Asia Bond Monitor—November 2020

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 and the People’s Republic of China; Hong Kong, China; and the Republic of Korea.

• Financial conditions recovered in emerging East Asian markets from 31 August to 6 November. 1 Investor sentiment improved during the review period amid economic recovery in major advanced economies in the third quarter. However, risks remained tilted to the downside amid a resurgence of the coronavirus disease  in major advanced economies and uncertainty about the trajectory of the global economic recovery. • Between 31 August and 6 November, 2-year local currency (LCY) government bond yields fell in most emerging East Asian markets as central banks maintained an accommodative monetary stance in response to weak economic outlooks. Meanwhile, 10-year bond yields showed a mixed pattern, tracking market-specific conditions. • Most regional equity markets rose and regional currencies strengthened during the review period. Credit default swap spreads also narrowed. Regional LCY bond markets experienced net foreign fund inflows in the third quarter of 2020. Net inflows were also observed in equities markets in early November. • Emerging East Asia's LCY bond market expanded to USD18.7 trillion at the end of September on growth of 4.8% quarter-on-quarter and 17.4% year-on-year in the third quarter of 2020. Growth was largely driven by the increased financing needs of both the public and private sectors due to the pandemic. Government bonds comprised 61.6% of the region's total LCY bonds outstanding at the end of September.

Risks to Financial Stability
• Risks remain tilted to the downside. The overriding risk is the ongoing COVID-19 pandemic, which may last longer than initially forecast. • Other risks include ongoing tensions between the People's Republic of China and the United States, and heightened social unrest resulting from the economic impact of COVID-19.

Special Section: Financing a Sustainable Recovery
• This issue of the Asia Bond Monitor includes a special section with discussion boxes on how green and social finance can contribute to a sustainable economic recovery from the COVID-19 pandemic. • The first discussion box reviews existing knowledge on how various environmental and social challenges hamper economic growth. • Another box reviews the development of green and social finance during the COVID-19 pandemic. • A third box outlines why externalities matter for the financial sector, covering topics such as reduced systematic and idiosyncratic risks, client demands and fund flow concerns, hedging for climate-related risks, and social pressure. • A fourth box discusses the economic effects of green and social finance.
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Executive Summary
Financial conditions in emerging East Asia strengthened from 31 August to 6 November. 1 Global investment sentiment showed improvement on the back of economic recoveries in major advanced economies in the third quarter (Q3) of 2020. However, risks remain tilted to the downside amid a recent spike in coronavirus disease  cases in advanced economies and lingering uncertainty about the trajectory of the global economic recovery.
Between 31 August and 6 November, local currency (LCY) government bond yields in most emerging East Asian markets fell at the shorter-end of the curve, while 10-year yields showed a mixed pattern across the region.
Improved investment sentiment was evident in the gains in most regional equities markets, strengthening of regional currencies, and declines in risk premiums. The positive sentiment was also visible in foreign portfolio inflows into regional bond markets in Q3 2020 and into some equity markets in early November.
Due to uncertainty over the trajectory of the pandemic, downside risks weigh heavily on the global economic outlook. Above all, COVID-19 remains the overriding downside risk for the world and the region. Other downside risks include ongoing tensions between the People's Republic of China and the United States, and domestic political and social instability in some economies.
Local currency bonds outstanding in emerging East Asia expanded to USD18.7 trillion at the end of September.
The size of emerging East Asia's LCY bond market climbed to USD18.7 trillion at the end of September. Growth moderated to 4.8% quarter-on-quarter (q-o-q) in Q3 2020 from 5.0% q-o-q in the second quarter. On a year-on-year (y-o-y) basis, growth accelerated to 17.4% in Q3 2020 from 15.5% in the prior quarter.
Government bonds outstanding continued to dominate the region's LCY bond market, totaling USD11.5 trillion at the end of September and representing a 61.6% share of the total bond stock. Corporate bonds summed to USD7.2 trillion and accounted for the remaining 38.4% share.
The People's Republic of China led the region in terms of LCY bond market size, representing a 77.5% share of the region's aggregate bond stock at the end of September. The Republic of Korea accounted for an 11.9% share, and member economies of the Association of Southeast Asian Nations (ASEAN) had a combined 9.0% share. 2 Emerging East Asia's LCY bond market as a share of the region's gross domestic product increased to 95.6% at the end of September from 91.6% at the end of June. The rising share of bonds outstanding to gross domestic product was due to regional governments' increased financing needs to combat the adverse effect of the COVID-19 pandemic.
In Q3 2020, LCY bond issuance totaled USD2.2 trillion on growth of 6.4% q-o-q and 39.8% y-o-y. Growth was largely driven by government bonds, which rose 11.4% q-o-q and 51.8% y-o-y. On the other hand, issuance of corporate bonds marginally contracted by 0.6% on a q-o-q basis but was up 24.3% y-o-y.
The November issue of the Asia Bond Monitor includes four special discussion boxes. Three boxes analyze the impact of COVID-19 on the regional economy and its financial markets, and one box reviews the role of LCY bond financing amid exchange rate volatility. Also included in this issue is a special section on financing sustainable development, which presents four boxes on how sustainable finance can contribute to green and inclusive development in the post-COVID-19 era and a theme chapter on bank efficiency and bond market development.
This box examines the impact of COVID-19 on global financial markets and capital flow dynamics. Data show that the pandemic has had a big impact on sovereign bond yields in both advanced economies and emerging market economies (EMEs). The impact was more pronounced across financial markets in EMEs. Fiscal stimulus and monetary policy easing had a bigger effect on sovereign bond yields and stock prices in advanced economies, with spillover effects in EMEs. Despite capital outflows from EMEs in the initial stages of the pandemic, policy measures were effective in restoring confidence, which led to net inflows into EME equities and bond markets in Q3 2020. This points to the need for EMEs to strengthen policy measures to address financial market volatility and manage capital flows.

