Introduction
1. Ladies and gentlemen, I am very glad to have the opportunity
to speak at this Global Bond Summit, all the more so because it is
being held here in Hong Kong and because development of a deep and
liquid bond market in Asia is a subject that is very close to my
heart.
2. It has been suggested that I should talk specifically about
the Asian Bond Fund (ABF) initiative. I am happy to do so not only
because ABF is an important initiative for promoting the
development of bond markets in the region but also because of the
active involvement of the HKMA in the past three to four years in
the project, including chairing the EMEAP Working Group that gave
birth to it. But I cannot, of course, speak for the eleven central
banks and monetary authorities comprising the EMEAP group, but only
for the HKMA, and so my comments today are those of the HKMA.
Asian Finance
3. Let me begin at the more macro level and draw your attention
to one aspect of Asian finance that has always struck me as odd,
and this is how financial integration in Asia is lagging behind
economic integration. With over half of total trade in Asia being
intra-regional trade, and with this proportion still on an
increasing trend, economies in the region are becoming increasingly
interdependent among themselves, arguably more so than each of them
depends on the developed economies in Europe and America. By
comparison, the degree of financial integration in Asia is
disproportionately low. For example, all of the Asian economies
have probably lent more individually to the United States than they
have collectively to other Asian economies.
4. Whether we like it or not, we now find ourselves in the
unenviable position of holding a substantial part of our savings in
the financial liabilities of an economy that does not save, fearing
that a diversification of a small part of such holdings might lead
to a sharp fall in the value of the rest, thus shooting ourselves
in the foot. We also find ourselves somewhat stuck with recycling a
large part of our savings through the developed markets back into
the region in a much more volatile form, occasionally creating
havoc in our monetary and financial systems.
5. We find ourselves - we are told - contributing to the global
imbalance by saving too much and spending too little, although
those that tell us pay little attention to the fact that we do have
typhoons and heavy rains, earthquakes and tsunamis, and we need to
ensure that we are able to help ourselves as much as possible in
case of need. They also pay little attention to the traumatic
experience of the Asian financial crisis of 1997-98 and the natural
inclination to build up ammunition, in the form of foreign currency
reserves, ever since. After all, most of us are small, in terms of
our economies and our political influence, and the reality of this
world is that, when you are small, you are more likely to be tossed
around. So we need to be more cautious in our finances.
6. We find ourselves being held, at least partly, responsible
for the dilemma currently surrounding the global imbalance, which
has been interestingly described as a "stable disequilibrium". The
description begs the questions as to how long the disequilibrium
will remain stable and whether the eventual adjustment path to
equilibrium is likely to be an unstable one. The answers to these
questions remain elusive.
7. This obviously is not a very comfortable position that we
find ourselves in. One solution to this structural problem in Asian
finance, at least to us in the HKMA, is greater Asian financial
integration to promote the stability, integrity, diversity and
efficiency of financial intermediation across jurisdictions in
Asia. At the micro level, an obvious, non-controversial initiative
that Asian jurisdictions support, although not necessarily for the
same macro reasons that I have described, is the development of the
domestic and the Asian bond markets, hence the EMEAP ABF
initiative.
Asian Bond Fund
8. As I mentioned earlier, the HKMA has the honour of chairing
the EMEAP Working Group to lead the initiative. This began in 2002
and in June of the following year, EMEAP launched ABF1. ABF1
invests in a basket of US dollar-denominated bonds issued by
sovereign and quasi-sovereign issuers in eight EMEAP markets -
China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines,
Singapore and Thailand. It was a small but significant step
forward. Think about it for a moment: eleven very different
economies of different sizes, with different economic structures
and stages of economic and social development, co-operating for the
first time to set up a bond fund and lay the foundation for
promoting the development of regional and domestic bond markets in
the Asian region.
9. The next, bigger step was ABF2, which extends the concept to
bonds denominated in Asian currencies. There are two parts to this:
the Pan-Asia Bond Index Fund (PAIF) and eight Single-Market Funds.
