Emerging East Asia local-currency bonds top $4 trillion: ADB report

By Susanna Moon

Chicago, Nov. 24 - Local-currency bonds outstanding in emerging East Asia stood at $4.2 trillion at the end of September, up 14.8% over 12 months and nearly eight times more than at the end of 1996, shortly before the onset of the Asian financial crisis, according to the November issue of the Asian Development Bank's Asia Bond Monitor.

The increase in local-currency bonds' growing role was attributed to their being a source of funds for companies and governments, recently to support economic stimulus packages, and to market reforms.

"The increase in emerging East Asia's outstanding bonds to above $4 trillion is testament to the hard work of the region's governments and regulatory authorities in opening up their markets with an eye to building a regional debt market," Jong-Wha Lee, ADB's chief economist and head of the Office of Regional Economic Integration, said in a press release.

Despite gains, governments must continue efforts to develop their markets further, the report said.

Emerging East Asia - comprising the People's Republic of China, Hong Kong, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam - makes up about 6% of the global bond market. That is up from 2% in 1996 but still well below Japan's 17% and the United States' 42%, the report noted.

Growth rates

Growth in emerging East Asian bond markets was particularly strong outside China, where markets were 16% larger than at the end of September 2008. Growth in China's bond market moderated to 13.9% year-on-year in the third quarter from 14.8% in the April-to-June period.

The sharpest growth rate in the region's markets was in Hong Kong, which grew 39% versus a year earlier due to significant issuance of exchange fund bills and notes for monetary purposes as well as two large sales of new special administrative region issues to aid local market development. The Indonesian local-currency bond market expanded 18.1%, while the Singapore dollar bond market grew 17.3%.

Government bond issuance grew fastest in Hong Kong, Korea and China. Meanwhile, corporate issuance expanded the most in Vietnam, Indonesia and China.

Although issuance has gone up, spreads have tightened, the report said, and turnover has risen since the height of the global financial crisis.

Concerns linger

Risks remain to emerging East Asian bond markets, notably uncertainty about the robustness of the global recovery and inflationary pressures, premature monetary or fiscal tightening and potentially volatile capital flows, according to the report.

More work needs to be done to bolster liquidity in local bond markets, according to the AsianBondsOnline annual liquidity survey, which accompanied the quarterly Asia Bond Monitor. Liquid bond markets help in the effective transmission of monetary policy and the creation of reliable pricing benchmarks, the report noted.

In the survey of 106 participants conducted in June and July, respondents agreed that increasing the diversity of the investor base is key to improving liquidity. Currently, banks and financial institutions constitute the dominant investor class in most government bond markets in Asia. Respondents also pointed to the need for better tax treatment and suitable hedging instruments.

"It's clear that despite all the developments in recent years, the region needs to further broaden the investor base, strengthen market infrastructure, and put in place a sound regulatory framework so that fixed-income markets can play their full role in the region's economies," Lee said.

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