The Pan-Asia Bond Index Fund, made up of local-currency debt sold by the eight participating governments and their government-backed institutions, is expected to begin trading by year's end under the management of State Street Global Advisors Singapore, the fund's executive committee said.

Thailand, Korea, Indonesia, Malaysia, Hong Kong, Singapore, China and the Philippines, which among them have outstanding debt of US$1 trillion, are all contributing to the new fund. Most will also seek to list the fund on their domestic exchanges in a bid to build trading volume by attracting as many investors as possible.

Asia's bond markets are less developed than those in Europe and the United States because companies in the region have traditionally favored bank lending over debt sales. And the few bonds that are sold are less likely to trade on secondary markets, driving up funding costs for borrowers and trading charges for investors.

``We are introducing new market infrastructure to Asia,'' said Julia Leung, executive director of the external department at the Hong Kong Monetary Authority, at a press conference.

Asian central bankers also see the new fund as a bulwark against rapid capital outflows, such as those triggered by the Asia financial crisis of 1997.

The share of bonds in the fund coming from each participating country was set based on current debt market size, ratings from international agencies and bond market turnover. The degree of market openness, or how easy it is for investors to move money in and out of the country, was another key factor. Korea scored the highest on all four counts and its debt will account for 21.26 percent of the fund, followed by Singapore and Hong Kong.

Although China has a large debt market in terms of outstanding issuance, its unconvertible currency and capital controls held its allocation to just 11.28 percent. Credit downgrades earlier this year forced the Philippines to the bottom of the list with 5.19 percent.

Each of the eight participating governments will also set up a domestic fund made up of local government or government-backed debt and run by local asset management companies and seek to list them on local stock markets. The goal is to attract investors who currently shy away from the market because the debt is often difficult to trade.

Hong Kong selected HSBC Investments while China tapped Beijing-based China Asset Management Corporation, which also manages a fund as part of the mainland's national social insurance program. These eight local funds will start out with US$1 billion in assets. In addition to government debt, Hong Kong bonds likely to be popular with fund managers include rail operator MTR Corp and the Hong Kong Mortgage Corp. On the mainland, debt sold by policy banks such as China Development Bank and China Export-Import Bank are expected to be included.

HSBC will act as custodian of both the PAIF and the eight domestic funds while benchmark indexes for all nine funds, called iBoxx ABF, have been developed by International Index Company, a joint venture run by major banks including ABN AMRO, JPMorgan and Morgan Stanley.

The funds will be passively managed, meaning their portfolios will match the components in the index, which reduces trading costs. Central bankers chose this as opposed to an actively managed fund, where fund managers try to beat the benchmark index through trading. Both trading costs and management fees on such funds are higher, which can deter the conservative investor who typically buys bonds.

Though observers reckon the new funds may win converts among investors, they are less certain it will do much to boost overall bond market volume - or attract more companies to sell debt. ``It's one more angle through which bond markets can gain popularity with the general public ... but I don't see a major stimulation of liquidity,'' Hong Kong Capital Markets Association Brian Yiu said. tim.leemaster@singtaonewscorp.com