I. Efforts should focus on the following elements to ensure success in developing and strengthening local currency bond markets:

1. • effective coordination among government agencies and close public-private sector partnership;

2. • simultaneous development of market width (the variety of product types), depth (the robustness of the investor base), and market infrastructure;

3. • enhanced transparency and market integrity;

4. • competition among market participants and openness to many players;

5. • conducive tax regimes for the holding and trading of bonds; and

6. • special measures to support long-term financing, where markets do not have the scale needed to provide liquidity and depth; (measures should be commercially based to avoid pricing distortions and inappropriate risk assessment).

II. Efforts to develop a regional bond market should concentrate on:

1. • moving towards open capital accounts and flexible exchange rate arrangements;

2. • strengthening regional policy coordination and cooperation; and

3. • developing domestic and regional credit enhancement facilities reflecting the market price of capital.

III. To accelerate the development of domestic bond markets and the emergence of a regional bond market, governments should intensify regional capacity-building efforts in partnership with the private sector. Four particular areas where APEC regional cooperation should play a significant role are the following:

A. Expanding the region's institutional investor base. APEC should undertake policy dialogue and cooperation involving the private sector to encourage broader cross-border investment by institutional investors in domestic bond markets. These efforts should focus on helping economies provide an enabling environment with respect to:

1. • government bond issuance programme to support the yield curve;

2. • tax regimes;.

3. • documentation and practices in markets;

4. • the environment for assessing risk and return in traded instruments and

5. • regulations governing markets and settlement systems.

B. Developing a strong regional credit rating industry. APEC should strengthen the credit rating industry in the region and lay the groundwork for the commercial and technical viability of regional ratings.

This is the report of a conference convened by the APEC Business Advisory Council (ABAC), the Asian Development Bank Institute (ADBI) and the Pacific Economic Cooperation Council (PECC) Finance Forum on 21–22 June 2005 in Tokyo, Japan. This conference focused on promoting private sector participation in the development of local currency bond markets and in facilitating the emergence of a regional bond market in the Asia-Pacific region.

Building on the conclusions of a previous ABAC/PECC conference on the necessary conditions for attaining these objectives (see Appendix B), public and private sector participants conducted an assessment of the extent to which such conditions are met in individual emerging markets and in the APEC region. The conference yielded the following assessment:

1. • There are wide disparities among developing APEC economies, but they may be broadly classified into two groups — a number of more developed emerging markets that have made significant advances, and a second group of markets that are still in the early stages of development.

2. • In the first group, only 5 per cent of all the key objectives for promoting private sector participation in bond market development in the region remain largely unmet, while in the second group, 80 per cent remain substantially unattained, indicating that a considerable amount of work remains to be done in a number of emerging markets.

3. • For the first group of economies, the main focus of concern is on enhancing market depth and liquidity. For the second group, the focus is on fundamental issues related to the depth and liquidity of capital markets (including benchmark yield curves, the investor base, savings) and the regulatory framework (such as disclosure, protection of creditor rights, enforcement).

4. • Of central importance for the proper pricing of risk is bond market liquidity, which requires a sound institutional framework and market infrastructure, as well as a robust investor and issuer base, a sufficient number of market makers, a wide variety of financial instruments, sound macroeconomic policies and an open economy and financial sector.[…]

A. KEY LESSONS FROM THE EXPERIENCE OF ADVANCED MARKETS

The region's developed economies provide a wealth of experience and lessons for promoting private sector participation in the development of local currency and regional bond markets in the Asia-Pacific. In these economies, markets developed alongside standards and norms governing regulation and market practices over lengthy periods of time. This process has been characterized in many cases by continued progress and occasional setbacks that included major corporate and systemic failures, with the latter providing impetus for reforms to address weaknesses and problem areas.

The development of the United States' bond market was stimulated by the growth of private investment in infrastructure, particularly railroads, without the benefit of regulation in the latter part of the nineteenth century. As large amounts of investments were lost during these early years through fraud and mismanagement, private sector firms in the form of credit rating agencies and the financial press emerged to provide information to help investors make better investment decisions. Eventually, the Securities and Exchange Commission (SEC) was established to address problems that had led to financial collapse and the Great Depression of the early 1930s and provide better investor protection.

