EMEAP (Executives’Meeting of Asia and Pacific Central Banks) has released a press statement at14:00 Beijing hour, announcing the imminent launching of the second phase ofthe EMEAP-invested Asian Bond Fund (ABF2).
The ABF2 willinvest in local bond markets of EMEAP members (excluding Japan, Australia andNew Zealand). Following the successful launch of the ABF1 that invests in USDdenominated Bonds issued by sovereign and quasi-sovereign issuers of theabove-mentioned 8 markets, the ABF2 marks another critical effort in promotingthe development of bond markets in Asia and a historical achievement ofregional financial cooperation. As a committed member of EMEAP, the PBC hasbeen making great efforts in developing and improving the ABF initiative andsubscribed to the ABF1, followed by the imminent subscription of the ABF2. ThePBC will continue to play an active role in the evolvement of the initiative,reflecting the demand for bond market development and regional financialcooperation.
1. Framework of the ABF2and its implications
EMEAP raised theABF initiative in 2002, calling for members to contribute their foreignreserves to establish an Asian Bond Fund, collectively investing in bonds ofAsian issuers, so as to promote the development of bond markets, which wasbroadly agreed as an effective solution to address the financial vulnerabilityarising from Asian economies’ excessive dependence on banking system andshort-term external financing. The initiative was strongly echoed by EMEAPmembers and the first phase of the ABF (ABF1) was successfully launched inJune, 2003. ABF1 has a total amount of USD 1 billion, investing in 8 EMEAPmembers’ USD-denominated sovereign and quasi-sovereign bond issues. Afteroperating for over 1 year, the ABF1’s performance is so far satisfactory.
The EMEAP startedits research on the framework of a local currency ABF right after the launch ofthe ABF1 to enhance the developmental effect of the ABF initiative on Asianbond market. With one year’s intense efforts, the EMEAP has come up withfeasible solutions for key technical details of ABF2, including fund structure,launch strategy, operation mode, index construction, etc., and is currently inthe process of finalizing the selection of managers and custodians for ABF2funds. The ABF2 will be launched in the near future.
The EMEAPinvestment in the ABF2 totals USD 2 billion. China is one of the largestcontributors. ABF2 consists of two parallel funds, i.e., the Pan-Asian IndexBond Fund (PAIF) and the Fund of Bond Funds (FoBF), targeting development ofthe regional market and individual local markets, respectively. Both funds aresubscribed initially by EMEAP members with foreign reserves and passivelymanaged against the newly constructed Pan-Asian Local Bond Index and countryspecific sub index by fund managers selected and appointed by the EMEAP,investing in sovereign and quasi-sovereign bonds of the 8 local markets.
The PAIF is aimed atcreation of a complete regional local bond index and investment productsstructured around this index, which could facilitate investments in Asian bondmarkets, particularly by investors of mature market. The Pan-Asian Indexjointly developed by the EMEAP and the International Index Corporation (IIC,formerly named iBoxx) will be the first local bond index covering 8 Asianeconomies’ bond markets and will play an important role in enhancing infrastructureof the regional bond market.
The FoBF isestablished to satisfy development demand of individual local markets, as wellas to provide a workable solution to enable the access of USD investment tolocal market. The launch and operation of country sub-funds will not onlyinject new liquidity into local bond markets, but also enhance marketinfrastructure and deepening the market by introducing index-based passivemanagement into the markets.
More importantly,different from the ABF1 that is confined to EMEAP members only, the ABF2 willbe offered to the public, hence help to create a self-sustained process ofmarket development. According to the EMEAP’s design, following the EMEAP’ssubscription in Stage I, the PAIF and FoBF sub-funds will be opened to thenon-EMEAP investors, including private sector investors, in Stage II. Theinitial subscription of the EMEAP members will serve as the seed money and ademonstrative case to follow, which will help to strengthen market confidencein the ABF2 and guide the investors, hence to ensure the ABF2’s successful transitionfrom a government project to a market-based product, fulfilling its objectiveof cultivating the market.
In light of thedesign of the ABF2, the EMEAP seems to have clearer and more sophisticatedthoughts on ABF initiative than what they had when launching the ABF1. ABF2’sdevelopmental effects are far beyond simply improving market liquidity. Itfocuses on more fundamental aspects, including development of marketinfrastructure, removal of legal and regulatory impediments and catalyzeself-sustained sources for growth in the long run.
2. ABF2’s positive role inpromoting development of China’s bond market
ABF2’s investmentin China may seem to be insignificant in size as compared with China’s totalmarket capitalization of around RMB 5 trillion yuan. Nonetheless, it is ofgreat significance to China’s bond market in terms of the evolvement of marketinfrastructure and market system.
a. Development of bondindex. Owing to various factors, so far there is not a full-fledged and broadlyaccepted all-market bond index in China. The sub-index for China sub-funds willintroduce advanced technologies of index construction and valuable practicalexperience for index development.
b. Development ofinvestment instruments on the bond market. There is only one bond fund in Chinaso far, while the concept of either index-driven investment or listed fund isstill new on the market. ABF2 China sub-fund will be the first index-drivenpassively managed bond fund in China. Compared with the active management,passive management against a benchmark index will be less costly and moretransparent. After being opened to the public, the ABF2 will become acost-effective and efficient investment instrument for domestic investors toinvest in domestic bond market.
c. Development of fundmanagement industry. Most fund managers in China lack the experience of passivemanagement. Managing the ABF2 will be a good opportunity for domestic fundmanagement companies to obtain experience. While participating in biding forfinancial advisor and China sub-fund manager, domestic fund managementcompanies exchanged views and cooperate with foreign counterparts and impressthem with their professionalism and creativity.
d. Integration ofsegmented bond markets. PAIF and China sub-fund will be investing in both theexchange bond market and the inter-bank bond market. China sub-funds will belisted when appropriate. These will be conducive to the integration of thesetwo markets.
The successfullaunch of the ABF2 will be the most important achievement so far in the area ofcentral bank cooperation and bond market development within the region. It notonly marks a great step forward in the regional financial cooperation, but willhave significant impact on local bond market development in the region.
