expectations on interest less so is aclrieving increases in short-term rates. The rate determination. Integralioni of miarkets has raised1 auithlorities have alsi, at iitunes wished lo resist decl ines the risk that exchange rate and domestic imioney stock iniitiated by the miiarket. Reductions in the stock of bank or inlerest rate objectives will more often ioie into bills bhi it up by the Banik of England during lie earli- confict. Such changes, together with a ten,dency for er period of overfundli ng has,e recentlY proved to be a otlier interest rates on bank lenidilg tvi respond more flexible instriiment fi,r Iiimitig thi sholt-ron inipact vif flexibly to changes in moneN market rates. are likely to large-,scale official purc!hases of foreign exchange oii Lltirnately liell) etablishi a monetary policy transisi- banik reserses. AlthoLugh [lie impact on muos%enients in sini mechaniism that relies riole on the interesl rate the Banik of Japan's foreign e-ehange reseres las at impacts on the veiemarid for mney anid therefiore spenld- times been very large in slollar terms in recent year, [lie rig. and less on the direct credit allocation effects that imipact on baiik reserves ii Japan ha, renirained sniall coime abouit with rigid rates on banik loans and deposits, relative to domestic influenres arid was readily managed by uising the instrumaenits available to the Bask of Japal. The way foreigin exchange market objeclives iniipinge oni As in other large countries. the influence of e-change a countr,'s scope for the pursuit of independenit diimes- market developments on initerest rates has come abiut tic interest rate objectives has also influiericed th5e iiairily by the adaptation of oiiiney market policy. desigin of their mor,es sacket irstrunients. It sI me sniall openi economies, where moniey market policy lis Yet aniotlier lesson ilial East Asian countries can draw givenr clear priority to exchange rate objectives, the fronii the iniduistrial ciiontrie' rise of indirect milletary irrstnirieirts desiginei to permit shliirt-teriu initerest rates policy instrimrentis ic that the level of reserve require- to respond quickly to external distvinrbaese have tend- nients, thoughi used as one if belirn. ians t be kept very edi io stabilize exchanige rates. In iriost larger iunitries. hor as riot to inirpede finlanlcial inirterrmediatioi. Reserve oni the oither hard, central baniks have attemlited hi requirement changes should he such as o enrabile banks keep iiioney mrarket interest rates onder close control, to iiieet their nieeds of reseres for clearing purposes. and iH mani) cases, tileir litsimumetits are designed more This lessmi has particilar miphir:aliorus for China anil tri priitect iimvirney miiarket rates against external Llistur- the Phi lipplines. bances by facilitatirig flexible adjustmerits ill tIre sLp- ply of bank reseives. Eveni in larger countries, however, Equally importanit is the choice of the rarkets Used by the efforts rinade (o introdulce iiiore flexibility in irioirey the iirisustrial sountries for cirnduicting opein riiarket market proceduires have heein iiteirded to permit operations. All four O,f tire coUintries operate in the se- exchange rates to be taken ori,re into account ini setting onidan miarkets, tln.iugh Germairy dies so both in the short-lernm iterest raLes. pritiara and secoidary mrarkets. This iiplies that a mere borid rarket existence is 1not sufficieIt for effec- Bank reserve targeting procedures in the United States. ry,e use of opeir mrarket operatiois. A secindary mar- thoughl desigines to facilitate ciortrol of the rironetary ket deve-lpment is inidu1pen,sable for a snistailned and aggregates, may gire the market some scope for ifnitiat- efficierit rise of that inrstriisrest. Alonig with this, it lig adjiustorenits in short-lenn interest rates consistent should also be noted that tIre hindustrial rcountries with olher assunired Federal Reserve objeclives. in,lud- earploy a riiix of oiutright purchases arid sales if gos- ilg ones for the exchanige rate. The borrowed reserve emionenit securities and REPO, as a palt of open nialket procedures since 1982 have oiften operated to keeli operations. In tIle initial stages whlein the secondary fliuctuiationis in the federal fuinds rate within a nan-ow rioarkets were in infanec