Debt markets in East Asian economies in 2016

Taken from our blog,”Brinks of economic thought”

Debt markets in East Asian economies in 2016

 

A short note study of Diversion in bond yields amidst global uncertainty.

 

Bond yields grew in advanced economies while they did not grow significantly in the developing economies. This had been evident from US Federal Reserve’s moves that it will continue its monetary policy normalisation. With the stable inflation rate under control coupled with encouraging employment figures for past continuous 40 + weeks, Fed increased its policy rates.

Despite the one way trend witnessed in the entire regional East Asian markets, one of the economies stood as an notable exception, China, where the 2 year and 10 year yield rose.

 

There are many uncertainties related to global factors which could impact the regions bonds markets.

  • The possible steps of policy rate hikes which will be taken by US Federal Reserve.
  • Deep rooted upcoming uncertainties being getting visible in the Euro region.
  • Depreciation of the Chinese Yuan, which may impact the growth prospect in the region.

The entire bond market of the East Asian region stood at around 10,000 USD, for which China accounted for nearly 70 % of them.

Out of these figures the government bonds dominated the major portion while accounting for nearly 65 %, while the private bonds stood for nearly 35 % on the total bond markets.

Asian markets had been consistently getting affected by the events that happened in 2016 in the world. One among the major was the UK exit from European Union. Then Italian referendum on the constitutional reforms was also a major event. Even this year general and presidential elections in Netherlands, France and Germany will decide the flow of capital from and within the emerging economies.

Any kind of uncertainty in the euro zone will increase the demand for safe heaven assets like heavy metals and highly rated sovereign bonds.

One of the most debated currencies in global economics, Chinese RMB Yuan, has also significantly depreciated in last 12 months. We have also seen the Chinese foreign exchange reserves have depleted, although they still are the largest in the world. China had invested heavily into the US treasury bonds, although gaining low returns, but enabling it to manipulate the currency and thus having high export surplus. This also enabled China to have the largest foreign exchange reserves.

Any kind of depletion in the RMB poses serious threat and risk to the potential stability of the markets in the region. It also poses challenge to the economic stability of the PRC in the region.

There is a significant risk that any further depreciation of RMB will result into the widening of US bilateral trade deficit with China, which could lead to change in the trade policy of US. Throughout 2016 People’s bank of China intervened heavily into the time when Yuan depreciated consistently by utilising its foreign exchange reserves.

The next and significant debt market in the region was of South Korea with outstanding bonds which stood at around 1700 USD.For Thailand the entire market stood at 303 USD.

When we make a study of market like Malaysia, we have to also keep in mind the role which Sukuk {Islamic bond} has played in the entire debts markets. It is one of the largest emerging Islamic debt markets in the East Asian region.

Share of the foreign holdings declined in East Asian markets in 2016 due to various factors. One being the uncertainty revolving around the US rate hikes and another being the strengthening of US dollar.

There were many interesting observations to be witnessed for the year. For example; The AAA-rated corporate yield versus government yield spread fell in the PRC and the Republic of Korea, but rose in Malaysia.

 

Policy and regulatory developments in East Asian Markets.

 

In December, the People’s Bank of China lowered the threshold—from CNY200, 000 to CNY50, 000—at which banks must notify the central bank of any domestic deposit, withdrawal, or transfer.

In February, the People’s Republic of China’s State Administration of Foreign Exchange announced that it would allow foreign institutions investing in the People’s Republic of China’s interbank bond market to purchase currency forwards, currency swaps, cross-currency swaps, and currency options.

In January, the Hong Kong Monetary Authority raised the countercyclical capital buffer requirement for banks from 1.25% to 1.875% as part of its implementation of Basel III.

In November, the Ministry of Finance announced that it would continue its frontloading policy for the issuance of government bonds in 2017.

Bank Indonesia, Bank Negara Malaysia (BNM), and the Bank of Thailand (BOT) signed two memoranda of understanding in December to promote the settlement of cross-border trade and direct investment in their respective local currencies.

In November, the Financial Services Commission announced measures to further develop the Republic of Korea’s derivatives markets, including the simplification of the listing procedures and diversification of derivatives that can be issued in the exchange-traded derivatives market and increased flexibility in the requirements for investors.

In November, BNM moved to discourage trading of Malaysian ringgit in the no deliverable forward (NDF) market. The central bank sees it as speculative activity that can potentially destabilize the Malaysian ringgit.

The Government of the Philippines plans to borrow PHP631.3 billion in 2017 to support its expenditures and loan payments.

Thailand’s Securities and Exchange Commission introduced a measure, effective 16 January, limiting intermediary holdings to one third for every new issuance of unrated debt securities falling below investment grade.

 

 

Harsh Vardhan Pathak

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