The U.S. bond market has grown since then to become the largest bond market in the world. However, even with its highly developed and robust financial markets, efforts continue to strengthen these markets and institutions and better protect investors' interests, especially in the wake of recent major failures that have affected investor confidence. Many of these recent reforms to improve the quality of market infrastructure and strengthen legal and regulatory frameworks have focused on creating a market environment in which investors are able to price risk, through improved transparency and disclosure.

Among the notable reforms undertaken by the public sector in partnership with market participants are the Fixed Income Pricing System, which centralized quotations and trade reporting for high-yield and other debt securities, and its replacement, the Trade Reporting and Compliance Engine, which facilitates the mandatory reporting of over the counter secondary market transactions in fixed income securities.

The development of local currency bond markets in the region and of cross-border investment and issuance in these markets has become a major objective of governments in the wake of the Asian financial crisis. Governments acknowledge the key role of private sector market participants in the emergence of deep and liquid markets, and the contributions they can provide to the design and creation of such markets.

In response to the call of APEC Finance Ministers for private sector inputs to assist in efforts to develop bond markets in the region, the APEC Business Advisory Council (ABAC) and the Pacific Economic Cooperation Council (PECC) convened a private sector-led conference in May 2004 in Taipei. In that conference, participants identified necessary conditions to enable expanded private sector investment and issuance, both domestic and cross-border, in the region's bond markets.

In 2005, ABAC and PECC collaborated with the Asian Development Bank Institute (ADBI) to convene a follow-up conference in Tokyo. The conference attracted the participation of 124 key public and private sector representatives who are actively involved in the development of the region's bond markets. This report summarizes the content of the presentations and discussions during this conference.

This conference sought to make an assessment of the extent to which individual economies are able to provide an enabling environment for private sector activity in the region's bond markets. It also sought to define a regional cooperation agenda, based on public-private sector partnership, to achieve progress towards providing such an enabling environment in individual economies throughout the region. As can be gleaned from this report, the conference succeeded in achieving both objectives.

The co-organizing institutions acknowledge the invaluable support of the Japanese Ministry of Finance, the Financial Services Agency, the Bank of Japan, and the Inter-American Development Bank; the effective collaboration of the Japanese committees of ABAC and PECC and of the ADBI and the ADB; and the active participation of key officials and regulators as well as private sector market players and experts from throughout the region.

A. Macroeconomic and Political Environment

1. • Stable political system; no major internal social upheavals are expected.

2. • Continuity in economic policies; no major economic policy reversals in last ten years.

3. • Stable financial system; banking systems and capital markets are strong.

4. • No restrictions on economic activities, trade and foreign investment (for all industries).

5. • No restrictions on trade in financial services and foreign investment in financial sector.

6. • No capital controls which significantly impact on capital flows.

7. • Exchange rate regime which is conducive to efficient capital flows and payments.

8. • Existence of domestic coordinating mechanism among government agencies to develop local currency bond market.

9. • Existence of mechanism to coordinate development of local currency and regional bond markets with other governments.

B. Regulatory Framework

1. • Clearly defined creditor rights, insolvency and informal workout processes.

2. • Effective enforcement of creditor rights.

3. • Tax and administrative procedures conducive to holding and trading of bonds.

4. • Effective legal framework for asset securitization.

5. • Cross-border securities transactions are unhindered.

6. • Robust system of clear, complete, timely and meaningful disclosure.

7. • Clear and sound rules on corporate governance, financial controls and market integrity.

8. • Effective enforcement of rules and penalties governing capital market activity.

9. • Market regulation and supervision effectively balances interests of all market participants

10. • Consistent regulations and laws (including taxation) promoting capital market activities.

11. • Competition regulator with full authority to act against anticompetitive market activity.

C. Reporting Framework

1. • Robust and transparent accounting standards for financial and non-financial institutions.