The PAIF is a single bond fund investing in sovereign and
quasi-sovereign local currency-denominated bonds issued in the
eight EMEAP markets, while the Single-Market Funds invest in
similar bonds issued in the individual markets. So far, the PAIF
and three Single-Market Funds in Hong Kong, Malaysia and Singapore
have been listed. The remaining five Single-Market Funds will also
be offered to the public within the next couple of months. I am
glad to see that the ABF Hong Kong Fund has been well received by
the market, growing by over 40% since its listing in June this
year.
10. The ABF2 project has been a good example of co-operation
between the public and private sectors. While this is an official
initiative with seed money of US$2 billion provided by the EMEAP
central banks, we relied on the private sector for product design,
implementation and marketing. The nine fund managers and the global
custodian for the nine funds were selected based on a very
competitive process. After all, the private sector is much better
at making these products market-oriented than central bankers.
11. The ABF initiative has also been successful in a wider sense
in a number of ways. First, it has helped to
promote product innovation. ABF2 Funds by themselves represent a
new class of bond products, which has helped to raise the awareness
of Asian bonds among investors. Some ABF2 Funds take the form of a
bond Exchange-traded Fund (ETF), which is the first of its kind in
Asia. They are a convenient and cost effective way for regional and
international investors to gain exposure to Asian bonds. With their
low costs and low entry thresholds, the funds also facilitate
retail participation in bond markets. ABF2 has also led to similar
products and derivatives coming into the market. We notice that
some banks have come up with their own Asian bond funds, a welcome
development, while an investment bank has issued a structured note
using PAIF units as the underlying asset.
12. Second, ABF2 has led to improvements in
financial market infrastructure. The iBoxx ABF Indices, the
benchmark indices for the ABF2 Funds, are transparent and credible
and compiled by an independent index provider. They can be easily
replicated and customised by the private sector for other
fixed-income products and derivatives and represent an important
piece of market infrastructure for Asia. Moreover, since bond ETFs
are a new product in Asia, in a number of cases, the linkage
between the clearing and settlement systems for debt securities and
that for equities have to be improved in order to allow the listing
and trading of a bond ETF on the stock exchange.
13. Third, the ABF initiative has been a
catalyst for regulatory and tax reforms in EMEAP markets, helping
to remove market impediments and facilitate financial integration
in the region. For example, the PAIF is the first foreign
institutional investor to be granted access to China's interbank
bond market. Securities regulators in Malaysia and Thailand have
recently issued new rules to facilitate listing of ABF2 funds as
bond ETFs. Malaysia and Thailand have exempted non-resident
investors from withholding-tax, and Malaysia has liberalised its
foreign exchange administration rules. Both Malaysia and Thailand
opened their domestic bond market to bonds issued by multilateral
financial institutions such as the World Bank.
14. Fourth, the ABF initiative has helped to
standardise and harmonise documentation for this type of exercise.
The trust deed and prospectus of the PAIF, which comply with laws
and regulations of Hong Kong and Singapore and are in line with
international standards, served as a model for the drafting of fund
documents for the ABF2 Single-Market Funds. This has helped to
promote the adoption of international best practices among EMEAP
economies.
ABF and Financial Stability
15. Let me turn to the other question that I have been asked
specifically to address, and this is how the ABF initiative can
contribute to financial stability in the region. I must confess
that, even though the central banks in the region have been
enthusiastic in the development of the project, the benefits of ABF
to financial stability in the region have not been clearly
articulated in our deliberations. I can assure you, however, that
this is not a reflection of any lack of brains on the part of Asian
central bankers or because the objectives have not been clearly
defined, although there may be a lack of a clear road map. But it
should be all right, as Deng Xiaoping pointed out, to cross the
river by feeling the stones. The lack of a clear linkage between
ABF or indeed debt market development generally and financial
stability is more a reflection of the difficulty of defining what
financial stability is.
