EMERGING East Asia’s local currency (LCY) bond market bucked the persistent trade tension between the US and China, and the global economic downturn, as it registered a steady growth in volume in the third quarter of 2019.
According to the latest issue of Asia Bond Monitor published by the Asian Development Bank (ADB) on November 20, the LCY bonds outstanding in the region reached US$15.2 trillion at the end of September, representing a 3.1% increase from the end of June. Government bonds outstanding totalled US$9.4 trillion, accounting for 61.8% of the total, while the stock of corporate bonds amounted to US$5.8 trillion.
“The ongoing trade dispute between China and the US, and a sharper-than-expected economic slowdown in advanced economies and China continue to pose the biggest downside risk to the region’s financial stability,” says ADB chief economist Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep the financial condition stable.”
ADB says the persistence and potential intensification of the China-US trade conflict poses a major risk to emerging East Asia, given the tight economic linkages that the regional economies have with both China and the US. It says the elevated level of trade and other economic tensions between the two countries is expected to have negative consequences for the region.
China remained the largest bond market in emerging East Asia, accounting for US$11.5 trillion or 75.6% of the total outstanding bonds in the region. The bond market expansion, though, moderated to 3.6% quarter-on-quarter during July-September 2019 from the 4% rise in the previous quarter, pulled down by the slower increase in the government bond market.
Local Chinese government bonds continued to drive the increment as the government pushed for a September deadline for local governments to utilize their bond quotas as part of measures to spur economic growth and boost infrastructure spending. At the end of September, these quotas had been mostly fulfilled.
Indonesia, meanwhile, had the fastest-growing LCY bond market during the third quarter, boosted by a large issuance of treasury bills and bonds. Total LCY bonds rose to US$227.5 billion at the end of September with growth rebounding strongly to 5.2% quarter-on-quarter after contracting 0.5% in the preceding quarter.
Foreign holdings of LCY government bonds in emerging East Asia were mostly stable between August 31 and October 15. Foreign ownership in Thailand’s LCY government bond market declined the most, shedding 0.8 percentage points to 17.2% at the end of the review period amid growth concerns and the Bank of Thailand’s efforts to limit capital inflows. Indonesia’s foreign holdings share also fell 0.4 percentage points to 38.6% as foreign investors grew cautious over concerns of slowing economic growth and weak trade figures.
In contrast, China saw its share of foreign holdings rise from 5.4% at the end of June to 5.8% at the end of September as the government continued to open its bond market to foreign investors. Foreign demand increased following the inclusion of Chinese government bonds in the Bloomberg Barclays Global Aggregate Index. They will also be included in J.P. Morgan’s Government Bond Index – Emerging Markets Global Diversified Index.
China likewise removed the investment quotas under the renminbi qualified foreign institutional investor and qualified foreign institutional investor programmes.
Foreign holdings in Malaysia recovered – rising from 22.3% at the end of June to 23% at the end of September – after the announcement that its government bonds would remain in the FTSE World Government Bond Index. However, uncertainty still persists since Malaysia was kept on the watch list pending a review scheduled for March 2020.
In terms of yields, ADB says the two-year yields in most markets in emerging East Asia generally followed the movements in advanced economies, with those in South Korea and Hong Kong trending upward. Yields were lower in China and Singapore, but the declines were marginal. The trends for the 10-year yields reflected the movements in the two-year yields.