and evolving. reliance oad range, anid to the extent that the objective for the dollar been oin REPOs, in order iiot to create volatility in bonid exchange rate lias ant impact on US irnterest rates, tle prices. bunt there awa a gradtial switch to outright pur- inflLenice lias mainly come thiough adaptalirro of the chases daid sales as the markets welre hroadened arid Federal Resere norms fir fund rates. In receiit years. the secoundary isiarket fRon tioined smuoithls. increasing weight has beein given to rising t[ie exchange rate in fourrmulathing initerest rate porlics in t[ie Uinited Likewise. a chiiice if instruimerts adopted for open Kirngdom, partly because if tIe diffiUclties experienced miarket ioperatiorns in thle industrial cunnnrutries cain le 65 instructive too for East Asiaci countries. Japan and ihe urgent since the growing iuternationalizatiooi of their UK, for instiance, tised commercial bills and comnier- bood markets in the 1980s. Capital nuigrates betweeci cial papers mainly of short-term matiurity alonig with countries wilh open capital accounts in search of goseritient boicils in open market operations. At times greater r,ewards, but its movenicents lead to changes in different instruments are used for achieving different exchanige rates as well as interest rates in directionis monetary policy objectives. In Gerimiany, foreign thlat are ofteni different fronii those desired in both I[fe exchange swaps are used for managing liquidity and niot capital inflow and capital outflow countries. For foi influencing the exchange rate. instance, in the UInited States the recent raising of short-term interest rates by the Federal Reserve result- East Asiaui countries wouldc do well in comprehendin,g erl in larger inflows of capital frocic countries with lower how the development of sophislicated bond markets has interest rates. fundamenitally changed the way monetary policies oper- ate ib the ilndustrial countries (as sooner or later they The iccessage in the experiences of these four industrial would fac'e siciilar situations). The chanige has mani- countries in regard lo the operation and effectiveness of fested itself in tlcree forms. First, bcunds hase become an monetary policies and [ie problems they face is clear. arbiter of mocnetacy policy. Secocid, it has heighteiced Though monetarv policy instriments have becouie more the secise for tieed tic coordiiate fiscal acitr mocnetacy flexible and work better by usinig markets tic iiiltielce pilicies withicic iiational hociciclaries. Third. it has creat- monetary coniditivis, waiile minuicizing informatioilc acid ed eveni grealer compulsioni ti synlcerojize aclion tracisaction coits, tIhey have seriouis implementalion among sovereign ciations in the sphere of imtonetars anid problems far too complex to lIacidle in real world situa- exchange cate policies in particular, and econocccic poli- tiois. Sophisticated anid well-develcped bond and cap- ries irn gecceral. Changes in bccncl yields set the diree- ital iniarkets do icot leave a large iciargin of error for licic for Ice lnioietarv pclicy. If fcr some reasocc icilla- nionelarn authccrities ncilless countries piirsue prudeit tionary pressures surge in these ecocnomies. they first acid well-orchestrated eccicccmic, fiscal, and nionetary iccpact bond prices-governiment and private-whichi policies. vary' according to the risk preinicini oni them. This is because the lholders ccf medium- acid loig-terimi bonds INDIRECT MONETARY INSTRUMENTS AND try' tI obtaici real returns on tlceni by adjccsting their MONETARY POLICY IN THE EAST ASIAN prices lo compensate for a rise in price levels. Baick COUNTRIES depositors wili hlow-earnincg assets move tilein intc highl-earinig bocils, thereby raising t[le while yield Before discussicig implementi ng inidlirect mconietary curve, even if the central banik fails tic raise shocrt-termc policies in Ice Asian countries, it is esseniial to look at icterest rates. Eve-n iiore iniiportacitly, withil ie variety of the ficaiccial Iiberalization that has takeni place in these bonids-asset-backed sec:urities in particudalr-iccreas- ccountries because of the reiaticnshlip between finanicial iiig ic volunce, tine inporc'tacnce of baciks is likely tIc wacce. deregulatioi acid the eVsilation if miarket-based instru- Siicce cecitral