The Asian Development Bank’s Burnished Bond Distinction

The Asian Development Bank issued its 2012 local currency bond report in advance of the annual meeting hailing its distinct asset class status, but fretting over rising capital flow and currency volatility from foreign investor participation. In the balance of payments the portfolio account has converged with traditional direct allocation strength with the pace of debt now outpacing equity purchase, as East Asia markets reach one-tenth the global total. The non-regional exceeds the intra-regional share of domestic bonds, which as in 2009 can foster instability despite the benefits in terms of price discovery, efficiency and liquidity, the lender believes. Institutional investor entry also diversifies the base dominated by banks, and is driven by host-country economic and monetary policy push factors outside Asian official control. Lacking cross-border coordination taxes and other inflow restrictions have been imposed to counter inflation and exchange rate spikes, and in Indonesia’s case a big state intervention program was organized. These instruments are of limited use in view of complex outside linkages which can only be addressed through joint central bank and regulatory action, the authors advise. The outstanding market size for the nine countries tracked increased 12 percent to $6.5 trillion in 2012, due mainly to corporate growth with that category one-third of the amount. Over half the volume is from mainland China with narrow overseas access, and Vietnam and the Philippines rose the most from a smaller base. Government bill and bond activity was flat with reduced sterilization need, with India an exception profiled for comparison purposes where structural changes aided a 25 percent jump. Korea remains the biggest company issuance center at $900 billion, seven times Malaysia’s Islamic-concentrated sum. Thailand added 7 percent in these placements last year and in Indonesia bank subordinated debt and sukuk accounted for one-fifth of them. East Asia’s bond/GDP ratio was 55 percent and international ownership was 30 percent in Indonesia and Malaysia, 15 percent in Thailand and 10 percent in Korea.

For half the group maturities were bunched at the short 1-3 year end, while the Philippines has more liquidity at the 10-year plus 50 percent proportion. Government yield curves moved down outside China which tightened money supply though repo operations. Corporate high-grade fluctuated more than high-yield spreads as trading support was limited. Emerging Asia issuance in major currencies was a record $130 billion in 2012 with the bulk from mainland and Hong Kong, China followed by Korea and Singapore. In January of this year it was $15 billion chiefly from Chinese property companies rushing to finance before stricter bank and tax treatment. The pan-Asian bond index lagged equities with a 7.5 percent gain, with the Philippines the top performer before recent central bank counter-measures against peso appreciation. The offshore renimbi benefited from new Hong Kong prudential rules and opening of the RQFII regime as Singapore initiated a corporate reading to distinctly analyze yuan sentiment.