Flows into Asia bond markets raise risk of asset price bubbles

Emerging East Asia’s local currency bond markets continued to expand in 2012, signalling ongoing investor interest in the region’s fast-growing economies but also raising the risk of asset price bubbles, said the Asian Development Bank’s (ADB) latest Asia Bond Monitor.

“Emerging East Asia is much more resilient than it used to be but Governments still need to be careful that the surge in capital inflows doesn’t fuel excessive rises in asset prices and that they are prepared for a possible reversal in the flows when the economies of the US and Europe pick up again,” said Thiam Hee Ng, Senior Economist in ADB’s Office of Regional Economic Integration.

By the end of 2012, emerging East Asia had US$ 6.5 trillion in outstanding local currency bonds versus US$ 5.7 trillion at the end of 2011. That marked a quarterly increase of 3.0% and an annual increase of 12.1% in local currency terms. The corporate markets, though smaller than the Government bond markets, drove the increase, growing 6.2% on quarter and 18.6% on year to US$ 2.3 trillion.

Emerging East Asia is defined as the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Investors have been putting their money to work in emerging East Asia since the early 1990s, but the flows have picked up pace in recent years because of low interest rates and slow or negative economic growth in developed economies while emerging East Asia has enjoyed high growth rates and appreciating currencies.

Investment is increasingly coming from overseas, with foreign ownership in most emerging East Asia local currency bond markets increasing in the second half of 2012. In Indonesia, for example, overseas investors held 33% of outstanding Government bonds at the end 2012, while foreign holdings of Malaysian Government bonds had reached 28.5% of the total at the end of September 2012.

The fastest-growing bond market in emerging East Asia in 2012 was Viet Nam, 42.7% bigger than at end 2011, largely due to the rapid expansion in the country’s Government bond market. The Philippine and Malaysian markets grew 20.5% and 19.9% respectively, while India’s market expanded by a strong 24.3% to US$ 1.0 trillion. Japan still has the largest market in Asia at US$ 11.7 trillion, followed by the PRC at US$ 3.8 trillion.

Governments in emerging East Asia are increasingly opting to sell longer-dated bonds another sign of strong market confidence in the economies of the region which is making them more resilient to possible volatile capital flows.

This is particularly the case in Indonesia and the Philippines. Maturities tend to be shorter in the corporate bond markets of the region.