bainks change ciconelacy stacice by operat- iients of icivocetary ciccitrcl. Eqccally relevant, if niioral icig icic bank re.eries, Iheir power to influeccee market hazard problecics are tc be a-icded, is the Icealilt ,f their liqcidity is likely ti viliccinish as a consequence. hankinig systemcs, thrIluglc which monelary inistrumenits wold be used lo districule liquidity. It shoculd alsic be TIhecricial importance if the coordinatini hetweenc fis- cuoted that transitioci from direct tco iidirect mocietary cal anid monetary pulicies caci hardly be cxaggeraled. cotctrol alters the chanccnels fur traisnitting monetary Loose fiscal policy (creates pressures oni dcomestic inler- policy as well as its targets, particularly in [ie context est rates, wihichi cectral baicks are not always in a posi- of freer capital flcws. tion to ciccinter, in iew of shifferent dicmestic eccnomic poclicy goals. But their hond uiuarkets ofte,c provide vif- Progress of Financial Liberalization in the East ferent siginals tic the ciconetary authorities, which tIley Asian Countries finch difficilt to ignore. The icdepecndence of mocetar' Financcial Iihberalizalicin durinig tlhe 1980s in tIne couan- policy thuLIS. is eri.c.sly cocciproiised. tries inculuded in thlis study was motivated by a variety of factcrs, a majcr one being the adoption of sounud The tlhird dinmensionc of chanuge is the imperative of macroeconomic policy by key decisionmakers. It is well coordiiatliou an,d convergencue of irdustrial country eco- appreciated in hue East Asian, iccUntries that competi- comic acid iuonletary policies. This has hecomuue nmore ti8e aicarkets e,nsucre rucce efficiecnt resciurce allocation, 66 higher savings mobilizationi, and rapid economic ladry during 1993-94. Singapore's normiial interest growth. Furthermore. efficient and deregulated fiLian- rates rint only otitpaced its inflation rate bult rioved cial markets lend to create a riore favorable environ- closely in alignment with international rates, signifying erite for policy responses to indenial and extenal rapid integration of its financial syNstemi with frreign shocks. Reformis also encourage the objective oif financidal rarketl. TIre prevalence ofpositive real inter- improving fiscal and monetary policy effectiveness. est rates deepenie(d financial miarkets. whicil is reflect- Sinigapore anid Hong Kong have beenl pionieers in finan- ed in thie growthi of brorad nmoney as a proportiin to tIre cial sector reform anid have developed into major GDP in these irritries. Thrus, the M2/GDP ratio sLr-ged regiorial financial centers. Malaysia aird Thailanld have Lup fronr 20 percent in Indonesia in 1983 to 48 per-en been the leaders in deregulatirig their finianicial uriar- in 1994: the corresponding 1994 ratios for Sirigapore, kets. Malaysia's financial reforriis 'vere nol much of a China, Korea. Thailand, and Malaysia vere 92, 88. 42. departure, as it, econoury was fairly free and largely 77. aLid 88 percent, respectively. competilive. In contrast. Thailandi had a controlled finanicial sectir. while its real economy was largely Sectoral credit allnratior rerqairemento involving inier- deregulated. It5 finiaricial deregulation lagged behinld est subsidies havr beeni substanlialls mordified in rnost tlia in other East Asian countries. but once started in of the East Asian countries. They were drastically 1990, gathered uriomeoitum to almrost reach the level if sealed down in Indonesia. tIre Philippines, arid, nrire liberalizationr in its advanced ireighiboririg courntries. receltly, ini Korea. but still form a lubstantial part of hank (redit ini China, Malaysia, arid Tliailan(l thoughl Inidonesian reform came largely as a response to tire oil they have been modified to redvce tie l,sirsidy element price shocks. while China's reflected its transition from ini the last two. a command econonrqy lowarvl a market economrr. Korea pursuedh finanicial liberalization lo keep pane withi Finianicial reforinis alsol have foicUsed on eiilianicing the denrarids made on its finan,cial systeni by its fast-griw- operatiomal anId rrnanagenienrt efficiency of tlhe financial ing real economy and tire pressure exertedl by its major ssteori. hindonesia, Korea. Malaysia, ilie Philippines, trading partners. The Philippines accelerated financial arid Thailand undertook