Foreign bond markets and financial market development: International perspectives

A key aspect of financial market reform following the 1997-1998 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 (Tan et al. 2001). Initially, attention was paid to markets where governments issued and traded, and subsequently to markets where industrial and financial corporations issued and traded (Schinasi and 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 protection 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 Markets Initiative; the formation of the Asian Bond Fund; 2 specific local market deregulation aimed at improving institutions; and proposals to enhance foreign participation by both investors and issuers in local markets. The objective of this chapter is to add to the discussion of foreign participation by investigating the contribution it makes to domestic bond markets.