Box 2: The Effect of COVID-19 on Financial Stability in ASEAN
ASEAN's relatively high level of globalization and financial openness suggests that COVID-19 will adversely affect the region's economic growth and financial stability. The region suffered during the 1997/98 Asian financial crisis and, to a limited extent, during the 2007-2009 global financial crisis. In 2020, expansionary monetary policies and fiscal stimulus packages have contributed to the restoration of financial stability in ASEAN. In addition to domestic policy measures, regional financial safety nets such as the Chiang Mai Initiative Multilateralization and the ASEAN Disaster Risk Financing and Insurance scheme can also mitigate financial turbulence. Policy recommendations in the context of regional cooperation that can reduce the negative economic impact of the pandemic include (i) establishing an ASEAN task force on pandemics to facilitate the coordination and alignment of policy responses among member economies, (ii) buildingup an ASEAN pandemic network to share information and knowledge on health care, and (iii) strengthening regional financial safety nets.

Box 3: Local Currency Bond Markets and Exchange Rate Risks
The 1997/98 Asian financial crisis underlined the importance of developing LCY bond markets to boost financial resilience. LCY bond markets mobilize private sector savings and channel them into longterm investments. They also mitigate currency and maturity mismatches on the balance sheets of public and private institutions. This discussion box shows that LCY bond markets serve as useful financing instruments in emerging markets during periods of exchange rate volatility by lowering possible exchange rate risk exposure among financing entities. The impact of COVID-19 has demonstrated the importance of developing deep and balanced LCY bond markets to boost financial sector resilience.

Box 4: The Duration of Recoveries from Economic Shocks Like COVID-19
It will take some time before the global economy recovers from the COVID-19 pandemic. Analysis of past economic downturns finds that it takes about 4 years for economic output and 3 years for employment to recover from such an impactful event. The severity of the recession, presence of a financial crisis, and depth of supply and demand shocks are all significant factors that affect the time to recovery. In addition, trade openness contributes to a faster recovery.

Box 5: Environmental and Social Externalities and Economic Growth and Development
The 2016 Paris Agreement reflected the international community's recognition of the disastrous effects of climate change and environmental destruction, and the global commitment to take action to achieve the United Nations Sustainable Development Goals. Rapid environmental pollution has been linked to climate change; hence, a virtuous or a vicious cycle can ensue between a country's environmental state and its economic growth. Social development can also contribute to sustainable economic growth. Investment in areas such as education, sanitation, health care, gender equality, and affordable housing fosters social development, which in turn promotes economic development and inclusive growth that reaches vulnerable groups. Economy-level evidence points to a significant and positive impact of improved environmental, social, and governance policies on economic growth when adopting sustainable and socially responsible practices. The nexus between

Theme Chapter: Bank Efficiency and Bond Markets-Evidence from Asia and the Pacific
The theme chapter investigates the link between bond market development and the profit and cost efficiencies of banks. The bond market is relevant for different aspects of banking sector operations. On the one hand, government bonds offer alternative risk-free assets for depositors and thus compete with bank deposits, while corporate bonds serve as an alternative direct financing instrument to bank loans for high-quality clients. On the other hand, government bonds serve as a liquidity management instrument to shorten the maturity profile of asset portfolios, while corporate bonds serve as a financing instrument that allow banks to tap longer-term funding. This study finds that banks consistently become more profit-efficient but less cost-efficient in economies with relatively more developed bond markets. Results also show that the structure of the bond market has an impact on bank efficiency. The study highlights the important role of well-functioning and balanced bond markets in financing economic development.

