Emerging Asian Bond Market Conference
27 June 1995 |   By : Dato' Dr. Mohd. Munir Abdul Majid, Chairman, Securities Commission, Malaysia

I would like, first of all, to thank the organisers of this Emerging Asian Bond Market Conference, the World Bank and the Hong Kong Monetary Authority, for inviting me to deliver this luncheon address.

You would have heard, over the last two days, of prospect and problems facing emerging Asian bond markets. In particular you would have read from the Malaysian country report of the World Bank study and you would doubtless have gathered from the director of the Research and Development division of our Securities Commission of the effort that has been put in to develop the Malaysian bond market, of the problems remaining -- both regulatory and market conditions -- and of a prospect still to be fulfilled.

I do not propose to rehearse before you yet again the history, problems and prospects in the development of the Malaysian bond market. What I would like to share with you are some thoughts about the importance of seeing through the further development of our capital markets, including of course the bond market.

It has become something of a cliche to say Asians do not like bonds, that Asians are traditionally accustomed to investing in stocks and shares where there are quick capital gains to be made. As bonds are usually long term investment products, Asians therefore have to adopt a longer-term investment attitude. There does appear to be a missing link between Asians, with their well-known high savings habit and bonds, a pre-eminent instrument to tap that habit. I believe, as with everything else, with the right package, attractive rates of return and marketed well, bonds will sell.

Neither investors in the US nor investors in Asia are peculiar. We know that in the US total corporate debts last year are four times higher than funds raised through equity -- and this excludes mortgage and asset-backed sectors. There is nothing peculiar or magical. Papers should have high credit quality, with clear transparent information on the risks involved available to investors. Transaction costs in issuance and trading of the papers should be low. The market should be liquid. We're back to fairness, efficiency, integrity, liquidity and transparency. Quite universal values really -- and not surprisingly so!

While we try to attach a peculiar Asian trait in aversion to bonds, we forget something we otherwise frequently talk about, globalisation. Even if we attribute the particular quality to Asian investors, which I do not accept, global flows of capital funds through institutions professionally managed looking for quality and secure investments with good returns through a diversified portfolio, should put paid to a necessarily bond averse Asian environment even if those funds and institutions are managed by Asians! We return to the inexorable universal requirement: good quality paper, and efficiency, integrity and liquidity in the market place. What must be present are the right conditions. If they are there, the market will see to the rest of it, in Asia as anywhere else.

And in Asia we are talking about the fastest rates of economic growth and the fastest prospective rates of growth, exerting enormous pressure on the financial system for investment funds. The call on the capital markets is fast increasing. In Malaysia in 1992 net funds raised in the capital markets for the first time surpassed new loans extended by the banking system. By far the greater proportion of the funds was raised through the private debt securities primary market, far exceeding funds raised on the equity market which however has, by a long chalk, the far more active secondary trading. We thus have a situation where the more important and larger market in terms of capital formation is constrained by the lack of liquidity in the secondary market caused by regulatory and institutional deficiencies which clearly must be addressed to engender bigger and faster rates of capital formation the economy clearly needs. Already, with all the current deficiencies, there is a lot of unsatisfied demand for Ringgit private debt paper. Just imagine what could be unleashed with a proper addressal of the regulatory and market environment shortcomings.

Last Thursday the Deputy Prime Minister and Finance Minister of Malaysia announced a number of measures to attract and to encourage the growth of the fund management industry in Malaysia. The desire to attract foreign funds with the promise of the release of domestic funds, particularly through the liberalisation of the management of Employee Provident Fund (EPF) assets, is predicated on the intention to achieve more efficient mobilisation of investment funds through institutional management. The measures announced by the Deputy Prime Minister would bring about three intended capital market consequences: greater institutionalisation, professionalism and diversification. All three of these would-be consequences would spell major qualitative and quantitative changes to Malaysian capital markets, which would not be satisfied by disproportionate reliance on the equity market alone.

It is only too true that the Malaysian stock market has grown by leaps and bounds, particularly since the late 1980's. With over 500 companies listed and a market capitalisation in excess of RM500 billion, it is the fifth largest stock market in Asia-Pacific and the 15th largest in the world, in terms of market capitalisation. Doubtless it will grow some more, and at quite a nippy rate. Quite apart from the increase in the number of new listings and corporate activity as a result of economic growth, improvements in the institutional infrastructure of the KLSE will further enhance the size and significance of the exchange in the Malaysian capital market. The decision to allow the acquisition of major foreign assets by Malaysian listed companies would greatly assist the capital raising activity while giving full support to the expansion of Malaysian companies overseas. With due prudence and diligence, it will not only increase further the market capitalisation of the exchange, but also the quality of assets listed. With good quality foreign companies also possibly listed on the KLSE in the future, we expect the exchange to be a regional centre of some significance.

Additionally, the announcement by the Deputy Prime Minister to allow the listing of infrastructure companies without track record based on future projected cash flows, signifies the opening up of what almost amounts to another board on the KLSE, giving further depth and breadth to the exchange. The Securities Commission which has been working on this for the last few months hopes to complete the process of consultation in a month and to finalise the guidelines for Ministerial approval after that. After ensuring statutory provisions fully allow for it, the listing of infrastructure companies can be expected before the year is out, marking yet another important milestone for the KLSE.

The start-up of the options and futures exchanges, which the promoters promise will take place in November, will make available in the Malaysian capital market hedging instruments useful to professional fund managers. The availability of stock index futures contracts, options on individual stocks as well as short term interest rate contracts will, we hope, enhance interest in the underlying cash markets while also bringing a greater level of sophistication to our capital market.

What remains to be worked at is the establishment of a healthy and active Ringgit bond market. While some efforts are under way, there must be greater concentration and urgency to fill in this missing link in the development of Malaysian capital markets. With the measures recently announced by the Deputy Prime Minister, we are confident that such concentration and urgency will be forthcoming so that the Ringgit bond market will not for long remain on the wrong side of "emerging" which our equity market looks like soon leaving behind.
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The Securities Commission Malaysia (SC) was established on 1 March 1993 under the Securities Commission Act 1993 (SCA). We are a self-funded statutory body entrusted with the responsibility to regulate and develop the Malaysian capital market.

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