The Asian Financial Crisis highlighted the importance of establishing a deep, liquid and mature bond market so as to avoid over-reliance on bank and equity financing.

While the Asian economies collectively hold more than US$1.5 trillion of official reserves, the great majority of these reserves are held in G7 currencies.

In other words, the bulk of the savings in Asia are channelled first to the OECD markets before a small portion of the same is channelled back to Asia in the form of bank loans and other forms of capital flows. The bond markets in this region do not seem to be a direct beneficiary of such capital flows.

The key to effective intermediation of savings to investments in the region is the development of a deep and liquid regional bond market.

That is beyond doubt and, in this regard, I am not going to elaborate further on why. Rather, I would like to share with you my views on how this can be done.

In this context, the main point I wish to emphasize is that, in my view, the development of the regional bond market must be pursued from both demand and supply perspectives, and at both domestic and regional levels.

I am therefore delighted to see that the Asian economies have moved from "planning" to "implementation" in the development of bond markets.

There are a lot of ideas and plans on how to develop the regional bond market in a number of regional forums, including the APEC, ASEAN+3 and EMEAP. I am pleased to see that these ideas and initiatives are complementary to each other.

The EMEAP Group* Asian Bond Fund (ABF) initiative, which is being developed under the EMEAP Working Group on Financial Markets chaired by the Hong Kong Monetary Authority, tackles the development of regional bond market from a demand perspective.

The first phase of the ABF, the US dollar ABF, which has a size of about US$1 billion, is now almost fully invested in US dollar denominated Asian bonds.

This US dollar ABF is an important step forward in promoting the efficiency of financial intermediation in the region. It helps to channel a small portion of the very sizeable official reserves held by the Asian economies back into the region.

After the launch of the US dollar ABF, the EMEAP Group is now proceeding with the study of the local currency ABF, the aim being to extend the ABF concept to include bonds denominated in local currencies. This should further contribute to the broadening and deepening of local currency bond markets in the region.

Meanwhile, the ASEAN+3 is studying various proposals to develop the Asian bond markets from the supply perspective. This Forum's emphasis is on the need to facilitate access to the market by a wide variety of issuers, and the creation of an environment conducive to developing bond markets.

Study groups have been established to examine the creation of new securitized debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, as well as both local and regional credit-rating agencies.

Whether or not the regional bond market will take off depends on whether supply and demand factors match each other. This also hinges on whether the necessary financial infrastructure, the soft and hardware for bond markets, is in place.

This is where the APEC Initiative on Development of Securitisation and Credit Guarantee Markets comes in. The Initiative is chaired by Hong Kong, China, together with Korea and Thailand, and sponsored by the World Bank.

While the ASEAN+3 and EMEAP initiatives tackle bond market development from a regional level, the APEC Initiative aims to tackle bond market development from the domestic level. Our APEC Initiative is therefore completely complementary to the other regional initiatives.

The APEC Initiative on Development of Securitisation and Credit Guarantee Markets is highly action-and result-oriented. It aims to promote the understanding and awareness of the importance of securitisation and credit guarantees to bond market development in the region. This is beneficial to the long-term development of bond market.

Through organising high-level policy dialogues, it will ensure that both investors and issuers are equipped with the knowledge and ability to develop the securitisation and credit guarantee markets, as soon as the market situation becomes conducive.

Another important objective of the Initiative is to assist those APEC economies, which are committed to reforming their markets, to identify market impediments and to draw up concrete action plans.

Thanks to the support of the APEC Finance Ministers and members, the Initiative has progressed well. Our first policy dialogue was held in Seoul, Korea in April 2003. Policy officials and representatives from academia used the opportunity to explore the use of securitisation at both domestic and regional levels.

Four member economies, China, Thailand, the Philippines and Mexico, have volunteered to participate in the initiative through receiving expert advice to assist them in identifying and removing impediments to developing securitisation and credit guarantee markets.

Seven economies, China, Japan, Australia, the U.S.A., Thailand, Korea and Hong Kong, China, have sponsored experts to assist in the initiative. The World Bank has also provided experts. This is very encouraging.

In order to demonstrate their commitment, those economies which will be receiving advice will establish a policy-level inter-departmental task force to take the lead in implementing market reforms.

They are also expected to form a private-sector advisory group to assist the authorities and the panel on identifying impediments and helping to remove them.

In that context, I am pleased to note that panels of experts for the four economies receiving expert advice have already been formed. Panel visits to Thailand and China were launched in June and July 2003 respectively.

Action plans have been prepared by the expert panels and have been submitted to the respective inter-departmental taskforces for comments and endorsement. The first panel visit to Mexico is being planned.

So far, the experience of the panel visits suggests that the responsibility for developing the domestic bond market tends not to fall neatly into any one ministry or department's work, nor is it the responsibility of any single institution or agency.

It is therefore of the utmost importance to secure support from high-level policymakers in the relevant authorities.

It goes without saying that strong political commitment is crucial for ensuring that the action plans produced by the experts are strictly and forcefully implemented.

The value of the APEC Initiative lies in the fact that it provides a focus and impetus to pool together resources and promote coordination among various ministries to achieve the goal of developing the domestic bond market.

Thus the central bank, Ministries of Finance, Securities Commission and other related government agencies are brought together through the inter-departmental task force to devote their joint efforts towards removing any market impediments.

Inevitably, each economy has its own mix of impediments to the development of a bond market. Typically, these include tax, accounting, legal and regulatory impediments.

Nevertheless, they are all essentially technical in nature, and can be overcome once there is the political will for reform. The APEC forum provides an ideal platform to generate and sustain that political will.

In my own city - Hong Kong, China, the development of the bond market has been high on my policy agenda. We have put in place a series of measures to simplify the regulations and streamline procedures in issuing and listing debt securities.

Good progress has been made. On the taxation side, we are planning to grant a 100% concession on profits tax for qualified debt instruments with a maturity period of seven years or more, and to exempt 50% of the profits tax for such instruments with a maturity period of three years or more, down from the existing threshold of five years.

The Hong Kong dollar bond market's outstanding amount reached HK$553 billion at the end of June 2003.

The recent development of our bond market is characterized by the growth of retail bonds. A number of well-established public corporations have issued bonds of different maturities ranging from five years up to 15 years.

Recently, the Hong Kong Monetary Authority has also launched a one-year pilot scheme for promoting Exchange Fund Notes in the retail market.

All these have helped to offer more choices to investors and make our bond market, particularly at the retail level, more mature. We are most willing to share our experience in promoting the development of our bond market with other jurisdictions.

Developing the regional bond market is not an easy task, especially in a region as diverse and complex as our own.

However, since we share the common goal of enhancing financial stability and economic growth, we have a common interest in stepping up our efforts and enhancing cooperation.

In developing the regional bond market, we must work together at both regional and domestic levels, tackling both supply and demand sides at the same time.

I believe that the regional bond market initiative is a worthwhile project to demonstrate our commitment to regional cooperation. I am confident that we will succeed.

(Note * EMEAP, the Executives' Meeting of East Asia-Pacific Central Banks, is a co-operative organisation comprising central banks and monetary authorities of eleven economies: Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand.)