Global and Regional Market Developments
Yields for 2-year local currency (LCY) government bonds declined in most emerging East Asian economies between 31 August and 6 November, while 10-year bond yield movements were mixed due to individual market differences. 1 Global financial conditions improved during the review period as investment sentiment was boosted by the enhanced performance of key advanced economies in the third quarter (Q3) of 2020. However, some caution remained as confirmed coronavirus disease  cases rose in many advanced economies and uncertainty about the global economic recovery lingered.
Between 31 August and 6 November, 2-year and 10-year bond yields rose in the United States (US) and declined in other developed economies ( Figure A). In the US, 2-year and 10-year government bond yields rose by 2 basis points (bps) and 11 bps, respectively. The uptick in yields was largely due to expectations of a new phase of spending on pandemic relief despite uncertainty regarding the timing and size of the stimulus package following the US election.
While the Federal Reserve noted that the US economy showed signs of recovery during Q3 2020 and left monetary policy unchanged at its September meeting, it also acknowledged uncertainty regarding the impact of COVID-19. US economic data have been mixed. Retail sales growth contracted to 0.6% month-on-month in October from 1.6% month-on-month in September, and the unemployment rate fell to 6.9% in October from 7.9% in September. Gains in nonfarm payrolls, however, declined to 672,000 in September and 638,000 in October from 1.5 million in August.
The Federal Reserve also upgraded its 2020 gross domestic product (GDP) growth forecast to -3.7% in September from -6.5% in June, and it revised downward the GDP growth forecasts for 2021 and 2022 from 5.0% and 3.5%, respectively, to 4.0% and 3.0%.
At the press conference following the Federal Reserve meeting, Chairman Jerome Powell indicated that it would take time for the US economy to return to its pre-COVID-19 output level and that additional fiscal support would be required. The Federal Reserve subsequently also left its monetary policy stance unchanged during its 4-5 November meeting.
In line with the Federal Reserve, the European Central Bank (ECB) left its monetary policy unchanged at its monetary policy meeting on 10 September. The ECB also noted some improvement in economic performance in the euro area, but remained cautious over uncertainty associated with COVID-19. The ECB's forecast for 2020 GDP growth was revised upward to -8.0% in September from -8.7% in June, while the 2021 and 2022 GDP forecasts were lowered slightly to 5.0% and 3.2%, respectively, from 5.2% and 3.3%. The euro area's economic recovery remained weak, as industrial production declined 6.8% year-on-year (y-o-y) in September and fell 6.7% y-o-y in August. The recent rise in COVID-19 cases in the euro area also heightened uncertainty over the economic recovery, while expectations of further monetary easing pulled bond yields down in the euro area.  In line with the ECB's forecasts, the euro area's GDP growth improved in Q3 2020, with GDP expanding 12.6% quarter-on-quarter (q-o-q) in Q3 2020 after declining 11.8% q-o-q in the prior quarter. However, on a y-o-y basis, GDP growth was negative at -4.4% in Q3 2020, which was still an improvement from a decline of -14.8% posted in the second quarter (Q2) of 2020.
During its 29 October monetary policy meeting, the ECB again left its monetary policy unchanged. However, the ECB noted that rising COVID-19 cases were dampening growth and initial data suggested that fourth quarter growth would be weaker. The ECB also hinted that it might ease monetary policy in December when its economic forecasts are updated.
The Bank of Japan (BOJ) also left its monetary policy unchanged at its monetary policy meeting on 17 September. While the BOJ noted some gains in the domestic economy's performance, the recovery is considered to be delicate. Japan's 2-year and 10-year yields marginally fell 1 bp each, despite expectations of expanded stimulus that could increase the debt supply to fund spending. The BOJ again left its monetary policy unchanged on 29 October. Updated economic forecasts from the BOJ showed a downgrade in 2020 GDP growth to -5.8% from -4.7% in July. The GDP forecast for 2021 was adjusted upward to 3.6% from 3.3%. However, the BOJ noted that the forecasts were highly uncertain given the impact of COVID-19. Japan posted an annualized quarterly GDP growth of 21.4% in Q3 2020 from -28.8% in Q2 2020. However, concerns that the gains may not be sustained led to Prime Minister Yoshihide Suga to call for a third extra budget.
Between 31 August and 6 November, yields on 2-year government bonds fell in most emerging East Asian markets, while 10-year bond yield movements were mixed ( Table A). The declining short-term bond yields reflected the accommodative monetary policies of most central banks in the region.
All emerging East Asian markets except the People's Republic of China (PRC) and Viet Nam recorded contractions in Q3 2020 GDP. However, while all other emerging East Asian economies recorded GDP contractions in Q3 2020, the pace of decline moderated compared with Q2 2020. The most significant improvement was noted in Malaysia as GDP declined to -2.7% y-o-y in Q3 2020 from -17.1% y-o-y in Q2 2020 buoyed by the easing of quarantine restrictions. In Singapore, advance estimates showed that GDP contraction slowed to -7.0% y-o-y in Q3 2020 from -13.3% y-o-y in Q2 2020, fuelled by the recovery in the manufacturing sector. Other markets with y-o-y GDP contractions in Q3 2020 include Hong Kong, China  (-3.5% from -9.0% in Q2 2020), Indonesia (-3.5% from -5.3% in Q2 2020), the Republic of Korea (-1.3% from -2.7% in Q2 2020), the Philippines (-11.5% from -16.9% in Q2 2020), and Thailand (-6.4% from -12.1% in Q2 2020). In contrast, Viet Nam experienced an economic recovery in Q3 2020, with GDP growth rising to 2.6% y-o-y from 0.4% y-o-y in Q2 2020, buoyed by strong exports. The PRC's GDP expanded 3.2% y-o-y in Q2 2020, and accelerated to 4.9% y-o-y in Q3 2020, the fastest growth rate among all regional markets.
To support economic recovery, regional central banks are expected to maintain their accommodative monetary stances. During the review period, all regional central banks held their policy rates steady, while the State Bank of Vietnam (SBV) further reduced its refinancing rate by 50 bps to 4.00% on 1 October to support the economy. On 19 November, both Bangko Sentral ng Pilipinas and Bank Indonesia (BI) reduced their respective policy rates by 25 bps each. From January through 20 November, emerging East Asia's central banks lowered policy rates, with a few central banks cumulatively cutting policy rates by 100 bps or more, including Bangko Sentral ng Pilipinas (200 bps), SBV (200 bps), BI (125 bps), and Bank Negara Malaysia (125 bps) ( Table B).
The movement of 10-year bond yields depended largely on market-specific factors as well as individual government responses to the COVID-19 pandemic. The weak economic outlook and subdued inflation were reflected in long-term bond yields across the region. In Indonesia, 10-year government bond yields fell by 57 bps during the review period amid efforts by BI to boost liquidity through macroprudential measures that included lowering banks' reserve requirement ratios and increasing central bank bond purchases, among others. Foreign bond inflows in October also helped push down rates. Viet Nam posted a decline of 32 bps between 31 August and 6 November, as SBV reduced policy rates on 1 October to support the economy. In Singapore and Thailand, 10-year yields fell 23 bps and 11 bps, respectively.
The PRC's bond market continued to buck the regional trend on the back of the domestic economic recovery, with the 2-year government bond yield gaining 38 bps between 31 August and 6 November, and the 10-year yield rising 18 bps. In the Philippines, the 10-year yield rose 19 bps due to an expected higher budget deficit in 2021 as well as increased government borrowing. In Malaysia, the 10-year yield rose 8 bps. A few markets witnessed a marginal change in the 10-year government bond yield, including the Republic of Korea (4 bps) and Hong Kong, China (-4 bps).