2. • Convergence of domestic accounting standards with the IFRS.

3. • Existence of time-framed plan for converging domestic accounting standards with IFRS.

D. Public-Private Sector Partnership

1. • Healthy cooperation between finance officials/regulators and the private financial sector.

2. • Existence of domestic consultative mechanism between public and private sectors to develop local currency bond markets.[…]

A. ADDRESSING IMPEDIMENTS TO CROSS-BORDER INVESTMENT IN THE REGION'S BOND MARKETS

A paper presented in this conference discussed the current situation of cross-border investment flows in bond markets in Asia and identified a number of key impediments to these flows. The elimination of impediments to cross-border capital flows is the most obvious and important prerequisite to the development of a regional bond market.

In Asia, foreign bondholders account for a very small portion of Asia's local currency bond markets. Recent studies show that foreigners hold at most 1 per cent of local currency bonds outstanding in Korea, Thailand, Hong Kong, Indonesia and Malaysia. Foreign holdings of Japanese government bonds account for less than 4 per cent of the market. With the exception of Australia, Hong Kong and New Zealand, foreign issuers of local currency denominated bonds in domestic markets also make up a small portion of the market (less than 1.5 per cent in Singapore, less than 1 per cent in Japan and negligible in Korea).

Intra-regional investment in Asian bonds is also insignificant. According to the IMF Coordinated Portfolio Investment Survey, out of the total US$9.13 trillion worth of cross-border investment in long-term debt securities made by residents of seventy economies at the end of 2003, Japan accounted for 15 per cent, Hong Kong for 1.7 per cent, and Singapore for 0.6 per cent. Other East Asian survey participants collectively invested a mere 0.3 per cent of the total. However, investments by these three economies in Asian bonds represent only a small part of their total overseas investment in long-term debt securities: 0.8 per cent in the case of Japan, 14.4 per cent for Hong Kong and 17.2 per cent for Singapore.

Impediments to cross-border investment in Asian bond markets may be classified into three types: (a) restrictions, which may be intentional or implied, that deter market activity; (b) omissions of law or practice, such as lack of credible benchmark yield curves or hedging instruments; and (c) discrepancies within and among individual bond markets, which encourage market participants to focus primarily on arbitrage rather than investment.

A. CONCLUDING SUMMARY

This conference focused on promoting private sector participation in the development of local currency bond markets and in facilitating the emergence of a regional bond market in the Asia-Pacific region. Building on the conclusions of the ABAC/PECC 2004 Taipei bond market conference about the necessary conditions for attaining these objectives, public and private sector participants conducted an assessment of the extent to which such conditions are met in individual emerging markets and in the APEC region.

Considering first the experiences of developed economies, a number of issues have been found relevant.

1. • The first is that private long-term debt markets should be the ultimate focus of efforts, given their importance to the overall process of economic development.

2. • Second, the experiences of advanced economies provide useful lessons and a body of continuously evolving international best practice that could benefit emerging markets, which makes it important for developed economies to participate actively in regional collaborative efforts.

3. • Third, appropriate pricing of risk by market participants is crucial to the growth of bond markets, and can be achieved through sound macroeconomic policies, an open economy and financial sector, and a sound institutional framework.

4. • Fourth, a broad institutional and retail investor base is needed in addition to the above policies and institutional framework, with government bond markets and investor education playing important roles.

5. • Fifth, public-private sector cooperation is indispensable for the success of efforts to develop the institutional framework and promote adequate supply and demand in the market.

Focusing on the extent to which emerging markets in APEC are able to provide a conducive environment for private sector participation in local currency bond markets, the presentations and discussions yielded the following assessment:

1. • There are wide disparities among developing APEC economies, but they may be broadly classified into two groups — a number of more developed emerging markets that have made significant advances, and a second group of markets that are still in the early stages of development.[…]

The development of bond markets in the Asia-Pacific region has been the focus of recent efforts among governments and regional organizations. The Asia-Pacific Economic Cooperation (APEC) forum began substantial work on local currency bond markets in the wake of the 1997–98 Asian financial crisis. In 2003, both APEC and the Association of Southeast Asian Nations Plus Three grouping (APT) initiated work on the development of a regional bond market. Various initiatives, including the Asian Bond Market Initiative (ABMI) and the Asian Bond Fund (ABF) are currently being undertaken, but governments recognize the crucial role of the private sector, particularly investors and issuers, for these efforts to succeed.

