ADB warns flows into Asia bond markets raise risk of asset price bubbles

Emerging East Asia’s local currency bond markets continued to expand in 2012, said the Asian Development Bank’s (ADB) latest Asia Bond Monitor on March 18.

For instance, by the end of 2012, emerging East Asia including the People’s Republic of China (PRC); Hong Kong (China) ; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam had $6.5 trillion in outstanding local currency bonds versus $5.7 trillion at the end of 2011.

That marked a quarterly increase of 3.0per cent and an annual increase of 12.1 per cent in local currency terms. The corporate markets, though smaller than the government bond markets, drove the increase, growing 6.2 per cent on quarter and 18.6 per cent on year to $2.3 trillion.

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.

The fastest-growing bond market in emerging East Asia in 2012 was Vietnam, 42.7 per cent bigger than at end 2011, largely due to the rapid expansion in the country’s government bond market. The local currency bond market of Vietnam in the fourth quarter experienced the most rapid growth in the region, expanding 42.7 per cent to $25 billion year on year and up by 17.6 per cent from the previous quarter.

The government bond market was up 54.6 per cent year on year to $24 billion, mainly due to an increase of 71.5 per cent in the issuance of treasury bills and bonds. The corporate bond market, however, contracted 47.6 per cent year on year to $1 billion, continuing a steady decline in place since March 2011.

According to ADB, emerging East Asia’s local currency bond markets expanded to signal ongoing investor interest in the region’s fast-growing economies but also raising the risk of asset price bubbles 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 Uyen Phuong

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