Economic Outlook
COVID-19 continues to cast a dark cloud over global economic prospects. The growth of confirmed cases and deaths has been exponential, with the worldwide numbers of cases and deaths surpassing 40 million and 1 million, respectively, as of 20 October 2020. The global nature of the pandemic is evident in the dispersed locations of the top 10 countries in terms of numbers of infections-the US, India, Brazil, the Russian Federation, Spain, Argentina, Colombia, France, Peru, and Mexico. The US, which also leads the world in the number of deaths, accounts for around 20% of both confirmed cases and deaths despite having only 4% of the global population. While there has been some progress in the development of treatments and vaccines, there is still a lot of uncertainty about when safe and effective treatments, and especially vaccines, will become widely available.
The bottom line is that the world is not out of the woods on the health front, which largely explains why a full-fledged global recovery is nowhere in sight yet. The unprecedented restrictions on the movement of individuals due to lockdowns, community quarantines, stay-at-home orders, and travel bans is crimping economic activity. Even when authorities relax restrictions, plenty of anecdotal evidence-such as Google community mobile data-indicates that individuals are often reluctant to venture outside over concerns that they may become infected. Furthermore, authorities have sometimes been forced to reintroduce stringent restrictions in response to a second wave-that is, a large increase in confirmed cases after a period of stabilization and decline. While the reintroduction is necessary to safeguard public health, it inevitably has a negative impact on economic activity in the short term.
Both the US and Europe have recently begun to experience a second wave of COVID-19. Europe, in particular, is experiencing a spike in new infections despite having tackled the first wave much more effectively than the US. In response, the governments of many European countries, including big economies-such as Germany, France, the United Kingdom, Italy, and Spain-have reintroduced various restrictions. There are growing concerns that Europe may experience a double-dip recession as the restrictions will hinder mobility and economic activity, causing a second recession just when the region had been recovering from the prior one. Europe's economy may contract in the fourth quarter of 2020 instead of growing at a healthy pace, as was widely expected before the second wave. Until a safe and effective COVID-19 vaccine is developed and distributed widely, the viral cloud of fear and uncertainty will limit global mobility and growth.
Despite the gloomy and uncertain economic outlook, the International Monetary Fund (IMF) has slightly upgraded its short-term global growth forecast. In its World Economic Outlook, released in October 2020, the IMF forecast that the world economy would contract by 4.4% in 2020, whereas in June it had forecast a larger contraction of 5.2%. According to projections, the world economy will grow by 5.2% in 2021, slightly down from its June forecast of 5.4%. The improvement in the forecast for the global economy's contraction in 2020 was driven by substantially upgraded growth projections for advanced economies. The IMF is now forecasting a contraction of 5.8% for this group of countries in 2020, compared to a significantly bigger contraction of 8.1% in its June forecast. On the other hand, for emerging markets and developing economies, the IMF's 2020 growth forecast was -3.3% in October versus -3.1% in June. For 2021, the IMF's October growth forecast for advanced economies was 3.9%, down from its 4.8% forecast in June. Its October forecast for growth of 6.0% in 2021 for emerging markets and developing economies was slightly up from the 5.8% forecast in June. It remains to be seen whether the second wave of COVID-19 and the reintroduction of restrictions in advanced economies, especially Europe, will perceptibly affect global growth outcomes in 2020 and 2021.
Developing Asia is not immune to the negative economic impact of COVID-19, but the impact is noticeably smaller than in the rest of the world. Partly, this is due to the fact that the region has done a relatively good job of containing the pandemic. Although some Asian countries, most notably India, have suffered major outbreaks, Asia has mostly weathered the COVID-19 storm better than other regions. This is especially true in East Asia, particularly the PRC, where everyday life is returning to a semblance of normalcy as a result of the remarkable success in containing the disease. In fact, the PRC is the lone bright spot in an otherwise gloomy global economic landscape. Its economy grew by a healthy 4.9% y-o-y in Q3 2020 after an expansion of 3.2% in Q2 2020 and a historic contraction in the first quarter.
According to the Asian Development Bank's Asian Development Outlook Update, released in September 2020, the PRC's economy is expected to grow by 1.8% in 2020 and 7.7% in 2021. The corresponding figures for the Association of Southeast Asian Nations (ASEAN) are -3.8% and 5.5%; for the Republic of Korea, the expected growth rates are -1.0% and 3.3%; and for Hong Kong, China, the respective figures are -6.5% and 5.1%. Output in developing Asia as a whole is projected to shrink by 0.7% in 2020 before expanding by 6.8% in 2021. The PRC's recovery is contributing to the resilience of other ASEAN+3 economies that trade heavily with the PRC, especially since the PRC's growth appears to be increasingly broad-based. 2 In particular, retail sales, a good bellwether of domestic demand, have risen since August after contracting during the first 7 months of the year.
Notwithstanding some positive trends, including the gathering momentum of the PRC's recovery, the overall economic outlook for ASEAN+3 remains subject to a great deal of uncertainty. The fundamental reason is that the global economic outlook will remain uncertain and negative until there is some clarity on when and if COVID-19 will recede. The second wave of new cases, which is forcing European governments to reintroduce restrictions that restrict mobility and hamper economic activity, is a stark reminder that the virus can derail economic recovery at any time until it is firmly brought under control. Until then, economic recovery is more likely to be an intermittent and fitful stop-and-go process rather than a smooth continuous one. Furthermore, many negative effects of the pandemic-such as largescale unemployment and business closures-are likely to persist for some time.
As economic performance in major advanced economies strengthened and the results of the US election became more clear, investor sentiment improved on expectations of an additional stimulus package in the US. Most equity markets in emerging East Asia posted gains during the review period ( Figure B.1). Among regional equity markets, the Philippines gained the most with a 13.6% increase, as the economy showed signs of recovery with the easing of social restrictions. In Viet Nam, the equity market rose 6.4% as the government was successful in gradually lifting restrictions put in place in response to the COVID-19 outbreak. In contrast, declines in equity markets were noted in Thailand (-3.9%), which was driven by rising political concerns, and in the PRC (-2.5%) ( Figure B.

