International Developments

Although bond markets in the Asia and Pacific region have had some successes they remain underdeveloped compared to the size of the region's economies. Thus, despite roadmaps to develop bond markets being adopted at the highest level of government (e.g., Lejot, Arner, and Liu 2006), and extensive policy reforms (e.g., Leung 2006), the “missing market” described by Herring and Chatusripitak (2000) remains.

Recent developments in international banking and international securities markets reported in data from the Bank for International Settlements (BIS) offer explanations to the possible reasons for and consequences of the underdevelopment (BIS 2009). According to data from banks reporting to the BIS,³ total lending in all markets covered increased 194% to US$24.5 trillion, (falling slightly during the 2007–2008 crisis period), whereas lending to developing economies increased 157.8% to US$1.9 trillion. Lending to economies in the Asia and Pacific region grew slightly less at 153% to US$608 billion, though it suffered a large decrease from 1995–2000 (31.9%) due to the Asian financial crisis of 1997.⁴ In addition, while the Asia and Pacific region had the highest level of bank loans outstanding in 2007, lending to the region decreased 3.6% during the financial crisis of 2007–2008, whereas lending to other regions, especially Europe, increased.

BIS data on bank deposits are also enlightening (BIS 2009). Of the developing regions that reported, it is not surprising that Africa and Middle-East (which includes key oil rich nations) provided the most deposits to banks in 2007 at US$867 billion, although the Asia and Pacific region was a close second at US$832 billion. Within the Asia and Pacific region, the People's Republic of China (PRC) and Taipei,China provided nearly US$444 billion in deposits in 2008, which combined with the totals from Hong Kong, China and Singapore total US$1.36 trillion, almost twice that of deposits from Japan (US$769 billion).

However, it is the net positions from BIS data that are of most interest to the current discussion on the scale and scope of the Asia and Pacific region's bond markets. In 2008, Australia was an important net recipient⁵ of bank lending at US$50.1 billion, as was India (US$78.8 billion), Indonesia (US$39.4 billion), and Korea (US$74.3 billion). However, overall, the region reported deficits of US$68.7 billion. In 2007, the net deficit was a staggering US$223.2 billion, with largest deficits coming from the PRC and Taipei,China. Notably, Japan changed from a net receiver of funds in 1995 (US$229.7 billion) to a net lender of funds in 2008 (US$234.9 billion).

Overall, international bank lending to developing Asia remains below lending to other regions, especially compared to lending to developing Europe. At the same time, regional deposits with banks in developing Asia have exceeded loans during 2000–2008. Thus, savings from the Asia and Pacific region continue to support international bank lending, despite regional policymakers' efforts to direct these funds for regional economic and infrastructure development.

The promotion of regional bond markets and the development of domestic corporate and foreign bond markets is not inconsistent with improving access to international debt markets through syndicated bank loans or international bond issues (such as Eurobonds). Chakraborty and Ray (2006) and others recommended a two-tiered approach to financial market development with complementary bank and bond market reform as the best strategy for long-term economic development. The International Monetary Fund (2005) and Burger and Warnock (2006a, 2006b) mentioned that necessary financial market reform would provide improved services, more efficient financial and legal institutions, better protection for investors, and sound fiscal and monetary policy management by government, which would benefit both bond market development and improve access to international investment or lending.

When considering the direction of international lending to the Asia and Pacific region in the form of international securities or syndicated loans, it is useful to note that issues all of the markets covered by the BIS grew 250% over 2000–2008 to US$23.9 trillion (BIS 2009). For the first time, this sum exceeded international bank lending, which was US$22.5 trillion. This suggests a global trend towards disintermediation, which may have been accelerated by the 2007–2008 financial crisis. Apart from the US and the United Kingdom (UK) which issued 37% of the total international debt securities in 2008, the important issuers were in the Asia and Pacific region: Australia with US$468 billion; Japan with US$398 billion; and Korea with US$109 billion.

Sums reported for syndicated loans were much less. From 2007–2008, syndicated loans fell 55% to US$297 billion, highlighting the fact that these markets (whose loans tend to be based on the London Interbank Offered Rate (LIBOR)) were particularly affected during the financial crisis. During the same time, syndicated lending in the Asia and Pacific region fell by 65.4% to only US$13.7 billion, with Korea experiencing the largest reduction (86.9% to just US$1.6 billion). Reductions of this magnitude last occurred during the Asian financial crisis of 1997 and highlight the implications of dependency on bank based lending.

Comparing these data also highlights the beginnings of disintermediation with new lending in the Asia and Pacific region favoring international securities issues over syndicated and direct bank lending. This is consistent with the region's issuers developing since the Asian financial crisis of 1997, as local corporations are more prepared meet information disclosure requirements demanded by international investors. Issuers also need to comply with International Accounting Standards and obtain credit ratings. Nonetheless, much more needs to be done to ensure continued financial stability and successful participation in global markets by the region's major economies (e.g., Blommestein and Santiso 2007; Tovar and Quispe-Agnoli 2008).

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