Bond markets continue to expand rapidly in emerging East Asia, as ADB’s latest Asia Bond Monitor shows. But they have the potential to expand even more.

Savings have been rising right across Asia, notably in the People’s Republic of China (PRC) and Japan. However, the report notes that most of these savings have been kept in-country as bank deposits or invested abroad in low-risk securities, with the money ultimately returning to the region in the form of foreign direct and other investment.

Channelling the region’s savings through advanced economies and their global financial centers in the US or Europe is inefficient and robs the region of the funds it needs to build its infrastructure, its companies and its economies.

Regional policymakers have undertaken significant country-level reforms and regional collective action to develop local currency bond markets as a means of directing the region’s massive savings to its burgeoning financing needs. Despite this, intraregional portfolio debt investment still remains low.

New research

Attitudes seems to be changing slowly though.

ADB research in the latest Asia Bond Market report shows that in 2001, Asian bond market investors were much more likely to invest in their domestic bond markets than in the bond markets elsewhere. And when it came to investing overseas, they showed a preference for buying US and European bonds over those in the neighboring Asian markets. 

However, by 2009, while Asian investors continued to have a bias towards home investment, they seemed just as happy to invest their funds overseas in both Asian and global bond markets.

Initial results for 2010 were similar to those of 2009 – Asian investors continued to have a bias toward their own respective bond markets and this bias appears to have strengthened, especially relative to bonds from the US and Europe.

Why aren’t Asians buying Asian bonds?

Meanwhile, a survey with 78 investors conducted by AsianBondsOnline found that increasing overall returns remained a primary motivation for Asian investors while risk minimization was another closely considered factor.  This suggests broad caution among participants when considering intraregional investment.

The enormous weight placed on economic and political stability also provided a partial explanation of the high degree of home bias among Asian investors.

The results of this study have important implications for financial and monetary cooperation in Asia, indicating that further work is needed to promote the development of local capital markets to encourage Asians to pursue intraregional investment.

The creation of deep and liquid markets and the lifting of cross-border barriers in Asia can stimulate greater financial integration and put the region’s vast savings to greater long-term productive use at home where it is needed most.