Growth in emerging East Asia LCY Bond Market Slows Down

 Growth in emerging East Asia LCY Bond Market Slows Down

The emerging East Asia’s local currency (LCY) bond market expanded at a slower pace in Q4 of 2022 due to a deceleration in the issuance of government bonds. 

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According to the latest issue of Asia Bond Monitor published by the Asian Development Bank (ADB), the slowdown was driven by a decline in issuance as most of the jurisdictions had fulfilled their borrowing requirements earlier in the year.

At the same time, issuance of corporate bonds contracted amid the elevated borrowing costs due to a tightening of monetary policy by most of the central banks in the region and concerns of bond defaults in China and Vietnam, particularly in the property sector in both economies.

Overall, the region’s LCY bond market totalled $23.2 trillion at the end of December. The issuance volume in Q4 of 2022 reached $2.2 trillion, with growth easing to 1.2% from 2.3% in the previous quarter. Government bonds outstanding totalled $14.8 trillion at the end of 2022, while corporate bonds reached $8.4 trillion.

The LCY bond market of China continued to be the largest in the region, amounting to $18.5 trillion at the end of December for a market share of 79.7%. The Chinese government continued to issue sovereign debt to finance stimulus measures and to roll over existing debt in the fourth quarter, albeit at a slower pace compared to previous quarters following the completion of local government bond quotas. 

The growth in government bonds in Q4 of 2022 stemmed from the expansion in Treasury bonds and other government bonds, policy bank bonds and local government bonds. On the other hand, the corporate bond market contracted 0.3% quarter-on-quarter amid the worsening property market debt distress.

Weakened Conditions

As ADB points out, financial conditions improved modestly in emerging East Asia between late November 2022 and early March 2023 amid eased recession risks and inflationary pressure. However, conditions weakened at the end of the period due to uncertainty about the US monetary policy and recent turmoil in the US and European banking sectors.

Between December 2022 and January 2023, easing economic headwinds and the re-opening of China drove up equity markets, narrowed risk premiums, strengthened currencies, and propelled portfolio inflows into the region. Regional financial conditions weakened between February and early March.

ADB chief economist Albert Park said that the recent turmoil in the US and European banking sectors underscored the importance of sufficient liquidity buffers amid tightening financial conditions.

“Corporate balance sheets weaken as asset values fall due to rising interest rates. Liquidity stress can occur when companies can’t refinance to meet their financial obligations in a timely way,” Clark added.

ADB noted that the emerging East Asia bond markets recorded aggregate net foreign portfolio inflows of $1.7 billion in December 2022 and January 2023. Most regional bond markets posted inflows, with the exceptions of South Korea and Malaysia. 

South Korea posted net outflows of $8.6 billion from its bond market as a sizable volume of bonds matured and investors anticipated that the Bank of Korea was nearing the end of its tightening cycle.

In Malaysia, there were small net capital outflows of $100 million during December 2022 and January 2023. Among the remaining regional bond markets, Indonesia recorded the largest net inflows at $5 billion due to its attractive yields. 

China recorded the region’s second-largest net foreign capital inflows of US$2.6 billion. Meanwhile, the Thai bond market received US$2.5 billion of foreign capital inflows over optimism that China’s reopening would boost the country’s tourism receipts, ADB said.

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