During their meeting with the APEC Business Advisory Council (ABAC) and the Pacific Economic Cooperation Council (PECC) in September 2003 in Phuket, the APEC Finance Ministers called for greater private sector inputs to assist the public sector's efforts to develop local currency and regional bond markets. In response to this call, ABAC and the PECC Finance Forum, in partnership with the Asian Bankers' Association (ABA) and the Association of Credit Rating Agencies in Asia (ACRAA), convened a private sector-led conference in May 2004 in Taipei on the development of Asia-Pacific bond markets.

In this conference, private sector participants expressed their willingness to collaborate with the public sector to promote the development of the region's local currency bond markets and the emergence of a commercially viable regional bond market. They identified conditions that are necessary to promote private sector investment and issuance in these markets, and recommended measures to promote these conditions. The key recommendations of the ABAC/PECC 2004 Taipei bond market conference are outlined in Appendix B.

These recommendations were endorsed by ABAC and PECC to the APEC Finance Ministers at their meeting in September 2004 in Santiago, Chile. ABAC also invited APEC member economies to conduct self assessments of the current policy environment for private sector participation in the development of their respective local currency bond markets as well as in promoting the emergence of a regional bond market, based on the areas of improvement identified in the Taipei conference.

“Developing Bond Markets in APEC: Toward Greater Public-Private Sector Regional Partnership” is a joint project of the APEC Business Advisory Council (ABAC), the Asian Development Bank Institute (ADBI) and the Pacific Economic Cooperation Council (PECC) Finance Forum. It was held on 21–22 June 2005 at the Asian Development Bank Institute in Tokyo, Japan.

The conference was jointly hosted by ABAC Japan, the ADBI and the Japan National Committee for Pacific Economic Cooperation (JANCPEC), with additional support from two private sector sponsors, the Nikko Cordial Corporation and Nomura Holdings Incorporated. Mr Yasuo Kanzaki, ABAC Finance and Services Working Group Co-Chair; Dr Jeffrey L.S. Koo, likewise ABAC Finance and Services Working Group Co-Chair and Chairman of the Chinese Taipei Pacific Economic Cooperation Council, and Dr Peter McCawley, Dean of the ADBI acted as Conference Co-Chairs.

The conference attracted participants from the public and private sectors, as well as from academe. Those from the public sector came from finance ministries, central banks and financial regulatory and supervisory agencies as well as regional and international financial and development institutions. Participants from the private sector included those representing investment and commercial banks; securities, insurance, credit rating agencies; stock exchanges; industry and services and academe.

Complete and detailed information about the conference, a list of participants, as well as conference papers and presentations are available at the conference website, which may be accessed at:

http://www.adbi.org/event/2005/06/21/751.bond.market.development/(ADBI website) and

http://www.pecc.org/finance/bond-market-conf2005.htm (PECC website).

CONFERENCE PROGRAMME

Tuesday, 21 June 2005

SESSION 1: OPENING SESSION

Session Chair:

Dr Peter McCawley, Dean, Asian Development Bank Institute

Welcome Remarks on behalf of the Japanese Hosting Committee

Mr Yasuo Kanzaki, Co-Chair, ABAC Finance Working Group and Special Advisor, Nikko Citigroup Limited

Opening Address

Dr Jeffrey L.S. Koo, Co-Chair, ABAC Finance Working Group and Chairman, Chinatrust Financial Holding Co., Ltd.

