East Asia's currency bond market up strongly in first half

MANILA, Philippines - Emerging East Asia’s local currency bond market grew by 18.8 percent in the year through June with $4.8 trillion in bonds outstanding amid strong foreign investment in the region, an Asian Development Bank report said Monday.

The growth was driven by a 24.4-percent year-on-year increase in the corporate bond market - an increasingly important source of funding for private investment in the region, the Asia Bond Monitor said.

Emerging East Asian bond markets comprise those of China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam.

Much of the investment in local currency bonds has come from outside Asia, but some also from within the region.

China’s holdings of Korean Treasury Bonds soared to four trillion won at the end of June from only 1.9 trillion won at the end of December 2009, or about 10 percent of foreign holdings of KTBs.

Most recent figures show foreigners held 27.4 percent of Indonesian government debt, 18.1 percent in Malaysia and 7.4 percent of sovereign debt in Korea, the report said.

“Emerging East Asia is experiencing strong foreign portfolio capital inflows as investors chase higher returns in local markets,” said Iwan Azis, head of ADB’s Office of Regional Economic Integration.

He said the risks to the outlook for Asia’s local currency bond markets are now tilted to the downside, with a slowdown in developed economies, volatile capital inflows and inflationary pressures posing threats.

As the end of June, China’s local currency bond market was at $2.85 trillion. The government bond market rose by 17 percent, while the corporate bond market soared by nearly 53 percent.

Governments in the region have continued with policy reforms to deepen domestic markets and expand cross-border transactions, the report said. They also have offered longer-term bonds.

China in August allowed foreign financial institutions greater access to its interbank bond market while Indonesia’s central bank is pushing for issuance of longer-dated paper. Korea introduced regulations to enhance trading of KTB futures, the report added.

Local currency bond issuance in emerging East Asia totaled $938 billion in the second quarter, up 6.5 percent on year, but 11.7 percent lower than in the first quarter due to a dip in central bank issuance. The most rapid growth rates in new issuance for the second quarter were recorded in Vietnam, China, the Philippines and Indonesia.