ADB warns of asset price bubbles risk in East Asia's bond market

The Asian Development Bank (ADB) today warned of risk of asset price bubbles due to continued expansion in emerging East Asia's local currency bond markets.

According to its latest issue of Asia Bond Monitor released today, East Asia had $6.5 trillion in outstanding local currency bonds by the end of 2012, up from $5.7 trillion at the end of 2011. That marked a quarterly increase of 3 per cent and an annual increase of 12.1 per cent in local currency terms.

This comes even as the local currency bond issuance in the region in 2012 fell 8.4 per cent to $3.3 trillion compared with the previous year, underpinned by the 15.6 per cent decline to $2.4 trillion in government bond issuance.

Corporate bond issues, on the other hand, rose 20.1 per cent to $860 billion during the same period.

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

Thiam Hee Ng, senior economist in ADB's office of regional economic integration, said "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 United States and Europe pick up again."

The ADB notes that the flows of funds by foreign investors 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.

At the same time, investment is increasingly coming from overseas, with the foreign ownership in most East Asia local currency bond markets increasing in the second half of 2012. In Indonesia, for instance, the overseas investors held 33% of the outstanding government bonds at the end of last year, while foreign holdings in 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 Vietnam, 42.7 per cent higher 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 per cent and 19.9 per cent respectively.

Indian market expanded robustly by 24. 3 per cent to reach $1 trillion and Japan still has the largest market in Asia at $11.7 trillion.