ADB: Emerging East Asia bond markets grow 18.8% to $4.8 trillion

By Angela McDaniels

Tacoma, Wash., Oct. 5 - Local-currency bond markets in emerging East Asia had grown by an annual 18.8% as of the end of June, with $4.8 trillion in paper outstanding, according to the Asian Development Bank's quarterly Asia Bond Monitor.

ADB includes the People's Republic of China, Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam in emerging East Asia.

According to ADB, this large expansion was driven by a 24.4% year-on-year growth in the corporate bond market, which has become an increasingly important source of funding for private sector investment.

Strong foreign investment

Emerging East Asian bond markets have also seen strong foreign investment. The bank said high offshore and onshore demand for emerging East Asia's local-currency bonds has reduced the premiums paid on corporate debt over government benchmark bonds and contributed to a flattening in government bond yield curves.

"Emerging East Asia is experiencing strong foreign portfolio capital inflows as investors chase higher returns in local markets," Iwan Azis, head of ADB's office of regional economic integration, said in the report.

ADB said that according to the most recent data, foreigners held 27.4% of Indonesian government debt, 18.1% in Malaysia and 7.4% of sovereign debt in Korea. While much of that investment has come from outside Asia, the bank noted that some has also come from within the region. China's holdings of Korean Treasury bonds, for example, grew to 4 trillion won at the end of June from 1.9 trillion won at the end of December 2009 and now account for about 10% of foreign holdings.

"The risks to the outlook for Asia's local-currency bond markets are now tilted to the downside. Nevertheless, a slowdown in the developed economies, volatile capital inflows and inflationary pressures are still threats," Azis said.

Hong Kong leads growth

Growth in the size of local-currency bond markets was led by Hong Kong (43.3%), Vietnam (35.8%), China (22.5%) and Thailand (18.4%), the report stated. ADB said the strong growth of the Hong Kong market was due mainly to the heavy issuance of exchange fund bills and notes by the Hong Kong Monetary Authority for monetary policy purposes.

At the end of June, the size of China's local-currency bond market was $2.85 trillion. The government bond market grew by 17.0% over that period while the corporate bond market expanded a much larger 52.7%, the bank said.

Governments in the region have continued with policy reforms and other innovations to deepen domestic markets, expand cross-border transactions and lengthen maturity profiles, ADB said. As examples, the bank noted that China in August allowed foreign financial institutions greater access to its inter-bank bond market, the Indonesia central bank is pushing for issuance of longer-dated paper and Korea introduced regulations to enhance trading of futures on its Treasury bonds.

Issuance totals $938 billion

The report said that local-currency bond issuance totaled $938 billion in the second quarter, up 6.5% on the year but 11.7% lower than in the first quarter due to a dip in central bank issuance. Total central bank bill and bond sales fell 25.7% quarter on quarter due to a reduction in sterilization activities.

Meanwhile, emerging East Asia's sales of bonds denominated in dollars, euros and yen are on track to match, if not exceed, the record $63.2 billion of issuance in 2009, ADB said. In the first half of 2010, sales reached $31.8 billion, with an additional $14.5 billion sold from July to mid-August.

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