Fri, 18 Oct 2019

China remains emerging East Asia's largest bond market

The Asia News
19 Sep 2019, 03:25 GMT+10

MANILA, Philippines - Emerging East Asia's local currency bond market expanded steadily in the second quarter of 2019 despite downside risks stemming from ongoing trade conflicts, a faster-than-expected economic slowdown in China, and moderating global growth, according to the latest issue of the Asian Development Bank's (ADB) Asia Bond Monitor.

"Foreign investment in emerging East Asia remains stable but there are still considerable potential risks. Financial stability in the region could be undermined if global investors change their views on emerging markets," ADB Chief Economist Yasuyuki Sawada said Wednesday. "Governments in the region would do well to continue to deepen local currency bond markets so they can act as a reliable local source of funding."

Emerging East Asia comprises China Kong, China; Indonesia; South Korea; Malaysia; the Philippines; Singapore; Thailand; and Vietnam.

Despite the risks, foreign investment in emerging East Asia's bond markets remained stable in the second quarter. Foreign holdings of local currency bonds rose in China on expectations of additional economic stimulus from the government, and in Indonesia on the back of a credit ratings upgrade. Holdings fell in South Korea, Malaysia, and the Philippines on a variety of domestic factors.

Local currency bonds outstanding in emerging East Asia totaled $15.3 trillion at the end of June, up 3.5% in U.S. dollar terms from the end of March this year and 14.2% higher than the end of June 2018. Bond issuance in emerging East Asia totaled $1.6 trillion in the second quarter, 12.2% higher than in the first quarter due to strong issuance of government bonds and a recovery in corporate bonds issuance.

At the end of June, there were $9.4 trillion in local currency government bonds outstanding, 13.6% higher than at end June 2018. The stock of corporate bonds was $5.8 trillion, up 15% compared with end June 2018.

China remained emerging East Asia's largest bond market, accounting for 75.3% of the region's total outstanding paper. In China, the stock of local government bonds expanded 5.4% on a quarter-on-quarter basis, the fastest of any bond category in the country, following directives for local governments to accelerate the issuance and use of special bonds to support economic growth and finance infrastructure and other development projects. At the end of June, China's debt-to-gross domestic product ratio was 84.6% versus 78.8% at the end of June 2018.

The Asia Bond Monitor includes three discussion boxes that focus on the impact of U.S. monetary policy uncertainty in emerging market currencies; the importance of domestic capital markets as a source of financing for corporates in emerging markets; and the challenges faced by financial markets on the use of other benchmark interest rates as they transition away from the widely used London Interbank Offered Rate, or LIBOR.

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