Asia Bond Monitor – September 2014

Emerging East Asian local currency (LCY) bond markets continued to perform well as global financial conditions have remained relatively benign thus far in 2014. The region, however, should prepare for possibly tighter liquidity as United States (US) quantitative easing is expected to end in October.

More expansionary monetary actions from the eurozone and Japan could offset some of the impact on liquidity conditions caused by the end of US quantitative easing.

Highlights

While LCY bond markets across East Asia have been calm in 2014, there are risks rising, including:

• earlier-than-expected interest rate hikes by the US Federal Reserve,
• geopolitical tensions that push up oil prices, and
• a slowdown in the People’s Republic of China’s (PRC) property market.

Special section: Renminbi internationalization

The PRC’s economy has grown rapidly to become the second-largest economy in the world. The international use of the renminbi is growing. The implementation of a cross-border settlement program has resulted in renminbi trade settlement rising from CNY534.8 billion in 2010 to CNY3.3 trillion in the first half of 2014. The market share of the renminbi in world payment values has increased substantially from 0.3% in January 2012 to 1.6% in June 2014, ranking the renminbi as the seventh-most used currency in the world. The offshore renminbi bond market has grown significantly from CNY10 billion worth of bonds issued in 2007 to CNY369 billion in 2013.

However, the international role of the renminbi is still relatively limited. The pace of renminbi’s liberalization is still very much under the control of authorities. The careful and measured pace of liberalization reflects an understanding that full liberalization could lead to large and destabilizing capital flows. Challenges that hamper the further development of the offshore renminbi bond market will have to be addressed. Among these challenges include expanding the diversity of issuers, increasing the issuance of higherrated renminbi bonds, and strengthening the domestic capital market prior to additional liberalization.

About the Asia Bond Monitor

This publication reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. It covers the 10 members of the Association of Southeast Asian Nations plus the People’s Republic of China; Hong Kong, China; and the Republic of Korea.