A Regional Bond Market A Regional Bond Market for East Asia?for East Asia?

The Evolving Political DynamicThe Evolving Political Dynamics of Regional Financial Coopers of Regional Financial Cooper

ationationJennifer AmyxJennifer Amyx

Department of Political ScienceDepartment of Political ScienceUniversity of PennsylvaniaUniversity of Pennsylvania

Presentation atPresentation atThe Australian National UniversityThe Australian National University

9 March 20049 March 2004

Project motivationsProject motivations Under what conditions will regional financial coopUnder what conditions will regional financial coop

eration emerge in East Asia?eration emerge in East Asia?

Variation in degrees of progress made to date acVariation in degrees of progress made to date across financial cooperation issues tackled thus faross financial cooperation issues tackled thus far: what explains variation in pace of progress?r: what explains variation in pace of progress?

Are regional cooperation outcomes affected byAre regional cooperation outcomes affected by Japan-China competitive dynamics?Japan-China competitive dynamics? Influence of the U.S. in the region? (esp. US-Japan relInfluence of the U.S. in the region? (esp. US-Japan rel

ationship)ationship)

Economic Capacities of ASEAN+3 Countries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1990199119921993199419951996199719981999200020012002

Years

Percentage

China

Indonesia

Japan

Korea

All others

Differential progress across 3 arDifferential progress across 3 areas of financial cooperationeas of financial cooperation

AreaArea Outcome to dateOutcome to date

Short-term liquidity suppShort-term liquidity support in time of crisis (Chiaort in time of crisis (Chiang Mai Initiative)ng Mai Initiative)

Mixed successMixed successNetwork of bilateral currency swapNetwork of bilateral currency swaps in place (after 3 yrs of negotiatios in place (after 3 yrs of negotiation) but amounts involved small and n) but amounts involved small and release of 90% of funds tied to IMF release of 90% of funds tied to IMF program being in placeprogram being in place

Common currency arrangCommon currency arrangementement

Little progressLittle progressNo initiative emerges beyond comNo initiative emerges beyond commitment to “study” the issuesmitment to “study” the issues

Asian bond marketAsian bond market Rapid developmentsRapid developmentsBut, a long way to goBut, a long way to go

Explanations for and implications of theExplanations for and implications of these patterns of progressse patterns of progress

How much explanatory value does an analysis of How much explanatory value does an analysis of political factors provide in accounting for variatiopolitical factors provide in accounting for variation in outcomes?n in outcomes?

What do these political factors and the results thWhat do these political factors and the results thus far suggest about how the process compares us far suggest about how the process compares to the European experience and the prospects for to the European experience and the prospects for attainment of eventual monetary integration in Eaattainment of eventual monetary integration in East Asia?st Asia?

Talk OutlineTalk Outline

Emergence of the ‘ASEAN+3’Emergence of the ‘ASEAN+3’ Examination of 3 areas of financial cooperExamination of 3 areas of financial cooper

ation focused on thus faration focused on thus far Explanation for greater and more rapid proExplanation for greater and more rapid pro

gress on bond issuegress on bond issue Assessment of political dynamics in East AAssessment of political dynamics in East A

sia compared to those in Europe on issues sia compared to those in Europe on issues of financial cooperationof financial cooperation

Situation prior to the 1997-98 ASituation prior to the 1997-98 Asian financial crisissian financial crisis

Increasing economic interdependence through traIncreasing economic interdependence through trade, direct investment and finance in regionde, direct investment and finance in region

But, unmatched by development of mechanisms But, unmatched by development of mechanisms and institutions for regional financial cooperationand institutions for regional financial cooperation

Most cooperation focused on trade and conducteMost cooperation focused on trade and conducted at sub-regional and supra-regional level (ASEAN d at sub-regional and supra-regional level (ASEAN and APEC)and APEC)

Motivations for the rise of the “AMotivations for the rise of the “ASEAN + 3”SEAN + 3”

Most proximate: Asian financial crisisMost proximate: Asian financial crisis Rise of regionalism elsewhere Rise of regionalism elsewhere (European Union, NAFTA, etc.)(European Union, NAFTA, etc.) Frustration with U.S. dominance of multilateral inFrustration with U.S. dominance of multilateral in

stitutions and a “hubs and spokes” model in registitutions and a “hubs and spokes” model in regionon

