APD | Improvement in investor sentiment noted in emerging East Asia

By APD writer Melo M. Acuña

MANILA, March. 21 (APD) – The Asian Development Bank (ADB) reported that investor sentiment toward emerging East Asia’s local currency bond market improved though there are “persistent concerns” about financial stability in the region notably the ongoing trade conflicts.

This was contained in the ADB’s latest issue of their quarterly Asia Bond Monitor which was released today.

At the end of 2018, ADB reported there were US$13.1 trillion in local currency bonds outstanding in emerging East Asia, 2.4% more than at the end of September 2018 and 11.9% more than at the end of 2017.

“Yields have fallen while foreign holdings have increased in most markets,” the report said.  Overseas investment in local currency bonds in the People’s Republic of China (PRC) bucked the regional trend.  It reported foreign holdings in the PRC market fell to 5.0% at the end of December 2018 from 5.1% at the end of September “reversing a rising trend seen since 2016, as the pace of US interest rate hikes looked set to slow and amid a depreciation in the Chinese yuan.”

“Risks to financial stability in emerging East Asia have receded somewhat recently,” said Yasuyuki Sawada, ADB chief economist said.  He added some uncertainties persist from the unresolved trade conflict between the PRC and the US, a potentially disorderly exit of the UK from the European Union and the slowdown of global growth momentum.  

Mr. Sawada added the rapid buildup in private debt during the past decade could also “damage economies and financial stability in the region.”  

The ADB noted the wave of financial volatility that unsettled emerging markets has subsided in recent months.

“Vulnerable markets such as Argentina and Turkey are showing signs of stability,” the ADB statement said.  A major factor said to be behind the stabilization of emerging markets in Asia and elsewhere manifested in the stabilization of their exchange rates, is the “expected moderation in the pace of interest rate hikes by the US Federal Reserve.”

With these positive developments, ongoing global trade tensions and other major downside risks mean that global uncertainty remains elevated.

The People’s Republic of China still had the largest local currency bond market in emerging East Asia at the end of 2018 with US$ 9.453 trillion in bonds outstanding, 72.2% of the region’s total.  In Asia overall, only Japan is bigger at an estimated US$10.668 trillion.

Emerging East Asia include the People’s Republic of China, Hong Kong, China, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Viet Nam.

The ADB report said in its special section, they underscored the potential for the development of markets for green bonds, whose proceeds are used for environment or climate financing.  Issuance in the region between 2016 and 2018 has been led by bonds in Chinese yuan, “which made up 46% of emerging market green bonds issued.”  Green bonds denominated in Indian rupee made up 2% of the total.

Debt tends to be more expensive in markets with greater vulnerability to climate change and higher debt costs mean projects to mitigate the physical impact of climate change  were found to be more costly.

It will be recalled ADB in 2018 made commitments of new loans and grants amounting to US$2.1 billion.  

(ASIA PACIFIC DAILY)