CREDIT MARKET. THE BOOM IN EAST ASIA'S BOND MARKET
. Andrew Wood: "East Asia’s bond market grows 15%", Financial Times

The value of local currency bonds outstanding in emerging east Asia grew by nearly 15 per cent in 2008, driven mainly by growth in China, the region’s biggest market, according to the Asian Development Bank. The amount outstanding at the end of 2008 was $3,692bn – a rise of 14.9 per cent in local currency terms and 8.2 per cent in dollars according to the ADB’s Asia Bond Monitor, which will be published on Tuesday. The report covers the 10 members of the Association of Southeast Asian Nations, mainland China, Hong Kong and South Korea. China accounts for about 60 per cent of total bonds outstanding in emerging east Asia and is the source of most of the growth in the region’s local currency bond market. Without China’s 22.5 per cent growth in local currency terms to $2,213bn outstanding, emerging east Asian bond markets expanded by just 5.1 per cent in 2008. Asian governments issued about three-quarters of the amount outstanding, but turmoil following the collapse of Lehman Brothers in September meant there was a slowdown in sovereign issuance as the year drew to an end.

Companies also slowed their bond sales during the last quarter of the year as risk premiums spiked and credit conditions remained stressed.The ADB expects issuance to rise this year as governments need to pay for stimulus packages and companies have to refinance existing borrowings. However, there is a danger of businesses being crowded out of the market. Increased competition from government and government-guaranteed financial institutions could raise corporate borrowing costs if investors prefer the relative safety of sovereign issues. “The big challenge now is whether Asian governments can use local bond market to promote economic stimulus,” said Lee Jong-wha, head of the ADB’s Office of Regional Economic Integration in Manila in the Philippines. “The risk is that borrowing costs become elevated but I think corporate bond issuance would increase, even though there’s some uncertainty about yields.” Local currency bond markets have lagged behind Europe and North America in sophistication, size and depth. East Asian corporate borrowers have traditionally relied on banks for financing and investors have preferred buying shares to trading debt. Governments have tended to have large surpluses and it has not been necessary for them to issue bonds, although the need for economic stimulus packages is changing that. Regional bond market growth is also hampered by the presence of a wide range of countries in very different states of economic development, and the lack of a single currency such as the euro or the dollar.