For ASEAN, important opportunity to get the “plus For ASEAN, important opportunity to get the “plus three” (particularly China and Japan) to talkthree” (particularly China and Japan) to talk

Differences with past regional inDifferences with past regional institution-building effortsstitution-building efforts

Participants: more exclusively “Asia”-- > exclusParticipants: more exclusively “Asia”-- > exclusion of U.S.ion of U.S. * Does excluding the U.S. mean that the grouping * Does excluding the U.S. mean that the grouping

assumes a competitive stance vis-à-vis the U.S. or assumes a competitive stance vis-à-vis the U.S. or U.S. dominated multilateral organizations? This is U.S. dominated multilateral organizations? This is a key question for U.S. policymakersa key question for U.S. policymakers

Role of ‘rise of China’ factorRole of ‘rise of China’ factor

3 financial sector initiatives3 financial sector initiatives Asian monetary fund-> currency swap network for Asian monetary fund-> currency swap network for

short-term liquidity supportshort-term liquidity support Mixed successMixed success

Common currency arrangementCommon currency arrangement Little progress (and certainly nothing concrete)Little progress (and certainly nothing concrete)

Asian bond marketAsian bond market Rapid developments forward in short period of time (oRapid developments forward in short period of time (o

ver past year and a half)ver past year and a half)

The Chiang Mai Initiative (CMI) oThe Chiang Mai Initiative (CMI) of May 2000f May 2000

Network of bilateral currency swaps among countriNetwork of bilateral currency swaps among countrieses

Seen by some as functional equivalent to an “AsiaSeen by some as functional equivalent to an “Asian Monetary Fund” n Monetary Fund”

Japan’s role as leader and arbitrator of intra-regionJapan’s role as leader and arbitrator of intra-regional interestsal interests

Outcome: 90% linkage to IMF program in place; revOutcome: 90% linkage to IMF program in place; review planned this yeariew planned this year

Key factor limiting greater regional independence: Key factor limiting greater regional independence: “surveillance” capacity“surveillance” capacity

Basic Elements of Bilateral Swaps Under Basic Elements of Bilateral Swaps Under Chiang Mai InitiativeChiang Mai Initiative

Modality: U.S. dollar and local currencies

Maturity: 90 days, renewable for up to 2 years

Drawing conditions: Activation linked to IMF programs but up to 10 percent may be disbursed without linkage to IM

F programs.

Interest rate: Market interest rate + premium

Other: Guarantee or collateral provided by the Government of country requesting the swap.

Source: Ministry of Finance, Japan

Exchange rate / currency coordiExchange rate / currency coordinationnation

Championed by Japan’s Ministry of FinanceChampioned by Japan’s Ministry of Finance Seen as route for internationalizing the yenSeen as route for internationalizing the yen

Study groups formed but little progressStudy groups formed but little progress Construct basket of regional currencies as an AsiConstruct basket of regional currencies as an Asi

an currency unit (like European currency unit in plan currency unit (like European currency unit in place 1979-98)?ace 1979-98)?

Little enthusiasm among actors, even in JapanLittle enthusiasm among actors, even in Japan Common currency arrangement seen to disproporCommon currency arrangement seen to dispropor

tionately benefit some members over otherstionately benefit some members over others View from outside the region? DisinterestView from outside the region? Disinterest

Underdeveloped bond markets iUnderdeveloped bond markets in Asia n Asia

(Hong Kong Institute for Monetary Research)(Hong Kong Institute for Monetary Research)

Effective but underused Hong KongSingapore

Effective but inefficient KoreaMalaysiaTaiwan

Semi-effective or blocked IndonesiaPhilippinesThailand

Underdeveloped China

Why the relative lack of depth or Why the relative lack of depth or activity in Asia’s bond markets?activity in Asia’s bond markets?

No shared singular explanation; constraintNo shared singular explanation; constraints differ across economies.s differ across economies.