2)
From August through October, investment sentiment was subdued amid rising COVID-19 cases in Europe and uncertainty related to the US election, which led to capital outflows from the region's equities markets. Inflows, however, were noted in early November, buoyed by strong inflows in the markets of the PRC and the Republic of Korea ( Figure C). The COVID-19 pandemic has significantly shaped global capital flows. Box 1 examines the effectiveness of COVID-19-related policy  (Beirne et al. 2020). In addition, the effect of the pandemic on EME equity and bond flows across 14 EMEs was assessed. This research also estimated the effectiveness of COVID-19-related policy responses on financial markets and capital flow dynamics. Figure B1 demonstrates that COVID-19 has had the greatest relative effect on sovereign bond markets across both advanced and emerging economies. In addition, based on an empirical analysis over the period from 4 January 2010 to 30 April 2020, Beirne et al. (2020) show that the magnitude of the effect of COVID-19 on financial markets is notably higher for emerging rather than advanced economies by a factor of around two across bond, stock, and exchange rate markets. In particular, bond yields in European and Asian EMEs are estimated to have declined by 24 basis points (bps) and 14 bps over the sample period, respectively, due to COVID-19. While EME bond yields rose sharply at the onset of COVID-19, coupled with substantial net capital outflows, it is striking that the overall effect on bond yields was negative, which may seem counterintuitive since an increase in COVID-19 cases might be expected to worsen financial market turmoil and increase sovereign bond yields. There are two explanations for why the overall effect on bond yields was negative. First, government bonds were perceived as safer assets than corporate bonds given that the corporate sector, with few exceptions, was very heavily affected by COVID-19 lockdowns. With many businesses fighting for survival, sovereign bonds were seen as the better alternative, even if the crisis also cast questions on the sustainability of public debt. Second, the crisis gave way to extremely accommodative central bank policies in most economies, with slashes in interest rates and new rounds of QE policies in all major advanced economies. Turning to the impact on stock markets, the greatest relative impact of COVID-19 is estimated to have been in advanced Asian economies and Latin America, whose markets plunged sharply.
On exchange rates, advanced Asian economies were most affected in relative terms, experiencing currency depreciations due to COVID-19, although the magnitude of these effects was not as large overall when compared to the effects on stock and bond markets. With regard to EME capital flows, COVID-19 has led to significant outflows of both equities and bonds, reflecting investors' flight to safety.
While there has been substantial heterogeneity across regions in the magnitude of the effects of COVID-19 on markets, the results in Beirne et al. (2020) show that this has also been the case in relation to the effectiveness of policy responses.  Foreign holdings of LCY government bonds showed mixed patterns in Q3 2020 ( Figure D.1). The foreign holdings share declined in Indonesia, the Philippines, and Thailand between the end of June and the end of September. In Indonesia, the foreign holdings share fell from 30.2% to 27.0% during the review period. Foreign investors dumped Indonesian bonds on concerns over debt monetization and a wide budget deficit in the 2021 state budget. The foreign holding shares in the Philippines and Thailand declined from 1.9% and 14.4% at the end of June, respectively, to 1.5% and 14.0% at the end of September.
The PRC and Malaysia witnessed slight increases in their respective shares of foreign holdings in the LCY government bond market. In Malaysia, the foreign holdings share climbed to 23.6% at the end of September from 22.7% at the end of June on expectations that Box 1: Global Financial Markets and Capital Flows: COVID-19 Impacts and Policy Responses continued As regards stock markets, interest rate reductions were more effective in advanced compared to emerging economies by a factor of around two. In addition, QE measures in advanced economies, as well as spillovers to EMEs, helped to boost domestic stock prices by around 12% and 16%, respectively. Moreover, QE by central banks in emerging Asia helped to increase stock prices by around 6%. The impact of fiscal policy on stock markets was confined to European advanced economies and EMEs overall, increasing stock prices by an average of around 8%. At the global level, while the magnitude of the effect of policy responses on exchange rates was much lower than in other markets, QE measures in EMEs led to a rise in net capital inflows by around 14% in the case of equities and around 16% in the case of bonds. Moreover, fiscal stimulus packages in EMEs increased net equity inflows by around 9%.
Overall, although heightened uncertainty due to the COVID-19 pandemic has affected the financial markets of EMEs more detrimentally than advanced economies, it appears that most EMEs have performed well in their policy responses to the pandemic. Whereas fiscal stimulus packages have contributed to restoring confidence in domestic financial markets, QE policy measures and interest rate reductions have also been effective in Asian economies by supporting stock prices. Notably, these measures also helped to stabilize capital flows. The scale of bond and equity capital outflows from EMEs highlights the importance of strengthening the domestic investor base to be less reliant on international portfolio investment. The COVID-19 crisis has illustrated the need for concerted efforts at bolstering domestic financial resource mobilization in EMEs and for reducing exposure to international portfolio capital and financial contagion. The extent of capital outflows also strengthens the case for reviving discussions around the management of capital flows and the development of a global financial safety net. It is important for EMEs to develop further their overall policy toolkits to respond to spikes in financial market volatility and crisis episodes, notably with the use of QE measures. With conventional monetary policy having easing limits and fiscal policy space constrained by excessive public debt, using QE policies can be a potent stimulator in domestic markets, particularly where inflation expectations are contained and exchange rates are flexible.
Malaysia would be kept in FTSE Russell's World Global Bond Index (WGBI). (On 24 September, FTSE Russell kept Malaysia's sovereign bonds in the WGBI; however, Malaysia remains on the negative watch list.) In the PRC, the foreign holdings share inched up to 9.4% at the end of September from 9.1% at the end of June as it continued to liberalize its bond markets. On 26 September, the PRC announced that it would streamline regulations for its Renminbi Qualified Foreign Institutional Investor and Qualified Foreign Institutional Investor programs into a single set of rules. Also, on 24 September, the FTSE Russell announced the inclusion of PRC government bonds in its WGBI starting in October 2021.
Foreign bond inflows into the region's LCY bond markets totaled USD29.8 billion in Q3 2020, slightly down from inflows of USD35.1 billion in the previous quarter ( Figure D.2). All markets for which data are available posted positive quarterly inflows except for Indonesia and the Philippines. The PRC and the Republic of Korea are the only bond markets in emerging East Asia that have consistently posted positive quarterly foreign flows in 2020.
Most regional currencies gained vis-à-vis the US dollar between 31 August and 6 November ( Figure E.1). The Korean won appreciated the most of all currencies in the region, gaining 6.0% on capital inflows into its financial market and improved economic conditions. The Chinese yuan also strengthened, rising 3.6% as its economic  Improved investment sentiment also led to a decline in credit default swap spreads in most emerging East Asian markets between 31 August and 6 November. During the review period, a spike was noted from the middle of September through early October when the Federal Reserve indicated that more fiscal support would be needed to support the economy and the US President tested positive for COVID-19, heightening risk uncertainty. Credit default swap spreads trended downward during the first half of October before rising toward the end of the month on the back of uncertainty over US stimulus negotiations, increased COVID-19 cases in European economies and the subsequent return of lockdown measures, and the US election. Credit default swap spreads subsequently declined again in the first week of November ( Figure F). The sovereign stripped spreads showed a similar trend ( Figure G).
While financial conditions improved during the review period, uncertainty over COVID-19 and its impact on economic recovery weighed on global investment sentiment despite accommodative monetary stances

