Asian Currency

Asian local currency bonds draw huge foreign investor interest


Bindu Lohani, vice president, Asian Development Bank


The lure of Asian bonds is hard for investors to resist and global bond funds, particularly those dedicated to emerging markets, are now allocating a greater share of their portfolios to emerging Asia’s local currency bonds.


According to Bindu Lohani, vice-president at Asian Development Bank (ADB), foreign investors now own over 26% of government bonds in Indonesia, more than 18% in Malaysia, around 8% in South Korea and over 4% in Thailand.


“Foreign investors are drawn to the local bonds because they offer attractive yields, give investors an opportunity to participate in Asia’s rapid economic expansion following the recent global crisis and gain from ongoing and anticipated currency appreciation,” he told the delegates at the 5th Asian Bond Markets Summit organized by The Asset magazine in association with the ADB in Singapore on November 16.


Lohani points out there is a growing interest from bond funds and global institutional investors such as pension and insurance agencies in longer-dated Asian currency bonds. “As these investors become increasingly comfortable with the improving credit profiles of Asian issuers, emerging Asia’s local bond markets should draw a substantial amount of the global savings,” he says. “Naturally, this will be complemented by the growth of insurance and pension fund industries within Asia itself.”


Lohani says it is essential to improve the market infrastructure (in trading and settlement), increase liquidity through primary dealers and repurchase or repo facilities, streamline tax issues and introduce well-regulated financial products such as interest rate futures. “By doing so, we can more efficiently absorb large capital inflows into emerging Asia’s bond markets, and more importantly, help channel these into long-term productive investments.”


The outstanding local currency bonds in emerging Asia, including India, now total over US$5.7 trillion and account for almost 8% of the total global bonds outstanding. The total outstanding volume in emerging East Asia, comprising Asean countries, China and South Korea, continues to increase with preliminary estimates of about US$5 trillion at the third quarter of 2010.


Lohani notes that the local currency corporate bond market has increasingly become the growth driver for the region’s bond market as a whole. Corporate bonds constituted nearly 30% of the total market at the end of the second quarter this year and ADB expects their share to rise rapidly over the next few years and contribute in funding PPP (public-private participation) infrastructure investment programmes.


The corporate bond market grew 24.4% year-on-year in the second quarter of 2010, faster than the 16.7% rise for government bonds. The China market, which accounts for almost 40% of the region’s total, rose 52.7%, while the tiny Vietnamese market expanded most rapidly at 170%.


Lohani attributes the strong performance and rapid progress of Asia’s local currency bond markets in recent years to both national policies and collective regional initiatives. He says the ADB will continue to be instrumental in accelerating the growth of Asia’s local bond markets, citing its inaugural international bonds denominated in renminbi that it priced in October. The 10-year bullet offering was upsized from one billion renminbi to 1.2 billion renminbi following strong investor demand. 


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