Introduction

A key aspect of financial market reform following the 1997 Asian financial crisis was the development of national and regional bond markets as an alternative to bank financing.¹ It was hoped that the development of alternative financial markets could provide a means of avoiding the “double mismatch” of currency and maturity in the balance sheets of local corporations (e.g., Tan, Karigane, and Yoshitomi 2001). Initially, attention was paid to markets where governments issued and traded and subsequently to markets where industrial and financial corporations issued and traded (e.g., Schinasi and Todd Smith 1998; Kim 1999; Batten and Kim 2001).

Academic attention and discussion by policymakers and practitioners has centered on an extensive range of regulatory and infrastructure initiatives that involve: improving regulation and the rule of law; enhancing financial market transparency; providing stronger investor protections and rights; improving clearing system performance and the reputation of local rating agencies; and providing the necessary stable macroeconomic policies to encourage investment. Recent policies that have been adopted include: the Asian Bond Market Initiative; the formation of the Asian Bond Fund; specific local market deregulation aimed at improving institutions; and proposals to enhance foreign participation by both investors and issuers in local markets.²

The objective of this paper is to add to the discussion of foreign participation by investigating the contribution it makes to domestic bond markets. We focus on foreign participants as issuers, adding to the existing literature that investigated their role as investors (Bae, Yun, and Bailey 2006). It is important to note that both foreign issuers and investors assume foreign exchange and possibly interest rate (maturity) risk as a result of these investments or liabilities. Despite some reservations arising from the level of risk management infrastructure present in the Asia and Pacific region, we argue that this largely overlooked segment is the best prospect to elevate regional and domestic bond markets to the global plane advocated by McCauley and Park (2006).

Previous literature that provided blueprints for bond market reform generally focused on two key aspects of market development: facilitating the demand and supply of bond issues; and overcoming the structural impediments, such as the absence of financial market technology, that may impede the development agenda (e.g., Walter 1993; Schinasi and Todd Smith 1998; Kim 1999; Rhee 2000; Lejot, Arner, and Qiao 2006; Rhee 2004; Park and Park 2005; Arner, LeJot, and Rhee 2006). While governments and local corporations have typically supplied new bonds, in some markets international organizations have also been involved. These non-resident bond issues in a domestic bond market are termed foreign bonds, and their issuance has been linked to the long-term development of these markets (Hoschka 2005; Inoguchi 2007).

The development of a foreign bond market is consistent with the three tiered bond market described by McCauley and Park (2006): first, there is a series of domestic markets in which domestic investors provide funds to domestic issuers; second, a regional bond market denominated in regional currencies with regional investors and issuers; and third, a global market in which a region's borrowers and possibly investors are minor players. Therefore the ultimate objective when developing a national bond market should be integration into a global securities market (Batten and Szilagyi 2007). In turn a regional bond market would compete with the alternative funding and investment opportunities provided by banks individually, or as syndicates, and existing debt securities, such as Eurobonds and other foreign bonds offered in large financial markets, such as those present in Japan or the United States (US).

In this paper we add to earlier country level analyses of the enabling role of foreign participation in bond market development (e.g., Batten and Szilagyi [2007] and Batten, Hogan, and Szilagyi [2009] considered markets in the Republic of Korea [hereafter Korea] and Australia, examining factors that have facilitated non-resident involvement in other financial markets and identifying impediments that may prevent application of these same factors to other local market segments, notably the corporate bond market. Our perspective includes all key foreign bond markets other than those in the US, whose scale and institutional environment warrants separate analysis. Particular attention is paid to the enabling role of supranational corporations, such as the World Bank, in facilitating corporate bond market development. Thus we also add to the analysis of Hoschka (2005) and Inoguichi (2007), which discussed the importance of multilateral development banks, especially the Asian Development Bank (ADB), to helping expand nascent bond markets.

Using information from the Thompson Reuters Fixed Income (RFI) Database on 3,132 foreign bonds issued in 14 different markets since 1928, we offer insights into the scale and scope of this segment with particular attention paid to the characteristics of issuers. Overwhelmingly, this market consists of sovereign, supranational, and major international bank issuers with high credit quality. Although there is a significant corporate presence, usually by non-bank financial institutions, issuance by this sector tends to have a shorter maturity and generally carries lower credit ratings. Local institutional investors appear to have a preference for simple fixed-rate coupons, which can then be swapped using foreign exchange and interest rate derivatives into the currency and coupon type of choice. Pricing and arbitrage between alternate products are therefore important drivers of foreign bond issuance.

The long-term viability of this segment appears linked to the presence of: highly liquid foreign exchange and derivatives markets that facilitate risk management and transformation; regulation that facilitates cooperation with market participants; and benchmark issues and competitive pricing between markets. This analysis will be of interest and value to those nations undertaking financial market reform to develop domestic markets or provide alternative funding mechanisms through improving issuance by domestic corporations in international bond markets (Jiang and McCauley 2004).

The paper is structured as follows: (i) we provide a brief background on recent developments in international banking, international debt securities and syndicated loan markets with an emphasis on the implications that changes in the scale and scope of these markets may have for domestic bond market development in the Asia and Pacific region (ii) we focus on key trends in the bond markets of the Asia and Pacific region (iii) we provide a detailed perspective on the characteristics of international issuers in foreign bond markets and discuss the implications of these characteristics (iv) we highlight policy recommendations that must be undertaken to further develop foreign bond markets in the Asia and Pacific region and elsewhere.

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