A. OVERVIEW OF PUBLIC-PRIVATE SECTOR PARTNERSHIP WITHIN CURRENT BOND MARKET DEVELOPMENT INITIATIVES IN THE REGION

The public and private sectors each have proper roles to play in development. A healthy market economy is normally one where the private sector engages in robust innovation and competition, while the public sector provides sound legal and policy frameworks, regulation and supervision. However, there is much scope for both sectors to enhance each other's effectiveness in playing their respective roles. There are also areas where direct collaboration can be fruitful, such as in infrastructure development. It is in this sense that public-private sector partnership is understood in this report.

The development of bond markets is highly relevant to the Asia-Pacific region's current situation. In a defensive sense, robust bond markets strengthen economies against financial instability. In the offensive sense, they play a crucial role in economic development, meeting the needs of ageing populations, and critical infrastructure financing. Such markets also provide better opportunities to a wide range of private sector market players such as institutional and retail investors, borrowers, intermediaries and other related professionals and service providers.

Experiences of bond market development efforts in East Asia and Latin America, as well as in the broader Asia-Pacific region, illustrate the importance of cooperation between public and private sectors. Policymakers in the Asia-Pacific region are conscious of the need to design financial systems and market infrastructure in cooperation with the private sector, especially global, regional and domestic market players. The involvement of organized private sector-led groups such as ABAC and PECC in APEC initiatives, as well as that of regional industry groupings such as the ABA and ACRAA, is part of this growing cooperation.

Within East Asia, in the context of ABMI, there is a growing realization that public sector priorities must be made to converge with private sector needs, if the initiative is to succeed.

Linking the Pacific Ocean to the Indian Ocean, Southeast Asia has long been an important passage for trade. Hot on the heels of traders were missionaries and proselytizers. The first of world religions to arrive in the region were Hinduism and Buddhism via trade links with India. Indian merchants not only established trading stations along the region but also brought along their religious and cultural influences. Beyond the spiritual, Hinduism and Buddhism have contributed to the development of a written tradition in Southeast Asia. And while Southeast Asian converts have incorporated local features and cultures into Hinduism and Buddhism for a distinct flavour, aspects of their religious life are still observably Indian. By the twelfth century, peoples in what are known today as Myanmar, Thailand, Laos, Cambodia, and Vietnam were converted to Buddhism. In Bali, part of Muslimdominated Indonesia, approximately 90 per cent of the population practise Hinduism.

The year and source of Islamic influence in Southeast Asia is a matter for debate. Some European scholars argue that Islam entered the region upon trade with India, some regional Muslim historians assert that it was imported directly from the Middle East, while other scholars believe that Muslim Chinese introduced it when they traded in the region. Nonetheless, it is generally accepted that Islamic teachers had, by the fifteenth century, established religious schools largely in the Malay Peninsula as well as in parts of Sumatra, Java, Kalimantan, and Mindanao. In the course of time, Islam absorbed many pre-existing Southeast Asian beliefs such as animism. Presently both Malaysia and Indonesia are predominantly Muslim, with the latter the most populous Muslim country in the world.

Christianity was, comparatively speaking, a late arrival to Southeast Asia. Christian missionaries only ventured into the region in significant numbers with the spread of colonialism from the eighteenth century. Failing to penetrate China and Japan, many Christian missionaries settled along Southeast Asia.

Diversity and change are the only constants in Southeast Asia. In a region of approximately 4.5 million square kilometres in size, over 500 million people, one thousand languages, a religious smorgasbord of Animism, Buddhism, Taoism, Hinduism, Islam, and Christianity, the sheer diversity of Southeast Asia defies simple categorization. The region has also been host to a variety of political ideologies from monarchism to colonialism, communism, authoritarianism, and different versions of democracy.

Given this diversity, a stable and distinct Southeast Asian identity remains elusive. The region's identity is very much defined in contrast to other regions than by any specific inherent features or characteristics. As a geographical concept, Southeast Asia is a recent invention. The term only gained popular acceptance from World War II, during which the British used “Southeast Asia” to describe the collection of peninsulas and islands to the south of China and east of India as a particular area of military operation against the Japanese. It was only in the 1950s and 1960s with the wave of anti-colonial and nationalist sentiments sweeping across the region that nation-states — itself very much a modern entity — emerged. On 8 August 1967, the Association of Southeast Asian Nations (ASEAN) was established in Bangkok. The five original member countries were Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined later, in 1984; Vietnam in 1995; Laos and Myanmar in 1997; and Cambodia in 1999.

