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ASIAN settlement procedures need upgrading and political risk and low yields put international investors off Hong Kong bonds, according to a key figure in the International Securities Market Association (ISMA).

  Even relatively sophisticated markets like Hong Kong were hampered by perceptions of risk or by the limited number of debt instruments they offered, said John Langton, chief executive and secretary general of Zurich-based ISMA.

  ISMA, which claims 900 members in 45 countries, has been the 'self-regulator' of its members for the past 25 years.

  Mr Langton warned: 'If domestic bond markets want to become more global they must improve settlement procedures.'   He said fixed-income investment boiled down to perceived risk. Hong Kong's economy was strong, the currency was tied to the US dollar, but investors still had a question mark over Hong Kong.

  'To buy Hong Kong debt is purely a question of risk and you can't help it that there is a cloud of uncertainty over Hong Kong,' Mr Langton said.

  The currency peg also tended to work against the Hong Kong dollar.

  'Major European bond investors won't think of Hong Kong dollars because it's linked to the US dollar - so they buy US dollar bonds,' he said.

  'Why would European investors buy Hong Kong dollars? US dollar has a vast choice of [debt] instruments.'   Relatively low yields also deterred foreign investors. 'Why pile in when there's no real incentive?' said Mr Langton, in town last week to attend the Pan Asian Bonds conference.

  He questioned the viability of the much-vaunted dragon bond market - dragon bonds are listed, launched, syndicated and sold in Asia and have been issued in Canadian and US dollars and in yen.

  'I get very mixed reports as to how much real demand there is for dragons,' Mr Langton said. Spreads were often almost identical to Europe and it was hard to see what a dragon offered that a Eurodollar did not.

  'Why bother setting it up here when it's already in Europe?' he said.

  But he said it made perfect sense for a bank like triple-A rated Bayerische Landesbank, one of the world's biggest bond issuers, to enter the market if it wanted to familiarise Asian investors with its name.

  'I think it's perfectly logical for a bank like that to do a dragon,' he said, welcoming the efforts of investment banks like Peregrine and Lehman Brothers to maintain a secondary market in dragon paper.

  ISMA membership in Hong Kong tended to be limited to Hong Kong arms of European or US investment banks and Mr Langton said ISMA was seeking to get some big local players on side, starting with Peregrine.

  'I'm approaching them,' he said. 'I think that's the first one we have to talk to.'   Mr Langton had some praise for developments in Asia's bond markets, telling conference delegates last week that the Asian bond market might 'soon be one of the most dynamic in the world'.

  'In the long run, Asian markets will become mature and will meet international standards as part of the global market. However, more things need to be done to ensure continued growth in this market,' he said.



Investor question lurks on local bond markets