IMPROVING THE INVESTOR BASE IN LOCAL CURRENCY BOND MARKETS OF CHINA, INDIA AND INDONESIA

Transcription

1 In cooperation with GIZ, The People s Bank of China Research Institute, Observer Research Foundation (India), Economic Research Institute for ASEAN and East Asia (ERIA, Indonesia) IMPROVING THE INVESTOR BASE IN LOCAL CURRENCY BOND MARKETS OF CHINA, INDIA AND INDONESIA CEPS-ASIFMA Symposium, Beijing 25 May 2016 Diego Valiante, Head of Financial Markets and Institutions, CEPS

2 Why local currency bond markets? 2

3 Why LCBM? 3 Financial diversification Intertemporal and cross-sectional risk sharing (debt) Stabilising capital flows by aligning term of credit with currency More funding sources Transmission of monetary policies More market-driven rates (e.g. QE more effective) Competitive pressure on banking system More efficient and attractive capital markets More sustainable finance for long-term infrastructure finance (e.g. project financing) $8 trillion infrastructure investment gap by 2020 (ADB) Funding future liabilities of ageing population

4 Financial diversification 4 Size of the financial sector (% GDP, end 2014) 500% 450% 400% 95% 350% 300% 250% 193% 152% 64% 89% 79% 35% 200% 150% 100% 50% 0% 119% 76% 266% 226% 37% 187% 47% 115% 105% 18% 52% JP US EU CN IN ID Banking sector assets Corporate and government debt securities Equity markets

5 Financial diversification 5 400% Capital markets structure (% GDP, end 2015) 350% 15% 31% 53% 300% 84% 250% 200% 88% 204% 12% 73% 150% 19% 4% 27% 10% 100% 72% 20% 34% 2% 152% 4% 50% 95% 16% 89% 64% 76% 47% 0% US JP EU CN IN ID Equity markets (end 2014) Government debt securities Financial institutions debt securities Corporate debt securities

6 Government bond markets 6 200% JP 204% 150% 100% US 88% EU 72% 50% 0% * IN 34% CN 20% ID 16%

7 Corporate bond markets 7 35% 30% US 31% 25% 20% 15% CN 19% JP 15% 10% 5% 0% * EU 12% IN 4% ID 2%

8 Turnover ratio (efficiency) 8 621% 217% 251% 103% 78% 57% 80% Gov. Corp. Gov. Corp. Gov. Corp. Gov. Corp. CN ID IN US Source: ADB, SEBI, RBI.

9 The investor base 9

10 Investor base - China % 90% 80% 70% 60% 50% 40% 30% 20% 10% Others 40.3% Fund institutions 23% Insurance companies, 9.2% Banks 28% 5.7% Fund institutions 10% Banks 72% 0% Corporate bonds (Sep 2015) Government bonds (Mar 2016) Banks Insurance companies Fund institutions Special Members Others

11 Investor base - India % 90% 80% 70% 60% 50% Foreign investors 13% Central bank 16% Mutual funds, 14% Provident/pension funds, 11% 0.3% 7.3% Insurance companies 21% 40% 30% 20% Insurance companies 36% Banking sector 48% 10% 0% Banking sector 16% Corporate bonds (Mar 2014) Government bonds (Mar 2014) Banking sector Insurance companies Provident/pension funds Mutual funds Corporates Foreign investors Central bank Others

12 Investor base - Indonesia % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Mutual funds 20% Pension funds 31% Insurance companies 16% Banks 20% 8% 4% 4% 12% Banks 29% Foreign Investors 38% Corporate bonds (Dec 2013) Government bonds (Mar 2016) Foreign Investors Banks Insurance companies Pension funds Mutual funds Others

13 How to secure diversification? 13

14 Three building blocks Information flows (price discovery) Information about the issuer (pricing underlying/counterparty) Information about the financial instrument (pricing product) Key objective is comparability 2. Execution (procedures) Entry requirements (accessibility to markets and products) Exit/renegotiation requirements (liquidation) Key objective is fairness 3. Enforcement (implementation) Enforcement of laws (e.g. supervisory practices, regulatory procedures, courts) Enforcement of contracts (e.g. insolvency proceedings) Key objective is certainty

15 Price discovery 15 Information about issuers Accounting standards n IFRS convergence n Enforcement Company data (e.g. business registry & company filings) Credit scoring and reporting Conflicts of interest information (RPT, ownership, etc) Information about issued products Prospectus Credit ratings Reporting systems (pre and post-trade) Yield curve liquidity (risk-free rate)

16 Three building blocks Information flows (price discovery) Information about the issuer (pricing underlying) Information about the financial instrument (pricing product) Key objective is comparability 2. Execution (procedures) Entry requirements (accessibility to markets and products) Exit/renegotiation requirements (liquidation) Key objective is fairness 3. Enforcement (implementation) Enforcement of laws (e.g. supervisory practices, regulatory procedures, courts) Enforcement of contracts (e.g. insolvency proceedings) Key objective is certainty

17 Execution 17 Barriers to entry (accessibility) Capital controls (quotas, investment restrictions, convertibility) Primary issuance access (objective criteria) Barriers to exit (liquidation) Calibration of prudential requirements ( buy and hold )

18 Three building blocks Information flows (price discovery) Information about the issuer (pricing underlying) Information about the financial instrument (pricing product) Key objective is comparability 2. Execution (procedures) Entry requirements (accessibility to markets and products) Exit/renegotiation requirements (liquidation) Key objective is fairness 3. Enforcement (implementation) Enforcement of laws (e.g. supervisory practices, regulatory procedures, courts) Enforcement of contracts (e.g. insolvency proceedings) Key objective is certainty

19 Enforcement 19 Public enforcement Institutional coordination (functional approach) Securities law (collateral, netting, etc) Weak sanctions/enforcement and implementation process Private enforcement Bankruptcy regimes Redress procedures

20 Case studies 20 China Green financial bonds SMEs bonds (Joint Bonds [no guarantees], Collective Notes, Private Placement) India Masala bonds Municipal bond (Ahmedabad) Indonesia Recap bonds Debt swap (staple bonds)

21 Thank you! 21