ADB: Emerging East Asia issuance falls 8.4% to $3.3 trillion in 2012

By Angela McDaniels

Tacoma, Wash., March 18 - Local-currency bond issuance in emerging East Asia totaled $3.3 trillion in 2012, a decline of 8.4% from 2011, according to the Asian Development Bank's quarterly Asia Bond Monitor.

Emerging East Asia is defined as the People's Republic of China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Government bond issuance fell by 15.6% to $2.4 trillion from $2.8 trillion a year earlier, but corporate bond issuance rose 20.1% to $860 billion in 2012 from $716 billion from 2011.

In the fourth quarter, issuance in the region's corporate bond sector grew 6.3% quarter over quarter and 6.6% year over year. ADB said the only large increases in new corporate issuance on a quarter-over-quarter basis came from China and Indonesia, which saw their issuance levels rise 26.1% and 118.7%, respectively, in the fourth quarter.

The $109 billion of new corporate issuance in China was the largest in the region. The next largest amount of corporate issuance was in South Korea at $93 billion. Taken together, corporate issuance in China and South Korea accounted for $201 billion, or 85.9%, of the region's $234 billion of corporate issuance in the fourth quarter.

The region's two most rapidly growing corporate bond markets in the fourth quarter were Indonesia and China, which grew 9.4% and 9.3%, respectively. They were followed by Thailand (6.7%), South Korea (4.1%) and Malaysia (3.9%).

Amount outstanding increases

The pace of issuance may have slowed, but the total amount of outstanding bonds still increased.

In total, $6.5 trillion of bonds were outstanding in emerging East Asia's local-currency market at the end of 2012 versus $5.7 trillion at the end of 2011. This is an increase of 3% over the end of the third quarter and 12.1% over the end of 2011.

ADB said the increase signals ongoing investor interest in the region but also raises the risk of asset price bubbles.

The corporate markets drove the increase, according to ADB, growing 6.2% on the quarter and 18.6% on the year to $2.3 trillion. In contrast, total government bonds outstanding in emerging East Asia grew only 1.4% quarter over quarter in the fourth quarter, reflecting very slow growth (0.9%) in China.

The five most rapidly growing markets in the fourth quarter on a quarter-over-quarter basis were Vietnam (17.6%), the Philippines (7.5%), Thailand (4.2%), Indonesia (3.3%) and China (3.0%). On a year-over-year basis, they were Vietnam (42.7%), the Philippines (20.5%), Malaysia (20.5%), Thailand (19.9%) and Singapore (19.4%).

Japan still has the largest market in Asia at $11.7 trillion, followed by China at $3.8 trillion.

Foreign investment increases

ADB said investment is increasingly coming from overseas, with foreign ownership in most emerging East Asia local-currency bond markets increasing in the second half of 2012.

In Indonesia, for example, overseas investors held 33% of outstanding government bonds at the end of 2012, while foreign holdings of Malaysian government bonds had reached 28.5% of the total at the end of September.

More long bonds seen

Governments in emerging East Asia are increasingly opting to sell longer-dated bonds. ADB said this is another sign of strong market confidence in the economies of the region and is making them more resilient to possible volatile capital flows.

In the Philippines and Indonesia, for example, around 45% of government bonds outstanding had remaining maturities of more than 10 years.

Maturities tend to be shorter in the corporate bond markets of the region, ADB noted.

G3 currency issuance increases

The amount of bond issuance denominated in G3 currencies - the dollar, the euro and the Japanese yen - increased to $130.8 billion in 2012. The largest amounts came from China ($31 billion), South Korea ($30.9 billion), Hong Kong ($27.9 billion), Singapore ($12.8 billion) and Indonesia ($12.1 billion).

In ADB's view, the most interesting aspect of these outcomes is that China has displaced South Korea from its traditional position as the largest G3 currency issuer in the region.

The largest individual G3 bond issues in 2012 were two Indonesian sovereign bonds of $2 billion and $1.75 billion, followed by 1MDB Energy Ltd. of Malaysia's $1.75 billion issue, Hutchison Whampoa's $1.65 billion issue in June and $1.5 billion issue in January and Cnooc Finance Ltd.'s $1.5 billion issue in May.

Risks

In ADB's view, risks to the region's local-currency bond markets are biased toward the downside and include the budget deadlock threatening the U.S. recovery, stronger growth potentially leading to higher interest rates and inflation and a surge of destabilizing capital inflows into the region.

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