A case for more retail participation in Asian bond markets

Asia continues to outpace other regions in economic growth, but the development of its capital markets, including bond markets, has not kept up. 

In a recent report, the Asia Securities Industry and Financial Markets Association (ASIFMA) found that Asian capital markets are underdeveloped and underutilised, and are roughly half the size of those in mature economies relative to GDP (footnote 1).

Clearly, given Asia’s high savings rate, there is substantial room for growth. China’s household savings rate of 30.5 per cent, for example, dwarfs that of developed countries, where it is about 5 per cent (footnote 2). 

Asia also continues to have high investment needs. We estimate that Asia will need some US$11.5 trillion (Bt379 trillion) in infrastructure investment alone before 2030. All that is required, then, is a more efficient transfer mechanism so that the region’s savings can be invested in the region’s bonds. 

Tapping the nascent retail market would certainly benefit bond issuers. With a fresh supply of capital, the cost of funding would decrease, freeing up additional capital to support the real economy. Government bonds in particular would provide access to liquidity for infrastructure projects, as well as a benchmark yield curve for the broader credit market. 

Investors, too, would benefit. As Asians age, they need a more stable, less risky income stream. The social safety nets in place are inadequate, so Asians must save more to prepare for their future pension and healthcare needs. 

Investors – especially the elderly and those approaching retirement – should be encouraged to move away from equities, which are unreliable machines for making or losing money – and move toward bonds, which provide a steady flow of income. 

But bonds are more than just a regular source of income for retirees. Different types of bonds are different wealth-management tools for different groups of investors. And as an asset class, bonds play an integral part of any investment portfolio. 

A fixed-rate bond pays a fixed rate of interest over its life. A floating-rate bond pays a variable rate of interest, adjusted regularly, which provides capital preservation and higher income as the interest rate rises. A zero-coupon bond is sold at a deep discount, but does not pay out any interest prior to maturity. Its main benefit is saving for an objective on a specific date. 

In Asia, there is somewhat of a dearth of debt instruments, but there is definitely no shortage of interest. Hong Kong, long a strong player in the equities market, has been trying to accelerate the development of its bond market. 

In each of the past three years, the Hong Kong government has sold HK$10 billion inflation-linked bonds, better known as iBonds, to retail customers. The first tranche, offered in 2011, attracted more than 150,000 subscribers. In the second year, subscribers doubled to more than 330,000. And last year, a record 525,359 Hong Kong residents subscribed (footnote 3).

Hong Kong’s example shows that governments can take the lead in developing bond markets – and they certainly have a need to do so. Most emerging Asian economies are reliant on exports, but to continue to grow, the share of consumption must increase. 

By helping to build a less risky investment channel that provides a more stable return, governments can nudge their people to save less, thus freeing up disposable income for domestic consumption necessary for these economies to become mature. 

Helping to develop bond markets also gives governments a chance to tidy up their financial systems. The lack of deep, liquid and efficient bond markets is one reason public projects and private enterprises in Asia rely on bank loans for funding. 

Maturity mismatches – between short-term deposits and long-term loans – can put a strain on liquidity, earnings and even at times, the solvency of banks. 

While there cannot be a perfect match of maturity profile of different assets and liabilities, a significant mismatch can threaten the entire financial system by inducing funding risk and interest-rate risk. 

Banks, too, should encourage the development of efficient bond markets. It is our duty to manage wealth for our customers, but as it stands now, the line-up of financial products available to them is neither complete nor well-stocked. 

We should help provide solutions so that customers – no matter their age, education, income, ethnicity, physical condition or employment status (footnote4) – can have their wealth properly managed. Financial services should be fair, flexible and inclusive. 

Asia’s economic development has been spectacular, and having deep, liquid and efficient bond markets in the region can help sustain that growth. 

 

FOOTNOTES

1. “Asia’s Capital Markets: Strategies for Sustained Growth”, ASIFMA White Paper, November 2013, pg 13

2. www.voxeu.org/article/china-s-one-child-policy-and-saving-puzzle

3. www.scmp.com/business/banking-finance/article/1260260/525000-subscribers-flock-ibonds

4. www.oft.gov.uk/shared_oft/ reports/financial_products/oft255.pdf

 

Tony Lewis is head of HSBC Securities Services in Singapore