There is a pattern in the Asian corporate bond market and it is not a good one. They remain underdeveloped as compared to the Western peers. However there is a plan in the works to change this from the Asian Development Bank (ADB).
It is very hard for a company in Malaysia to produce a Thai baht bond. It is hard for a Philippine company to issue a Philippine peso bond or an Indonesian company to issue a rupiah bond. Why? The complex rules hinder this and they simply do not know how to issue bond offerings.
The ADB is now trying to come up with a plan to standardize corporate bond issuance throughout the Pacific Rim. This will include Southeast Asian markets as well as South Korea, China and Japan.
Rapid Asian Bond Growth since 2009
The Asian bond markets have seen a period of rapid growth since the global financial crisis in 2009. They have risen 24.2 percent of the combined Asian gross domestic product or GDP in 2012. They were 16.7 percent of the GDP in 2008. Still, with very few exceptions, the secondary market is small and not very liquid. Most corporate funding in the region remains bank based. Even though we have seen a pickup in issuance, secondary markets have very low trade volumes and lack investor diversity. Issuance of corporate debt remains dominated by a handful of big companies. In Taiwan and Indonesia, 10 companies make up 80 percent of the corporate bond issuance for the region.
The ADB wants to promote greater investment by making it easier for regional investors to buy in each other’s corporate bond markets. To do this, they must work with market regulators and participants in order to smooth out regulations across the region for issuing debt. A single rule would be optimum here. It would make trading easier and the issuance and raising of capital easier across the region. If this accomplished we can expect a number of positive outcomes.
Better Benchmarks, Maturities and Economic Growth
If the ADB is successful, we could see it easier to develop benchmarks including a yield curve that has similar maturities. Right now this hard. You have many different issues n different currencies and denominations. Covenants are simply not the same now. With this one simple change, you would make liquidity and transparency better. In return, by developing the region’s debt markets, you will get continued economic growth. In a consumer based high income economy, consumers must have access to an improved financial system that gives them better access to capital and modern financial products. Businesses are the same.
Many of the area central banks have a huge buildup of exchange reserves due to high rates of savings. This means that the Asian surplus for the past 15 years has been recycled into the international financial system through portfolio cash flows as central banks buying developed nation and government bonds instead of their own country’s debt. This has resulted in slower economic growth via businesses.
Binary Options Take for the Day:
The corporate bond world in Asia is changing. We are seeing it evolve and mature to try and equal its Western peers. This will only help the region’s corporate growth and continues to make Asian and Pacific Rim equities more and more attractive to hedge one’s portfolio.
Discussion:
What do you think? Is it time to jump in and buy developing market corporations? We still have weakness in Europe and the United States. China is slowing down. Is it time for countries like Vietnam to shine? Sound off in comments below and let us know what you think.