Historically, private sector lobbying (often nHistorically, private sector lobbying (often non-Asian banks) has driven financial sector on-Asian banks) has driven financial sector reforms in these economiesreforms in these economies

Arguments for expanding Asia’s Arguments for expanding Asia’s bond marketsbond markets

Region may become less prone to contagion from eRegion may become less prone to contagion from economic shocks and shifts in sentiment if lessen ficonomic shocks and shifts in sentiment if lessen financial system reliance on banking sector and imprnancial system reliance on banking sector and improve the efficiency with which savings is mobilized.ove the efficiency with which savings is mobilized.

If bonds issued in local currencies or as an ‘Asian If bonds issued in local currencies or as an ‘Asian bond’, then also decreases currency mismatch probond’, then also decreases currency mismatch problemblem

US dollar’s 2002-2003 weakness suggests to AsiaUS dollar’s 2002-2003 weakness suggests to Asian investor that capital preservation may not be comn investor that capital preservation may not be compatible with a passive accumulation of U.S. gov’t bpatible with a passive accumulation of U.S. gov’t bondsonds

Shared goal: better dvlpt of local Shared goal: better dvlpt of local bond marketsbond markets

But, getting there is politically difficult for many gBut, getting there is politically difficult for many governments and requires passage of much legislovernments and requires passage of much legislation and high level of policy coordinationation and high level of policy coordination

Thus, regional cooperation efforts being viewed bThus, regional cooperation efforts being viewed by many individual country actors as drivers for doy many individual country actors as drivers for domestic reformsmestic reforms

Developments to date

Market evolving through a series of relatively low-profile and interlinked initiatives rather than through a single ‘big bang’

Rush of initiatives moving ahead of creation fo infrastructure to trade these instruments

Developments to dateDevelopments to date

Establishment of on “Asian Bond Fund” in June 2003 (for investing in dollar-denominated bonds) by EMEAP (managed by BIS)

Second and larger “Asian Bond Fund” (for investment in local currency bonds) to be launched in months by central bankers

Developments to dateDevelopments to date ASEAN+3 Finance ministers expected to an

nounce market-enabling initiatives in May (following up on 2002 “Asian Bond Fund Initiative” and establishment of working groups in summer 2003)

Thailand and South Korea plan unilateral initiatives

Multilateral entities plan to issue local currency bonds in China and Thailand

Division of labor in working toward creation oDivision of labor in working toward creation of regional bond marketf regional bond market

TaskTask ForumForum

Supply sideSupply side ASEAN+3 (ABMI), APECASEAN+3 (ABMI), APEC

Demand sideDemand side EMEAP (ABF-1, ABF-2)EMEAP (ABF-1, ABF-2)

Political supportPolitical support ACDACD

A division of laborA division of labor EMEAP (central bankers group)EMEAP (central bankers group)

Focus on demand side through establishing Asian bond fund Focus on demand side through establishing Asian bond fund (US$1 bil) with plans for 2nd fund now underway(US$1 bil) with plans for 2nd fund now underway

Idea initiated by Hong Kong Monetary AuthorityIdea initiated by Hong Kong Monetary Authority Goal: help alleviate exchange rate risk and buoy investor inteGoal: help alleviate exchange rate risk and buoy investor inte

rest in Asian bondsrest in Asian bonds Politically, relatively easy to do because involves investing sPolitically, relatively easy to do because involves investing s

mall amounts in EXISTING bonds and mall amounts in EXISTING bonds and US dollar- denominUS dollar- denominated foreign assets commonly held by all EMEAP central ated foreign assets commonly held by all EMEAP central banks so can draw on these.banks so can draw on these.