Box 2: The Effect of COVID-19 on Financial Stability in ASEAN
The coronavirus disease  pandemic is a oncein-a-century global public health and economic crisis. a Member countries of the Association of Southeast Asian Nations (ASEAN) have been profoundly affected by  Like the rest of the world, ASEAN has seen a significant number of confirmed cases and fatalities.
Although the region has been spared huge outbreaks such as those in the United States, India, the Russian Federation, and Brazil, the numbers are far from trivial. As of 7 October, ASEAN as a whole had suffered over 500,000 confirmed cases and over 10,000 deaths. To contain the pandemic, the region's governments imposed various restrictionslockdowns, community quarantines, and travel bans-which limited the mobility of people within and across countries. As a result, the region was hit hard economically. According to the forecast of the Asian Development Outlook 2020 Update, which was released in September 2020, the 10 economies of ASEAN will collectively shrink by 3.8% in 2020, although they will bounce back into positive territory with growth of 5.5% in 2021. In addition to the COVID-19-related restrictions, the dire global outlook is another major factor in the region's severe economic downturn. ASEAN's relatively high level of economic globalization, in terms of both trade and capital flows, suggests that COVID-19 may adversely affect not only the region's economic growth but also its financial stability. The region suffered a devastating blow during the 1997/98 Asian financial crisis as a result of a sudden and sharp reversal of capital flows. Since then, ASEAN economies have strengthened fundamentals to protect themselves from another financial crisis. These robust fundamentals served ASEAN well during the 2007-2009 global financial crisis, which had only a limited impact on the region's financial stability. Nevertheless, the unprecedented scale and global nature of the COVID-19 shock, in conjunction with the region's relative financial openness, poses a clear and present danger to financial stability. The global financial market turmoil of March 2020 also affected ASEAN economies, as evident in the tangible depreciation of their currencies ( Figure B2.1). Financial conditions have subsequently turned more benign in ASEAN and the rest of the world. Nevertheless, if the pandemic persists, instability may return to financial markets.
A major contribution to the restoration of financial stability in ASEAN in 2020 has been the concerted implementation of expansionary monetary policy. Like their counterparts elsewhere, the central banks of ASEAN have cut benchmark interest rates decisively ( Figure B2.2). They have also taken other measures to inject additional liquidity into their financial systems. These include reducing reserve requirement ratios, creating funds for lending to firms, implementing temporary suspensions of interest repayments, and relaxing payment conditions for loans related to COVID-19. In addition, ASEAN governments have launched fiscal stimulus packages to support growth and protect vulnerable groups. Such fiscal stimulus indirectly supports financial stability by boosting growth and thus preventing a rise in business closures and nonperforming loans. At the same time, stimulus expands fiscal deficits and public debt, which can eventually pose a risk to financial stability. While these strong domestic policy measures are the primary defense against financial turbulence, regional financial safety nets can also make a significant contribution.   -. -. -. -.

