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Asia’s Ballooning Bond Market

  • Allen T. Cheng

The Asian Development bank has long supported the development of the region’s bond market. In the 1970s the bank began helping governments issue sovereign debt, and since the 1980s ADB has advised companies on how to access credit.

Asia’s sovereign and corporate bond market for nonlocal currencies has more than quadrupled over the past decade, to $693 billion of issuance in 2016 from $155 billion in 2006. Last year nearly 80 percent, or $549 billion, of the bond sales were considered high grade, according to Nikko Asset Management Co.

“We do believe that ADB’s efforts to promote the Asian bond markets have paid off,” says Bertram Sarmago, Nikko’s investment director in charge of Asian fixed income and co-­author of “Asia Credit — a New Major Global Asset Class,” a research report released in February. He adds,“Bond markets in the region continue to grow, with increasing participation from both issuers and investors — both global and local.”

ADB provides information on Asian bonds to ordinary investors who don’t have access to sell-side research, while working with governments and regulators to encourage bond investing, says Sarmago, who adds that the bank has supported initiatives to increase local corporate bond issuance via a guarantee program.

“We hope to see even further initiatives promoting more active local currency corporate bond markets, as well as programs that improve foreign investor access to local bonds, derivatives, and hedging and market liquidity,” he says.

Initial results are encouraging. There has not been a single default among Asia’s high-grade bonds, according to the Nikko report, which notes that China is likely to remain a large part of the region’s high-grade credit market. China, which dominates Asia’s economic growth with about 60 percent of the region’s GDP (excluding Japan), currently has 44 percent of the market.

Given the sheer size of China’s economy and the country’s increasing integration with global financial markets, Nikko says it is highly likely that Chinese financial firms will continue to dominate offshore issuance in Asia’s high-grade credit market for some time to come.

The asset manager will be watching for whether Asian companies begin to disintermediate local banks by directly accessing offshore markets.

“If this trend, which has occurred in other markets as corporates become more sophisticated, also takes place in Asia, then we would expect to see sector issuance continue to diversify, especially in more developed Asian markets,” Nikko said in its February report.

The fund manager also predicted that local Asian funds and institutional investors — especially pensions, insurers, and banks — will continue to look outside their markets and across the region for stable investment opportunities. This will “drive the development of high grade credit in offshore markets to meet this need,” Nikko wrote.

The firm noted that Asia’s local currency bond markets rose from about $2 trillion in 2006 to just under $12 trillion in 2016. “The attractiveness of local currency capital as a substitute to offshore high grade local issuers may also absorb some of the growth and slow the supply of Asia credit, especially if intraregional investors become more comfortable with non–hard currency risks,” the report said.

See related stories: Asian Development Bank: A Force of Stability; China's Consumers Power Ahead; and ADB Seeks Private Sector Help for Infrastructure Projects.