Emerging East Asia's local-currency bonds remain vital but face risks; Vietnam leads growing pack

By Susanna Moon

Chicago, Nov. 29 - Emerging East Asia's local-currency bonds still attract investors both at home and abroad as the region's markets tackle mounting challenges, according to the latest Asia Bond Monitor in a press release by the Asian Development Bank.

The report assesses the bond markets of the People's Republic of China, Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

The local-currency markets are expanding at a slower rate with $5.5 trillion of outstanding bonds at the end of September, up 5.5% from a year ago. That compared with a year-on-year growth rate of 7.6% at the end of the second quarter of 2011.

The expansion in the third quarter can be tracked to strong growth in the region's corporate bond market, which expanded by 15.4%, while the government bond market grew by just 1.3%, the bank noted.

"Asia's low debt levels, strong economic fundamentals and the yield pick-up compared with bonds of developed markets contribute to the attractiveness of local bonds," Iwan J. Azis, head of the Asian Development Bank's office of regional economic integration, said in the release.

Risks include market volatility sparked by growing uncertainty in the European economies as well as the slowdown in Asia's economic growth and the potential for abrupt capital outflows, the release noted.

Burgeoning market

Bonds issued by local governments could become an interesting new asset class in the local markets, the bank said. The Thai government now permits issuance by local governments and the companies they own. China recently approved issuance of bonds by the municipal government of Shanghai and the province of Guangdong for RMB 7.1 billion and RMB 6.9 billion, respectively.

Yield curves in most markets have flattened and in some cases shifted down as markets and policymakers focus on supporting growth rather than stemming inflation, according to the bank.

Declining yields, particularly for longer-dated bonds, offer governments the chance to raise cost-effective debt.

Vietnam was the fastest-growing local-currency bond market in the third quarter, expanding 22.2% on year to $17 billion. The corporate bond market grew by a strong 34.7% with the government bond market increasing 21.1%.

China has the largest local-currency bond market in emerging East Asia with $3.2 trillion of bonds outstanding at the end of September. That was 3.5% more than a year ago and 0.5% more than at the end of June. The 20.0% year-on-year growth in the corporate bond market contrasted with the 0.7% contraction in the government bond market.

Bond issuance in the region totaled $829 billion in the third quarter, up 7.6% versus the second quarter but down 19.9% year-on-year. Central banks reduced sales to offset foreign-exchange inflows, the release noted.

Corporate issuance was also down 24.4% on a year-on-year basis. This decline, however, was from extraordinarily high levels in 2010, the bank said.

AsianBondsOnline's latest liquidity survey of more than 100 investors shows that bid-ask spreads have widened compared with last year but turnover ratios have improved. The survey results show that market participants want governments to issue more bonds to improve market liquidity, the bank said.

As of the end of October, borrowers in emerging East Asia had raised $63 billion in so-called G3 bonds - or bonds denominated in dollars, euros or yen - suggesting the region may fall short of the record $87 billion in issuance witnessed in 2010, the bank said.

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