Box 2: The Effect of COVID-19 on Financial Stability in ASEAN continued
March 2010 under the ASEAN+3 initiative as a network of bilateral swap arrangements amounting to USD120 billion. CMIM's implementation and surveillance processes are being strengthened to improve its effectiveness and speed in tackling financial crisis.
Separately, the ASEAN Disaster Risk Financing and Insurance (ADRFI) scheme is being developed to strengthen regional financial resilience in the context of climate change and natural hazards. The comprehensive framework is designed to equip ASEAN member countries with risk management and risk transfer capabilities. ADFRI will enable them to overcome the financial burden caused by extreme events through both ex-ante and ex-post arrangements.
ASEAN has yet to develop a regional mechanism for the COVID-19 pandemic crisis or similar shocks. The policy gap in both the CMIM and ADRFI initiatives for dealing with transnational disease outbreaks includes the lack of technical and financial capacity building and public health sector cooperation among ASEAN countries. This includes funding hospitals and medical clinics; health care training for lowerincome countries; and the stockpiling of medicines, alcohol, surgical masks, vaccines, and other emergency equipment to quickly tackle the spread of a transnational disease. At the global and regional levels, international financial institutions have also supported countries affected by the COVID-19 outbreak. The International Monetary Fund uses the Catastrophe Containment and Relief Trust to support its member countries, while multilateral development banks like the Asian Development Bank are supporting countriesincluding Thailand, the Philippines, and Indonesia-through grants and loans. Although this financial support is helpful, it is nowhere near enough to respond to a systemic financial crisis.
Appropriate and timely policies supported by regional cooperation can reduce the negative economic impacts of the pandemic. We propose three policy recommendations. First, the establishment of an ASEAN task force on pandemics would facilitate the coordination and alignment of policy responses among member countries. A regional framework for policy responses can create public trust and promote transparency. Second, the building-up of an ASEAN pandemic network-consisting of hospitals, healthcare workers, pharmaceutical companies, and research institutions-is needed to share information and knowledge on healthcare resources for mitigating pandemic-related shocks and preparing financing schemes. Third, regional financial safety nets must be strengthened, including their role in mitigating the impact of COVID-19 and other similar shocks to financial stability.

Box 3: Local Currency Bond Markets and Exchange Rate Risks
The 1997/98 Asian financial crisis underlined the importance of developing local currency (LCY) bond markets to boost financial resilience. a LCY bond markets mobilize private sector savings into long-term investments, while also mitigating currency and maturity mismatches in the balance sheets of public and private institutions. LCY bond markets absorb capital inflows, thereby contributing to financial stability. b Park, Shin, and Tian (2018) showed that LCY bond markets also play a significant role in stabilizing currencies against external shocks. c In recent decades, LCY bond markets in emerging Asian economies have expanded rapidly, catching up to European LCY markets in size. Since the Asian Bond Markets Initiative was launched in 2002 by the Association of Southeast Asian Nations (ASEAN) and the People's Republic of China, Japan, and the Republic of Korea-a grouping collectively known as ASEAN+3-regional LCY bond markets have experienced rapid growth. As of June 2020, LCY bonds outstanding in emerging East Asia had reached USD17.2 trillion, a more than 14-fold increase since 2002. Furthermore, LCY bonds outstanding as a share of the region's gross domestic product reached 91.6% in 2020. The rapid development of regional LCY bond markets has reduced financial vulnerability to sudden capital flow reversals, as evidenced by the resilience of the region's financial systems and economies during the 2007-2009 global financial crisis and the "taper tantrum" in 2013.
Well-developed LCY bond markets allow domestic borrowers to tap LCY funding when exchange rates are volatile, thus mitigating currency risk in investments and project implementation. Figure B3.1 confirms that demand for LCY financing in Asia rose in recent years when exchange rates were more volatile.
Currency depreciation adversely affects balance sheets in both the public and private sectors, especially when exposure to foreign currency financing is large. When a domestic currency weakens, it becomes more costly to repay foreign currency debt. LCY bonds thus offer a financing solution that is cheaper and free of exchange-rate risk for LCY investment and spending. Figure B3.2 reveals that when emerging market currencies depreciate, the demand for LCY financing tends to increase, as evidenced by greater LCY bond issuance in emerging Asia. This implies that better developed LCY bond markets serve as an important alternative funding source for local borrowers when the domestic currency weakens.
The outbreak of the coronavirus disease (COVID-19) soured global investment sentiment and caused turmoil in global financial markets in March and April 2020, putting emerging market currencies under pressure. A huge amount of financing will be needed to tackle COVID-19 and its economic effects. As evidenced by Figures B3.1

Introduction
Attention is beginning to turn from the magnitude of the economic impact of the outbreak of the coronavirus disease  to the likely trajectory of recovery. a In this connection, Eichengreen, Park, and Shin (2020) seek to make headway on the question of what recovery from a COVID-19 recession may look like, focusing on the duration of the recovery; that is, how long will it take to re-attain the levels of output and employment reached at the prior business cycle peak?
We start by categorizing all post-1950 recessions in advanced economies and emerging markets into those that were induced by a supply shock, a demand shock, or both shocks. We measure recovery duration as the number of years required to re-attain prerecession levels of output and employment. We then rely on existing literature on business cycle dynamics to identify candidate variables that can help account for variations in recovery duration following different kinds of shocks. By asking which of these variables are operative in the COVID-19 recession, we can then draw inferences about the duration of the recovery under different scenarios.

