Developing the local bond markets became a priority for many Asian countries after the Asian financial crisis wreaked havoc in 1997, giving a violent demonstration of the risks inherent in relying too much on foreign capital for funding.
The push since then has been clear. According to figures in an August 2016 report published by Asian Development Bank, total outstanding local currency bonds in emerging Asia stood at $10.23tr in December 2015, up from $2.57tr 10 years earlier. China and South Korea dominated that increase, but countries in the Association of Southeast Asian Nations ( Asean ) also played a role.
“The Asian financial crisis was the trigger for the development of the local currency market,” says Stephen Williams, head of global banking, southeast Asia, at HSBC. “While I wasn’t at HSBC at the time, I remember the bank winning the Asian bond house award in 1998 or 1999. Few banks had pitched the award that year as the dollar market — at that time seemingly everyone’s focus — was pretty firmly shut.
“What we failed to realise was that behind the scenes HSBC was spearheading the local currency bond markets and building up capital markets capabilities in local markets around the region. I think that was the time that I’d fully appreciated the opportunity afforded by the domestic markets.”
In 2017, Asia ex-Japan issuers raised $950.8bn equivalent in local currency bonds, through just over 5,000 deals, shows Dealogic. That represents a steady increase. In 2000, volumes totalled $42.8bn. They had jumped to $224.9bn by 2008.
More recently, the region has seen the introduction of new products, such as Masala bonds, a term for offshore Indian rupee bonds, and more recently Komodo notes, the name for a similar, growing list of international Indonesian rupiah offerings.
Hot dim sum
These products are following a bigger, more familiar market.
One of the biggest developments over the past 10 years has been the growth of the renminbi-denominated debt market, both onshore and offshore. The first dim sum — that is, offshore renminbi — bond was issued in Hong Kong in July 2007 by China Development Bank, after the Chinese government gave some domestic financial institutions the all clear to sell notes.
Two years later, regulators expanded the pool of issuers to include foreign financial institutions incorporated in mainland China. But the market did not truly take off until 2010, when the Chinese government boosted issuance to include multinational corporations and international financial institutions. In 2011, it allowed mainland non-financial corporations too.
From that point onwards, the only way was up as the regulators took various measures to streamline rules around remittance of proceeds to further boost the asset class.
The efforts were undoubtedly successful, with global firms such as McDonald’s and Caterpillar jumping on the bandwagon alongside the likes of the ADB. But the momentum came to a grinding halt on August 11, 2015, when China announced a surprise devaluation of the renminbi that effectively shut the dim sum bond market.
While there is some sporadic issuance, the focus has shifted to the development of Panda bonds — renminbi notes sold in onshore China by non-Chinese borrowers. When the market opened in 2005, only a handful of foreign issuers tapped the market, as approval was largely done on a case-by-case basis by the regulator.
While issuance warmed up a couple of years ago, last year was lacklustre with volumes standing at Rmb71.9bn, a sharp 46.3% fall from 2016, shows data from GlobalRMB, a sister publication of GlobalCapital. But the market consensus is that the 2018 pipeline is robust, and will be given an added boost if guidelines for issuance are published.
Hard at work
While China’s story is one mainly of success, not all markets in Asia have grown at a similar pace.
“We’ve seen only sporadic growth in Asian local currency markets,” says Frank Kwong, head of primary markets, Asia Pacific, at BNP Paribas. “We’ve seen the dim sum market coming up from time to time. We also saw the Philippine sovereign do a global peso deal around 2009. We’ve seen various attempts to grow the Asian currency markets, but over the years only CNY and Japanese yen have been attracting a lot more attention.”
He adds that when it comes to yen, the market has become a lot more domestic over the years as ultra-low rates have dimmed the currency’s appeal to international investors. On the flipside, foreign accounts have gravitated to RMB as the coupons are juicier.
According to Williams, there has been a “dramatic evolution” in the local markets, the most prominent of which has been in the RMB market.
“But you’ve also got extremely vibrant capital markets in Hong Kong, India, Singapore and Malaysia,” he says. “We have seen a rapid broadening of currencies, tenors, structures and of investors, and hand in hand with that we’ve seen an explosion of issuance.”
The investor base for Asian local currency bonds, for instance, has developed from being favoured by domestic banks to seeing local institutional investors, like pension funds and insurance companies, coming in to play.
Push from countries
Various bodies have been hard at work to make local currency debt markets stronger, especially in Southeast Asia. In December 2002, the ASEAN countries of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, along with China, Japan and the Republic of Korea — collectively called ASEAN+3 — launched the Asian Bond Markets Initiative to develop the local currency bond markets as an alternative source of funding to foreign currency-denominated bank loans. This was to minimise the currency and maturity mismatches that had in the past made the region susceptible to any unexpected reversal of capital inflows.
In 2010, the Credit Guarantee and Investment Facility (CGIF) started as a trust fund within the ADB to provide guarantees for local currency corporate bonds issued in the region.
In the same year, the Asian Bond Market Forum was established by ASEAN+3 to provide a platform to have standard market practices for cross-border bond transactions within the region. In 2015, the ABMF released guidelines for the ASEAN+3 multi-currency bond issuance framework to make the issuance and investment process within the region simpler.
The groundwork has been laid, but how much it has paid off, and will pay off, is still a big question.
Ashish Malhotra, Standard Chartered’s Singapore-based global head of bond syndicate, says the local currency bond markets have not changed much when considering opportunities for foreign issuers.
“By local currency, I really mean the domestic markets, not the CNH or Singapore dollar markets that are more open,” he says. “China’s market in particular has evolved in the last few years with the Panda bond market. However, in some of the domestic markets, incoming cross-border activity from western or other Asian issuers was not massive to begin with and we have seen even lesser activity.”
This is a point GlobalCapital hears time and time again. Although there have been great strides in opening up some markets to foreign issuers, many Asian countries have stood still. Some have even taken a step back; in 2015, Thailand all but shut its market to foreign issuers after the regulator barred the proceeds of bond sales to be taken offshore.
When considering them overall, Asian bond markets have come far. But market development is now split between the haves and the have-nots.
For those wondering whether there is still plenty more room to grow in Asia’s local currency bond markets, the answer is a resounding yes. z