intensive 1r1eaUres to reduice deregulationr to get rtl of seroums niacroecrrn..oiic market segiiientation any1 obstacles to murnpetitimme by imbalances, includirig a paynrerits crisis. allowinig greater freedomr of eirtrs. expanding the scipe of permissible businiess activities for different types of The East Asian countries nave eitlier complelely freed firnancr:ial institutions. and relaxing restrictions ori for- interest rales or begun regulating them to reflect market eigin banks. Better mrrariagemennt oftlenl iplied that conditionis. Rates rave beeni filly deregulated in baniks rieedeni to be given greater autornomry anid nriore Indonesia arid the Philippines: Korea, Malaysia, anrld responsibilities for operational perfmriarce,. which in Thailand iniitially relaxed contrmms throtigh mnrre fre- turni has led to mies leriding policies, sophisticated quent adjustrilents in rates. wider banids for regulated infonnatiomn systermis. and miew prirdUCts. The refomr if rates, arid removal of interest rate ceilinigs. Korea niaim - Chinia's financial systeni lias riot progressedl as mnitch a, tained a general strait jacket of regilate(d interest rates, that if the other countries. In urintrast. baniks in with frequeit adjustmrerls in resprise to inflation rates. Sirgaprire arid Hong Konig hare been imore efficient. It took decisive steps toward full interest rate liberal- mrroden, innovative. arnd financially sunnd. any1 are bet- ization inn 1994, and is einpected to crmorpletely elioili- ter positioned tin respond to t[ie Use of indirect nimornetary nate regilationo bym 1997. Chinxa's proigress toward poliu) itisrmtruents. interest rate deregulation, mas beeni relatively slrw. Since 1985 interest rates hase beeni changed rio less The developrirent of mrroney riiarkets ii these comnntries than a d-izen tunes, largely to keep pace twiln inflation. is closely relatesd to financial liberalization from t[ie Moniey mnarket rates in China are the nrutnomrre of nego- puint of view of innlirect ilronetary cornrtrol procediures. tiationis between the aulhorized finiancial instituntions. The Philippines and Singapore had active organized arid cornsequenrtly are still far frrnrm being exposed to monvirey markets before the n-set of fin,ancial sector milarket iiflinrerices. reforiris, and with liberalization, they grenu faster and became nmore competitive as new anid disersified money By and large. financial liberalization in these countries mrarket instnoirerits emrerged. By the beginning of the has coninbuted to attaining positivw real interest rates. 1980s monrey markets ass,umed increasing iroportance except inn China where they remrairn negatise. particu- in Indonesia, Korea. Malaysia. Thailand, and Hong 67 Kong. China's money miiarket has remained rudimenta- nial exchange rates. which is what matters from the ry. thi,r. and less conipetitise. In genieral, the develop- point of view of operating a imionetary policy. irient of moley miarkets has been fostereul by the initro- dLICiOrI of new financial instruments, iicltiling central Viability of the Financial System handk and government securities, certificates of Use of indirect inonetaly policy instroments, such as deposits, various kinds of coimercial paper, and reprir- openi miarket operations or central batik rediscornts, chase agreements. Interest rates oni these instcuments revquires a healthy national banking systeril. A cenitral are relatively conipelitively dletermi ned. The develop- bank rlesigi ing indirect procedures for monetary coIn- mitent of deep and ide imiorley markels has provided trol tries to pick creditwirrthy and livquid i istniments to flexible iriealis for cenrtral bank management of livjuaii- place oni its balance sheet so as to minimize its risks. To ty through ripen rirarket operativns anin rediscount the extent government bon0ds or central banik hills are rnechanisn-. uised in openi rimarket operations, or as collateral for rediscouninmg willt banks, there is rarely aniy risk, but The lialirilarks of external finianicial liberalizationi are iheir fire instrnmierits are spanired by the private sec- the rrpenrirng of tIre current and capital acconnts anid the trr. tlhe cenitral barrk has lo assess the creditworthiness exteirt of flexibility in exchange rate determination. By of thro- instrmrnents