Asian bond markets recover this year

Bond markets in emerging East Asian countries recovered strongly in the first half of 2009 as government stimulus packages and corporate issues boosted holdings of local currency bonds.

A survey by the Asian Development Bank (ADB) found Emerging East Asia’s bond market grew by 12.8 per cent year-on-year on a local currency (LCY) basis to $US3.94 trillion.  The market grew by 5.2 per cent quarter-on-quarter as financial markets showed signs of stabilizing and regional economies appeared to be recovering.

Emerging East Asia consists of mainland China, Hong Kong, Indonesia, South Korea; Malaysia, Philippines, Singapore, Thailand and Viet Nam.

The ADB said the corporate sector was a more significant driver of growth than governments in the region due to large funding needs for energy and infrastructure investments, although it noted that many Asian corporates are state-owned companies.  Banks also issued bonds to support their capital adequacy ratios.

Government bond yield curves steepened in most markets in August, reflecting much lower policy rates at the short end of the curve and market concerns over fiscal sustainability at the long end, the report said.

THE ADB said the continued growth of the regional market had given it “respectable bulk.”  Local currency issuance of $US3.94 trillion outstanding at the end of the first half compared with $24.62 trillion in the United States, the world’s largest market, and $11.08 trillion in the Japanese market. 

Emerging East Asia accounts for 6.2 per cent of the global market, compared with 2 per cent in 1996. 

China was the largest issuer in the region during the period.  The ADB said mainland China’s corporate bond market reported exceptionally strong growth of 90.9 per cent year-on-year as state-owned enterprises were active.  Banks had also issued subordinated bonds to support their capital following an increase in lending.  The medium term note market was very active, with major issues by the State Grid Corporation, China National Petroleum Corp and Petrochina.
The Hong Kong Monetary Authority issued Exchange Fund bills and notes for monetary policy purposes.  The Indonesian government aggressively issued bonds to finance its stimulus program and because the government had stopped issuing bonds in Q4, 2008.  The Korean government also issued to fund its stimulus program and to support the financial sector.

Although the regional market is dominated by government and bank issues, the corporate bond market provided the greatest growth.  This market grew by 62.4 per cent in the Philippines as leading corporates issued to fund investments in infrastructure and energy and banks issued subordinated bonds to support their capital adequacy ratios. Corporates account for 43.5 per cent of bond issues in the Philippines.

Korea’s has a much-larger corporate bond market in actual size and state-owned companies and financial institutions there have been aggressive issuers of bonds this year.

The ADB said improved investor sentiment helped companies raise funds at a time when banks were still wary of lending.  The report said the lack of a diverse corporate debt market, including a weak high yield segment, remained a shortcoming of currency bond markets in the region.  Bond markets were dwarfed by equity markets, it noted.