This modest growth was mainly on the back of the 3.2% expansion of the government bond market to US$48.0 billion, due to issuance of treasury bonds and central bank bills. Further, the growth in the government bond market offset the 3.4% contraction of the corporate bond market during Q2/2019 to US$5 billion.
The report revealed emerging East Asia’s local currency bond market expanded steadily in Q2 despite downside risks stemming from ongoing trade conflicts, a faster-than-expected economic slowdown in China, and moderating global growth.
“Foreign investment in emerging East Asia remains stable but there are still considerable potential risks. Financial stability in the region could be undermined if global investors change their views on emerging markets,” said ADB Chief Economist Yasuyuki Sawada. “Governments in the region would do well to continue to deepen local currency bond markets so they can act as a reliable local source of funding.”
Emerging East Asia comprises China, Hong Kong (China), Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
Despite the risks, foreign investment in emerging East Asia’s bond markets remained stable in Q2. Foreign holdings of local currency bonds rose in China on expectations of additional economic stimulus from the government, and in Indonesia on the back of a credit ratings upgrade. Holdings fell in South Korea, Malaysia, and the Philippines on a variety of domestic factors.
Local currency bonds outstanding in emerging East Asia totaled US$15.3 trillion at the end of June, up 3.5% in US dollar terms from the end of March this year and 14.2% higher than the end of June 2018. Bond issuance in emerging East Asia totaled US$1.6 trillion in the second quarter, 12.2% higher than in the first quarter due to strong issuance of government bonds and a recovery in corporate bonds issuance.
At the end of June, there were US$9.4 trillion in local currency government bonds outstanding, 13.6% higher than at end June 2018. The stock of corporate bonds was US$5.8 trillion, up 15% compared with end June 2018.
China remained emerging East Asia’s largest bond market, accounting for 75.3% of the region’s total outstanding paper. In China, the stock of local government bonds expanded 5.4% on a quarter-on-quarter basis, the fastest of any bond category in China, following directives for local governments to accelerate the issuance and use of special bonds to support economic growth and finance infrastructure and other development projects. At the end of June, China’s debt-to-gross domestic product ratio was 84.6% versus 78.8% at the end of June 2018.
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