Political sensitivities anticipated, esp. in Japan, if move towaPolitical sensitivities anticipated, esp. in Japan, if move toward buying up large amts of assets with lower credit ratings thrd buying up large amts of assets with lower credit ratings than US Treasury bondsan US Treasury bonds

A division of laborA division of labor ASEAN + 3 Finance MinistersASEAN + 3 Finance Ministers

Focus on supply sideFocus on supply side Considering creation of an Asian credit guarantConsidering creation of an Asian credit guarant

ee institution and an Asian credit rating agency ee institution and an Asian credit rating agency Discussion of Japan Bank for International CooDiscussion of Japan Bank for International Coo

peration acting as guarantee institutionperation acting as guarantee institution

Role of other regional groups:Role of other regional groups:

APEC (led by HK, Korea and Thailand)APEC (led by HK, Korea and Thailand) Focus on securitization issuesFocus on securitization issues

ACDACD Includes IndiaIncludes India Provides political support for ideasProvides political support for ideas

Supplemented by individual counSupplemented by individual country effortstry efforts

Ex: Japan’s METI plans to set up a structurEx: Japan’s METI plans to set up a structure that provides guarantees for bonds issuee that provides guarantees for bonds issued in local currencies by Japanese companid in local currencies by Japanese companies operating abroad in Asia es operating abroad in Asia

Explaining the rapid progress on Explaining the rapid progress on the bond issuethe bond issue

FeasibilityFeasibility Domestic politicsDomestic politics Makes use of a number of issue-specific capabiliMakes use of a number of issue-specific capabili

ties (which differ from overall national capabilitieties (which differ from overall national capabilities)s)

More potential for positive sum aspect to cooperMore potential for positive sum aspect to cooperationation

Supportive or passive response by actors outside Supportive or passive response by actors outside the regionthe region

FeasibilityFeasibility

Asian bond fund less ambitious and more Asian bond fund less ambitious and more easily implemented than currency cooperateasily implemented than currency cooperation pact -- draws on existing foreign exchanion pact -- draws on existing foreign exchange reserves and amounts involved not very ge reserves and amounts involved not very largelarge

Issuing bonds in local currencies will be mIssuing bonds in local currencies will be more difficultore difficult

Foreign Currency Sovereign Debt Foreign Currency Sovereign Debt Long Term RatingsLong Term Ratings

(Source: Bloomberg Database; as of 27 Feb, 2004)(Source: Bloomberg Database; as of 27 Feb, 2004)

Moody’s Bond Rating S&P Bond RatingSingapore Aaa AAAJapan Aa1 AA-South Korea A3 A-China A2 BBB+Malaysia Baa1 A-Thailand Baa1 BBBPhilippines Ba2 BBVietnam B1 BB-Indonesia B2 B

Foreign Currency Sovereign Debt Foreign Currency Sovereign Debt Short-term RatingsShort-term Ratings

(Source: Bloomberg Database; as of 27 Feb, 2004)(Source: Bloomberg Database; as of 27 Feb, 2004)

Moody’s Bond Rating S&P Bond RatingJapan P-1 A-1+Singapore P-1 A-1+Thailand P-2 A-2South Korea P-2 A-2China P-1 A-2Philippines NP BVietnam NP BIndonesia NP B

Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership

THAILANDTHAILAND PM Thaksin a key proponent; creation of Asian PM Thaksin a key proponent; creation of Asian

bond market leads to nat’l press conferencebond market leads to nat’l press conference Motivation: silence domestic critics and emergMotivation: silence domestic critics and emerg

e as new leader within ASEAN?e as new leader within ASEAN? Importance of political leadership in bringing BImportance of political leadership in bringing B

ank of Thailand on boardank of Thailand on board

Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership

JAPAN:JAPAN: Typically, very little involvement on these types of issuTypically, very little involvement on these types of issu

eses But, (then) Finance Minister Shiokawa strongly supportBut, (then) Finance Minister Shiokawa strongly support

ive of EMEAP Asian Bond Fun idea because pushing Bive of EMEAP Asian Bond Fun idea because pushing BOJ liability structure in direction desired by gov’t (towarOJ liability structure in direction desired by gov’t (toward inflation targeting measures)d inflation targeting measures)

Even so, political involvement very low compared to ThEven so, political involvement very low compared to Thailand, Malaysia, etc.ailand, Malaysia, etc.

Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership

KOREA:KOREA: Leadership under Kim Dae-Jung but currently pLeadership under Kim Dae-Jung but currently p

olitical leadership lackingolitical leadership lacking BUT, other quasi-governmental actors (such as BUT, other quasi-governmental actors (such as

KAMCO) enthusiastically pushing forward bond KAMCO) enthusiastically pushing forward bond market issuesmarket issues

A number of countries possess A number of countries possess capabilities to contributecapabilities to contribute

Japan weak in domestic credit rating agentJapan weak in domestic credit rating agents, experience with secondary debt markets, experience with secondary debt markets, etc.s, etc.

But, Korea, Malaysia, and Thailand have mBut, Korea, Malaysia, and Thailand have more experience here. ore experience here.

-> Issue-specific capacities differ sigificant-> Issue-specific capacities differ sigificantly from aggregate economic capabilitiesly from aggregate economic capabilities

Infrastructure requirementsInfrastructure requirementsComponentComponent Best positioned to leadBest positioned to lead

Credible system of governance (esCredible system of governance (esp.strong and indep. regulator)p.strong and indep. regulator)

UnclearUnclear

Guaranteeing agencyGuaranteeing agency Japan ?Japan ?(Japan Bank for Int‘l Coop)(Japan Bank for Int‘l Coop)

Credible rating agencyCredible rating agency Korea and Thailand?Korea and Thailand?

Strong legal system w/ well-functioStrong legal system w/ well-functioning bankruptcy proceduresning bankruptcy procedures

UnclearUnclear

Developed base of natural buyers Developed base of natural buyers of long-term securitiesof long-term securities

JapanJapan

Reactions outside the region?Reactions outside the region? IMFIMF

SupportiveSupportive EuropeEurope

SupportiveSupportive U.S.U.S.

Passive stance Passive stance But, potential for concern?But, potential for concern? Detrimental impact on demand for US Treasury bonDetrimental impact on demand for US Treasury bon

ds unlikely until currency pegs eliminatedds unlikely until currency pegs eliminated

Why relatively more progress?Why relatively more progress?Summing upSumming up

Relatively easy to take small steps toward longer Relatively easy to take small steps toward longer term goalsterm goals

Supportive or passive reactions by external actorSupportive or passive reactions by external actorss

Neither Japan nor China is natural leader on all aNeither Japan nor China is natural leader on all aspects of infrastructure-building; potentially large spects of infrastructure-building; potentially large contributions by smaller economiescontributions by smaller economies

Coincidence with domestic political ambitions (esCoincidence with domestic political ambitions (esp. in Thailand)p. in Thailand)

Economic Capacities of ASEAN+3 Countries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1990199119921993199419951996199719981999200020012002

Years

Percentage

China

Indonesia

Japan

Korea

All others

Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences

Diversity and heterogeneity of economies in regioDiversity and heterogeneity of economies in regionn Substantial economic convergence a prerequisite to jt Substantial economic convergence a prerequisite to jt

action at regional levelaction at regional level Political leadershipPolitical leadership

Differences in political systems and weak trustDifferences in political systems and weak trust No dominant power like U.S. in western hemisphere; nNo dominant power like U.S. in western hemisphere; n

or, a stable bipolar relationship like Franco-German allor, a stable bipolar relationship like Franco-German alliance in Western Europe. iance in Western Europe.

Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences

In Europe, Maastricht conditions for convergence In Europe, Maastricht conditions for convergence required relevant differences be eliminated as prrequired relevant differences be eliminated as precondition for participation in monetary union; to econdition for participation in monetary union; to offset consequences of diversity, compensation offset consequences of diversity, compensation mechanisms envisaged and financed.mechanisms envisaged and financed.

East Asia: efforts to proceed at regional level firsEast Asia: efforts to proceed at regional level first, hoping for regional developments to provide prt, hoping for regional developments to provide pressure for convergence on domestic actors; little essure for convergence on domestic actors; little discussion of compensation mechanismsdiscussion of compensation mechanisms

Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences

The desire for monetary union and establisThe desire for monetary union and establishment of euro served as focal pt in Europehment of euro served as focal pt in Europe

Private sector played a KEY role in EuropeaPrivate sector played a KEY role in European monetary integration/union but relatively n monetary integration/union but relatively silent in East Asiasilent in East Asia

Political integration was a clear goal in the Political integration was a clear goal in the European processEuropean process