There is little doubt that Southeast Asia is undergoing modernization, changing not only the way Southeast Asians live but also the way they see themselves. The extent of modernization, however, varies from country to country. It is thus important not to think of modernization as a static concept but as an uneven process that societies undergo. This book seeks to capture the main debates surrounding certain issues that are affected by, and in turn influencing, the modernization processes in Southeast Asia. It is not intended to serve as a comprehensive examination of the complex and multifarious processes of modernization; rather, it offers itself as an introductory, and hopefully critical, approach to selected issues.

The modernization of societies depends on their ability to create new institutions, exploit advanced technologies, master their environment, and adapt their patterns of behaviour for common goals. Conventional wisdom has it that education, by improving the capabilities of individuals and institutions, plays a key role in the modernization process. Education serves as a catalyst for economic, social, and political development, all of which contribute to overall national development. Nonetheless, precisely how education, as a causal agent, triggers economic growth continues to be a matter for debate among researchers. On the one hand, numerous studies suggest that education is strongly linked to economic productivity, technological advancement, higher individual income, lowering of poverty levels, gender equality, greater awareness of citizenry responsibilities, and the general elevation of quality of life. Education also breaks cultural barriers by connecting societies to the rest of the world through the common languages of mathematics, science and technology, and ideologies.

On the other hand, there are counter-studies that suggest that education may have negative consequences. Uneven access to education, for example, leads to an education system that may perpetuate and legitimize divisions based on ethnicity, gender, or economic status. If a certain ethnic group or class is found to be over-represented in higher education at the expense of others, it may lead to a polarization of society, with ethnically heterogeneous societies being the most vulnerable. Another popular criticism of education is its heavy reliance on Western information, technologies, pedagogy, and philosophies. This is especially evident in higher education such as colleges or universities, and if left unchecked, will make younger generations more susceptible to Western or global culture and may be responsible for weakening their cultural roots and traditional values. One economic criticism is that poverty-stricken families may begin by borrowing heavily to send their children to universities in the hope of giving them the means to a better life. However, when job scarcity becomes chronic, these families sink deeper into debt, thus creating a downward spiral.

Flipping through a popular news magazine recently, I came across two glossy images of Southeast Asia. The first was a beautifully composed photograph of weather-beaten Thai farmers in oversized straw hats bending over terraced rice fields. The second image was a close-up snapshot, washed in a fashionable blue tint, of an urban Chinese professional in a sharp business suit barking into his mobile phone as he navigated the metropolitan city. While close to caricature, these two contrasting images capture several truths about the region.

Firstly, the region's history of uneven economic development has resulted in extremes. In the city the rich are never too far from the poor while throbbing cities are never too far from half-empty dusty villages. Secondly, from Philippines to Indonesia to Thailand to Singapore the experience of modernization is a subjective one. Southeast Asia's modernization experience has been informed by the cultural, religious, and political facets of its many national constituents. Islam, semi-democratic, and authoritarian states, ethnic interests, and cultural values all influence the way modernization is conceived as well as the perception of promises and threats it holds for society at large. Thirdly, the two images underline not only the close geographical but also psychological and normative proximity between the old and the new, between the rural and the urban, between tradition and modernity in Southeast Asia. The lifestyles and values of many Southeast Asians are neither anchored completely in the rural or the traditional nor do they unfold exclusively in the urban or modern. The Southeast Asian must learn to negotiate different conceptual worlds from the religious, the ethnic, and the cultural to the professional, the cosmopolitan, and the global. Given these unique political, social, and cultural conditions, will a Southeast Asian modernity emerge?

A SOUTHEAST ASIAN MODERNITY?

One major question concerning many Southeast Asian intellectuals and thinkers is: can Southeast Asia ever become modern on its own terms?