The November edition of the Asian Development Bank’s local-bond publication, reviewing the August-October quarter in nine East Asian markets, cited higher yields, currency depreciation and reduced foreign holdings as likely trends into next year against the backdrop of emerging economy “risk aversion” and developed-world monetary-policy adjustment.

It noted that equity markets also sold off, while credit default swap spreads stayed intact on 4% quarterly growth in the group to US$13 trillion, almost three-quarters from China.

The ADB added that China’s trade fight with the US could dent “healthy” economic expansion, and an annual survey of liquidity conditions was mixed, with the absence of corporate and government bond hedging tools a main bottleneck.

In advance of the next phase of the 15-year-old Asian Bond Markets Initiative, it offered a retrospective tracking progress against Latin America. The work praised corporate issuance strides, but found that domestic-currency regional placement remained stuck with onerous non-resident rules.

The ADB’s September economic update put GDP growth below 6% in 2019 with domestic demand still “robust,” but trade conflict could be a further drag. While China continues above that threshold, ASEAN (Association of Southeast Asian Nations) members’ advance is set at 5% and Hong Kong’s and South Korea’s just 3%.

Consumer price inflation will rise 0.5 percentage point to near 3% next year, with geopolitics aggravating oil-cost uncertainty.

In the third quarter, yields rose everywhere except China and Vietnam, with the largest increases, of 150-200 basis points, in Indonesia and the Philippines.

Only the Hong Kong dollar and Thai baht appreciated during the period, while the Indonesian rupiah and South Korean won depreciated 3.5% and 2% respectively.

Credit default swap spreads inched up in Thailand and South Korea, with the latter capped by ebbing tensions with the North.

International ownership of local bonds dropped in all markets outside China, with the level there a small 5% in contrast with 25% in Malaysia and 35% in Indonesia, where the central bank raised interest rates five times between May and September to sustain inflows.

On an annual basis, market growth is almost 13%, with China’s same-magnitude leap in local-government special bond issuance leading the way in the quarter. South Korea’s $2 trillion size was second, accounting for 15% of East Asia’s total.

ASEAN combined was $1.3 trillion at end-September, with Thailand and Malaysia each around $350 billion, and Islamic-style sukuk 60% of the latter.

Singapore’s US$300 billion market had heavy monetary-authority issuance to absorb excess liquidity, and Vietnam’s tiny $50 billion one registered improvement in the nascent corporate segment. Government bonds are still two-thirds of activity overall, with the ratio to gross domestic product at 73%.

Indonesia’s pace near doubled over the three months with the return of conventional central-bank bills as of July, while the Philippines’ 38% drop was greatest, without the previous quarter’s retail Treasury bond exercise.

East Asia cross-border transactions were down 20% in the time frame to $4 billion, with Hong Kong and mainland China 60% of the sum. Laos reappeared with a $400 million deal, with the Chinese yuan the top currency denomination.

US dollar, euro and yen regional issuance slipped 9% to $220 billion through the third quarter, with the dollar the 90% preference. Chinese names including Tencent and China Construction Bank were the biggest portion, and South Korean state banks were also active. Indonesia’s $15 billion was one-third of the ASEAN total, and Cambodia was represented with Naga Corporation’s $300 million.

Yield curves moved up across the board with US Federal Reserve interest-rate increases and balance-sheet shrinkage, as speculative-grade corporate offerings were shunned, the report commented.

The Malaysian Securities Commission liberalized retail investor access; the Philippine central bank approved simpler placement rules; and the Thai Bond Market Association is considering digital Bitcoin settlement to strengthen non-government demand.

The yearly online participant and regulator survey revealed worse or unchanged liquidity in Indonesia, South Korea and Malaysia, with the last “sidelined” awaiting policy direction from the re-elected Mahathir Mohamad administration. Their turnover ratios slid, as bid-ask spreads widened to almost 5 basis points.

On qualitative indicators, along with missing hedging tools, the lack of investor diversity, tax clarity and repo availability were obstacles. Government bonds are tax-exempt in China, Malaysia and Vietnam, while other jurisdictions apply 10-25% interest withholding to illustrate uneven performance and development paths ahead for more selective buyers.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.