Improving global investment sentiment and financial conditions provided a much-needed lift for local currency bond markets in emerging East Asia, despite risks from the coronavirus disease (COVID-19) pandemic, says the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.
“Governments in the region have been agile in dealing with the impact of the COVID-19 pandemic through a wide range of policy responses, including monetary easing and fiscal stimulus,” said ADB Chief Economist Yasuyuki Sawada. “It is crucial that governments and central banks maintain accommodative monetary policy stances and ensure sufficient liquidity to support financial stability and economic recovery.”
Emerging East Asia consists of the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.
Government bond yields in most emerging East Asian markets declined from 15 June to 11 September on the back of accommodative monetary policies and weakening growth across the region. Meanwhile, improving sentiment has led to gains in the region’s equity markets and a narrowing of credit spreads, with most regional currencies strengthening against the United States (US) dollar.
Local currency bonds outstanding in emerging East Asia reached $17.2 trillion at the end of June, up 5.0% from March this year and 15.5% higher than in June 2019. As a share of regional gross domestic product, emerging East Asia’s local currency bonds outstanding climbed to 91.6% at the end of June, from 87.8% in March, mainly due to the large amount of funding needed to fight the pandemic and mitigate its impact. Bond issuance in the region totaled $2 trillion in the second quarter, increasing by 21.3% from the first quarter this year. The PRC remained home to the region’s largest bond market, accounting for 76.6% of the region’s total bond stock as of the end of June.
The region’s government bonds outstanding reached $10.5 trillion at the end of June and accounted for 60.8% of the region’s aggregate bond stock. Corporate bonds, meanwhile, totaled $6.7 trillion.
A worsening and prolonged COVID-19 pandemic that could further dent the region’s economic outlook—ADB is projecting a 0.7% contraction for developing Asia in 2020—is the biggest downside risk to financial stability. Other risk factors include potential social unrest due to the pandemic’s economic impact, as well as continuing tensions between the PRC and the US.
The third issue of ADB’s Asia Bond Monitor this year includes four discussion boxes. These examine recent trends and changes in the investor profile in local currency bonds markets in Asia; the increased use of digital payment amid the COVID-19 pandemic; the growth of environmental, social, and governance (ESG) investments in the region amid COVID-19; and the resilience of ESG investments during the pandemic.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.