16. Indeed, the question has been receiving increasing attention
in the international financial community, and attempts are being
made on both the academic front and among those with policy
responsibility to model financial stability and integrate it with
the more traditional macroeconomic analysis, in both the domestic
and international dimensions. I await with keen interest the
emergence of an authoritative analytical framework of general
application. Meanwhile, I share the views of some that financial
stability can be negatively defined as the lack of financial
instability, given that it is easier to define what the latter is.
In my opinion, when the financial system fails to function
properly, in terms of mobilising savings to finance economic
activities - the all-important process of financial intermediation
that promotes economic growth and development - then there is
financial instability. When, as a result of a shock to the
financial system, money is suddenly not available even for the
creditworthy fund raisers no matter how high a price they are
prepared to pay, then financial stability is not achieved.
Alternatively, when, because of a breakdown of confidence for one
reason or another, those with surplus money are simply not willing
to trust the financial system with it, by placing it with banks or
investing in financial instruments, then financial stability is not
achieved.
17. With this somewhat inadequate analytical framework in mind,
then it is clear, at least to me, that ABF, by increasing the
diversity of financial intermediation channels, reduces the
probability of disruption in the all-important process of financial
intermediation and the occurrence of financial instability, thus
contributing to financial stability.
18. There is another dimension of financial stability that we
have considered in our deliberations on ABF. Although the empirical
evidence is probably difficult to establish, given the increasing
degree of intra-regional dependence in Asia, we feel that regional
savings are probably less volatile than savings from the developed
markets. This is partly also because the management of savings from
the developed economies is more sophisticated than that of regional
savings, with a much greater involvement of financial institutions,
including hedge funds, which are a lot more nimble and probably
also have a different perception of risks in the region. By
contrast, those mobilising regional savings within the region
probably have a better understanding of regional issues, although
we should not expect them always to take account of the wider
public interest in their purely commercial activity of fund
management. Thus if ABF acts as a catalyst for a greater proportion
of regional savings being recycled within the region, instead of
through the developed markets of Europe and America, there is
likely to be some benefit to financial stability.
What Next in ABF
19. Let me turn to the question of "what next" in the ABF
initiative. I am acutely aware of the fact that the HKMA is only
one of eleven central banks and monetary authorities in the EMEAP
group and that the ABF project is an EMEAP project, and not an HKMA
project. As I said earlier, I cannot speak for EMEAP, although ABF1
and ABF2 were developed while the HKMA had the honour of chairing
the relevant Working Group. Indeed, we are scheduled to hand over
chairmanship in May next year, having exceptionally provided the
chair for two consecutive two-year terms. But allow me to tell you,
nevertheless, what we in the HKMA think could be possible
directions to be explored.
20. There are two such directions, which hopefully could lead to
an ABF3. First is to enlarge the scope of credit
acceptable to the central banks as investors, but address the
problem of inadequate credit quality through credit enhancement or
guarantee arrangements. Second is the
securitisation of bank assets. Both are familiar concepts to the
financial markets, and so there is no need for me to elaborate,
other than to say perhaps that we favour simple products that can
be readily understood not just by simple-minded central bankers but
also by the not-so-sophisticated investors in the region. We
support the EMEAP and other regional fora to further look into
these ideas. And we look to the private sector to participate fully
in this continuing effort.
21. Let me close by going back to financial stability and say
that the ABF initiative, whether it gets to ABF3 or ABF4 or ABFN,
is not the full answer to financial stability in the region. Asia
is particularly vulnerable to financial instability because of,
principally, the size of the individual, fragmented markets,
relative to international capital, and the openness of those
markets, assuming that prudent macroeconomic policies are a
pre-requisite that is always observed. To reduce vulnerability from
those sources, without stepping back from maintaining open markets,
we need greater financial integration or co-operation, and perhaps
one day monetary integration. But these subjects should best be
left for another day.
15 November 2005
