The growth in the emerging East Asia local currency (LCY) bond market slowed down in the first quarter of 2017, underpinned by reduced issuance activity in China.
The latest issue of Asia Bond Monitor published by the Asian Development Bank (ADB) on June 23 shows the growth rate moderated to 1.1% quarter-on-quarter to reach US$10.5 trillion at the end of March, compared with the 2.4% increase in the previous three-month period.
The new issuance volume in the first quarter of 2017 amounted to US$852 billion, down from US$946 billion in the previous quarter. Government bonds accounted for US$6.8 trillion, or 64.9% of the total bond stock in the region, with corporate bonds accounting for the rest of the amount.
The overall growth in China’s LCY bond market slowed to 0.8% in the first quarter of 2017 due to a decline in government bond issuance – except policy bank bonds – amid rising credit concerns and the associated deleveraging efforts to mitigate such risks.
Growth in municipal bonds slowed to 3.6% quarter-on-quarter after rising 9.3% in the fourth quarter of 2016. New regulations announced in April capped the debt issuance by the riskier local government units.
However, the ADB says the People’s Bank of China (PBoC) still expects an increase in local government bond issuance, raising its local government bond quota to 18.8 trillion yuan (US$2.7 trillion) in 2017.
Overall, China continued to account for the largest market size in the region with outstanding bonds of US$7.24 billion at the end of March, but its share fell to 68.9% of the total, compared with 70% at the end of December 2016.
This development comes as bond yields in emerging East Asian markets continued their downward trend between March 1 and mid-May as optimism in global economic prospects gained pace.
“Strong economic fundamentals are helping emerging East Asian markets to realize gains from the improved global outlook,” says ADB chief economist Yasuyuki Sawada. “Policy efforts should continue to encourage investments in emerging East Asia while safeguarding the region’s financial stability.”
Indonesia experienced the largest decline in yields among the LCY government bond markets as it benefitted from positive investor sentiment and a credit rating upgrade. S&P Global Ratings on May 19 announced the lifting of Indonesia’s credit rating to investment grade, from BB+ to BBB-, bringing it in line with the two other rating agencies – Moody’s Investors Service and Fitch Ratings. The largest drop was noted in 10-year yield as it fell 49bp.
In Korea, where the domestic political uncertainties are receding in the aftermath of the presidential election on May 9, the 10-year yield rose, but the two-year yield posted a decline. In Singapore, the 10-year yield dropped, but the two-year yield rose marginally. It was the other way around in Thailand, where the 10-year yield rose slightly, while the two-year yield fell.
China was notable as it was the only market whose entire yield curve shifted upwards due to rising credit concerns and the government’s efforts to deleverage in order to reduce risk. The yields for both two-year and 10-year paper rose as the authorities raised interest rates on reverse repurchase agreements and lending facilities, and pushed through measures to foster deleveraging.
In the Philippines, yields were driven higher by rising inflation and significant retail Treasury bond issuance.
Meanwhile, foreign holdings in a number of emerging East Asian LCY bond markets rose as investor sentiment has turned positive in recent months. Indonesia recorded the largest gain as foreign holdings in its LCY government bonds went up to 38.2% at the end of March after falling to 37.6% at the end of December 2016. Further gains were noted at the end of April to 39.1%.
This was fueled by positive investment sentiment on the back of an improved macroeconomic and financial environment, and what was then an expectation of a sovereign rating upgrade that happened in May.
The share in foreign holdings also increased in Thailand by 0.6 percentage points to 14.7% at the end of March, but the share in Malaysia declined by 6.6 percentage points to 25.6%. The continued decline in Malaysia came after regulations were issued by Bank Negara Malaysia, the central bank, which deterred foreign banks from engaging in non-deliverable forward contracts. The inability of offshore investors to hedge ringgit-denominated investments has led to capital outflows. In April, however, the foreign holdings’ share started to recover.
