A. ADDRESSING IMPEDIMENTS TO CROSS-BORDER INVESTMENT IN THE REGION'S BOND MARKETS

A paper presented in this conference discussed the current situation of cross-border investment flows in bond markets in Asia and identified a number of key impediments to these flows. The elimination of impediments to cross-border capital flows is the most obvious and important prerequisite to the development of a regional bond market.

In Asia, foreign bondholders account for a very small portion of Asia's local currency bond markets. Recent studies show that foreigners hold at most 1 per cent of local currency bonds outstanding in Korea, Thailand, Hong Kong, Indonesia and Malaysia. Foreign holdings of Japanese government bonds account for less than 4 per cent of the market. With the exception of Australia, Hong Kong and New Zealand, foreign issuers of local currency denominated bonds in domestic markets also make up a small portion of the market (less than 1.5 per cent in Singapore, less than 1 per cent in Japan and negligible in Korea).

Intra-regional investment in Asian bonds is also insignificant. According to the IMF Coordinated Portfolio Investment Survey, out of the total US$9.13 trillion worth of cross-border investment in long-term debt securities made by residents of seventy economies at the end of 2003, Japan accounted for 15 per cent, Hong Kong for 1.7 per cent, and Singapore for 0.6 per cent. Other East Asian survey participants collectively invested a mere 0.3 per cent of the total. However, investments by these three economies in Asian bonds represent only a small part of their total overseas investment in long-term debt securities: 0.8 per cent in the case of Japan, 14.4 per cent for Hong Kong and 17.2 per cent for Singapore.

Impediments to cross-border investment in Asian bond markets may be classified into three types: (a) restrictions, which may be intentional or implied, that deter market activity; (b) omissions of law or practice, such as lack of credible benchmark yield curves or hedging instruments; and (c) discrepancies within and among individual bond markets, which encourage market participants to focus primarily on arbitrage rather than investment.