rarefrill. The central bank has to tire early 1980s restrictions on capital flows had been L(Se its judgment to assess the risk if paper offered as virtL ally eliminated in Idvdnesia and Singapore. ciullateral for rediscotirit or outrigirt purchase by focus- Malaysia irposes almost no restrictions ron capital ing ion tlie bonriwers of baniks wh1o create the iistni- lliws iltat are rnot firrariced ry Irr al borrowing. In the ments. Bank creditrrrs-mahily depositors-alsrr have Philippinres. capital accoint crrrr.trrls rerrrairrievl rn tlre to determine whetlrer they sirouli trust baniks with their books in rtie 198(ts but were not vignrrr.rslv erfirhced. fLIllrls. Seell ill tlhis perspective,. ile rniost relexarit coir- By 1994 tlie capital arcourrnt was substanitially ripen. sideralion is the fionaricial soundness if the banks to pavinrg tlre waa for Iiinkirrg t[ie dmnrestic iioney anin cap- which the cei tral banik lenvds througir rediscorriutiig. ital markets io international firancial markets. In Korea. on tire orther haid, iliougir snime liberalizationi If tlie baniks are bhrdened with rnorn-perforrrinhg assets, rneasures. parlicularly for foreigir direct irestixrent arid the central bairk shoruld obviously use extreme cation overseas irnvestnienrt by residents, were in place by the irn rising indirect monetary policy instrumentis. Baniks in late 1980s, capital accouirt conivertibility has been lim- Singapore. Hong Kong, Malaysia. anid tire Philippines iten. It is likely tlhal these remainririg impedimenits to cap- measure rip isell as creditwsrtihy irstitutione, while ital flows will be ehirinated by 1997 when ils financial those in China haoe yet to clean up their balance dereguilation plan is fully implemnented. Thie exceptioun is sheets. Sexeral Korean banks have problems witih nun- China, whch lias limited the openiirng of its capital perforninig assets, brit these are r0ot serious enough lo account, thriugh it ton is moving gradrially toward that goal. deter tlie cenitral hanik from undertaking inidirect ionne- Lary control procedures. The likelihood of losses from During the 1980s the East Asiani coriiitries adopted bad loan policies lIas been r:ontained in almost all these imiore flexible exchange rate arran,gements, replacinrg countries by mreasures to strengthen the supervisory lixed exchange rates, usuially pegged to the dollar. franrework. Singapore, Malaysia, Thailard, anld Hong Malaysia, Thrailaird, ald Honig Kong put in place flexi- Kong have well-honed inroritoring and prudential ruin- ble exchanige rate arranrgemernts with currencies pegged trol mechanisnius to nraintainr the soundness of their io cuomposite baskets. Indoniesia, Korea. the banks. while Ilrdoriesia, Korea, and the Philippirres Pihilippines. arid Singapore have maniaged float have irrtroduced measLures to strenigthen supervisors reginnes. Chliias is inrore akin to a dual exchange rate, functions ii the last few years. These uneasures include thorugh it Lolifievi its rates recently at a fixedi parity. In centralizing sirpersisory responsibilities, developing general, these exchange arrangernents corresponrd tnr annd uanifving regulators machirery, and extending tire Inteerratiornal Monetary Fund classification 4f supervisiour to noribarik financial irrterrnediaries. In pegged exchange rate regimes. The rates are adjusted genieral. tire emrphasis of supervision lias shifted frouri frei1uerilly, albeit in sunnall steps, while tlhe flexible mrrinitoring rourie orperations to monitoring credit exchange rates are operated as pegged rates. The essenlce anralysis plorcedures aurd bank portfolios. arrd enforcinrg of these arTangenrents. however, is thlat tire rates, wiretler pnuderitial ratios. Their financial systenrs. thus, have pegged to the dollar or a basket 'If cIrrTelncies, or operat- geared threnrselxes to be souind counterparts that will ed as a mranaged floal. in fact functionr like fixed nomi- enable central banks to conrdrlht opern iniarket opera- 68 tiocis or open market type transactions withiart risking domestic prices. whichi niiay warrant a resIrictive adverse selections and illoral hazard prccblerrs.s domiestic iionietarv policy. The reverse happens witli a fixed exchanige rate anid an pen econonly. cvith a losv ef Implementation of Monetary Policy control on domirestic mon