1 Historic Challenges and Opportunities for Developing Asian Bond Market Shanghai, China November 2005 ZHU Guangyao Director-General International Department MOF, China

2 Lessons from Asian Financial Crisis Heavily relied on banking loan Mismatch problem: maturity mismatch and currency mismatch Lack of regional financial cooperation

3 Asian Corporate Financing still Rely More on Banking Loans Financing Comparison (As of End 2004)

4 Total Amount of Outstanding Corporate Bonds (As of End 2004) 14.9

5 Corporate bond as percentage of total financing

6 Commentary: Asian bond market is less developed  Historical data shows major Asian economies’ corporate bond as percentage of total financing remain low  US corporate financing is balanced well between bond offering and bank loan, while Asian economies rely heavily on bank loans  Asian economies’ total amount of corporate bonds are far less than in the US

7 US Treasury has been increasing during the past years

8 Public debt takes the majority part of US Treasury Financing

9 Foreign Reserves of major Asian economies Singapore MalaysiaThailandIndonesia Philippines Hong Kong, ChinaChina Taiwan, ChinaKoreaIndiaJapan , , , ,427.27, , , , , , , , , , ,599.29, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,543.0 USD million

10 Foreign Reserves of major Asian economies

11 Foreign Reserves of China, Japan and Korea

12 Huge foreign exchange reserves in East Asia turn to US assets

13 Bonds dominate in Asian foreign exchange reserves

14 Long Term US Treasury Bond Distribution (As of June 2004) RegionAmount ( USD Bn) Europe1,274 Eurozone841 Asia1420 America536 Oceania23 Africa5 Supranational38 Others218 Total3,514

15 Long Term US Treasury Bond Distribution (As of June 2004)

16 US Treasury Bond held by Asian Economies China USD Bn

17 US debt as percentage of total FX reserves (As of June 2005)

18 Main Challenges Less developed bond market infrastructure Lack of sound bond issuers (bond supply) Lack of stable bond investors (bond demand) Dollarization trend, lack of wide-accepted regional denominated currency

19 The attempt of ABMI working groups Creating New Securitized Debt Instruments Credit Guarantee & Investment Mechanisms Foreign Exchange Transactions and Settlement Systems Local and Regional Rating Agencies + Plus, Ad-hoc Support Team

20 Opportunities The willingness of the Asian economies to develop bond markets Improvement of local market infrastructure Sustained development of regional cross- border trade and investment Plentiful fund because of high savings rate The active participant of public and private sector

The breakthrough in China ’ s bond market The launch of Panda Bond

22 Panda Bond – Development in China’s Bond Market Panda Bonds : debt instruments issued by international lending institutions in local Chinese currency. Issuer : international financial institutions lending or investing for development purposes Key requirement for issuer : 1) a credit rating above AA 2) Its total lending to and investment in domestic projects or enterprises has exceeded USD1 billion 3) funds be used to finance the medium and long-term fixed asset lending to or equity investment in projects in China

23 Panda Bond – Development in China’s Bond Market (Cont) Recent approval : IFC : 1.13bn RMB ADB: 1 bn RMB in interbank market Related development of China financial market open to foreign institutions : 1) It is the first time foreign institution can issue rmb-denominated bond in China. 2) In interbank market, foreign commercial banks that have RMB licence can participate in the bond issuance, syndicate and trading. 3) Market bring in the first offshore institutional investor - pan Asia Bond Fund.

24 Panda Bond – Development in China’s Bond Market (Cont) Timelines related: 2002 IFC and ADB seek to issue RMB-denominated onshore to fit its demand in local loan. Beginning of 2004 PBOC started to study the possibility of international financial institutions with The Ministry of Finance, The State development and Reform Commission and The China Securities Regulatory Commission. Sept 2004 PBOC submitted the Provisional Administrative Rules on International Development Institutions' Issuance of RMB Bonds to state council for approval. February 18, 2005 PBOC annouced Provisional Administrative Rules on International Development Institutions' Issuance of RMB Bonds.

25 Benefits of Panda Bond The development and openness of local bond market The new regulation reduce the cost of capital for local enterprises. Before the approval, these international financial institutions issue foreign currency denominated bonds offshore, and lend the money to local enterprises through banks or financial departments. In this way, enterprises take the foreign exchange risk. The new regulation benefit local enterprises by getting rid of currency risk and improving the efficiency of capital usage. These bonds that carry no credit risk and, will set a benchmark for gauging the risk of other corporate and municipal borrowers.

26 Potential impact of Panda Bond A vibrant local market would mean that companies would not have to look to offshore markets for funding, which would help keep down China's foreign debt. The market could help cut China's balance of payments surplus over time, because raising funds at home naturally reduces capital inflows. Allowing foreign agencies to raise capital locally reduce the need to raise funds overseas and bring foreign currency into China, which may help relieve upward pressure on the yuan over time.

27 Reference Data Sources The Bank for International Settlement The World Bank The International Monetary Fund The Asian Development Bank UBS Research Deutsche Bank Research