Empirical findings
The main findings of the empirical analysis are as follows.
For gross domestic product (GDP) per capita, both the amplitude of the recession and the presence of a doubledip increase recovery duration, as expected; that is, severe recessions and double-dip recessions lengthen the time it takes an economy to recover. Similarly, both global recessions and the presence of a financial crisis lengthen recovery durations. There is also some indication that experiencing both supply and demand shocks-as is during the current COVID-19 recession-lengthens recovery time. Recession amplitude, double-dip, financial crisis, and both shock variables remain significant when included simultaneously.
Additional analysis indicates that the results for the duration of employment recoveries are broadly similar with the results for GDP per capita recoveries. In addition, we find that economies with floating exchange rate regimes did better in general, albeit not in response to global recessions. This is likely because flexible exchange rates are not very useful if all economies are in trouble simultaneously. Also, there is evidence that trade openness is associated with faster recoveries. This is consistent with the idea that recovery

Data and Empirical Methodology
Our primary data are real gross domestic product (GDP) per capita in national accounts and employment. These were collected from the Penn World  (2019). We considered 23 advanced economies and 21 major emerging markets. The sample period of GDP and employment for advanced economies is from 1950 to 2017. The sample period of GDP and employment for emerging markets varies. For some, it is also from 1950 to 2017, but for others the sample starts as late as 1990. The frequency is annual in all cases. The recovery duration of per capita GDP and employment is defined as how many years it takes for the two variables to recover to their levels at the preceding business cycle peak. For the entire sample, we find that it takes real GDP per capita and employment around 4 years and 3 years, respectively, to recover to their previous peak.
The business cycle chronology is calculated by applying the Bry and Boschan (1971) algorithm as coded by Jorda, Schularick, and Taylor (2013) for both advanced economies and emerging markets. Then we calculate the duration of recoveries, which is defined as number of years for GDP per capita from peak to recovery of prior peak. Then we investigate the determinants of the duration by employing a parametric survival model with a Weibull distribution. We estimate both pooled regressions and panel regressions with random effects. The coefficients estimated determine the hazard rate so that a positive sign on a coefficient means that it shortens the duration of the recovery.
The dependent variable is the duration of the GDP recovery, defined as number of years for GDP per capita from previous peak to recovery of prior peak. We estimate coefficients based on the panel survival model with a Weibull distribution. A negative sign on a coefficient means that it lengthens the time to recovery (i.e., it reduces the likelihood of the ongoing recovery spell ending in the current period).  Some implications for developing Asia's post-COVID-19 recovery prospects What are the implications of these findings for recovery from the COVID-19 recession in general and in developing Asian economies in particular? A number of our empirical results point in the direction of lengthy recoveries. The COVID-19 recession is unusually severe, which will make for extended recoveries if history is any guide. The fact that the COVID-19 recession is global points in the same direction. It means that economies, including a growing number of emerging markets in Asia and globally, that had been moving in the direction of more freely floating exchange rates will not be able to exploit that policy flexibility by depreciating their currencies and crowding-in exports since their export markets are also likely to slowly recover. It means that the tendency for economies that are more open to trade to recover more quickly, something that normally works in developing Asia's favor, will be less potent this time.
Another troubling omen is that the COVID-19 recession involves both aggregate supply and aggregate demand shocks, as first supply was disrupted by lockdowns and then households and firms reduced their spending owing to the loss in incomes. Our results strongly suggest that these are the recessions from which recovery is slowest. The negative supply shock is unavoidable under the circumstances, but the negative demand shock can be mitigated by policy. Emerging markets, including those in Asia, have responded more aggressively than to previous recessions. Some of those with greater fiscal space than in previous recessions have used this advantage more aggressively. In addition, the rapid responses of multilaterals such as the International Monetary Fund and the Asian Development Bank have provided low-income economies with additional fiscal space.

Risks to Economic Outlook and Financial Stability
Downside risks continue to dominate upside risks to the global and regional economic outlook and to financial stability. The overriding downside risk remains the uncertain trajectory of the COVID-19 pandemic. Europe's recent experience suggests that economic performance will be inextricably linked to success in containing outbreaks. In February, the European Union (EU) suffered a major outbreak that began in Italy and soon spread to the rest of the continent. EU governments imposed lockdowns and other stringent restrictions that helped contain the disease but also took a heavy toll on the economy. Reduced mobility and economic activity sharply lowered the EU's GDP in Q2 2020 by more than 10.0% q-o-q. However, the restrictions helped to bring the pandemic under control, as evident in a sharp decline in cases and deaths. This allowed governments to ease restrictions, which immediately boosted demand and growth. Third quarter gross domestic growth reached almost 10.0% q-o-q, and there was growing optimism about a sustained recovery. However, a virulent second wave of COVID-19 cases struck Europe in October, and optimism quickly turned to pessimism. In response, governments across the continent have imposed a new round of restrictions. In September, the ECB forecast that the euro area would grow at a healthy pace of more than 3% in the fourth quarter of 2020. However, some economists are now predicting an outright contraction.
Emerging East Asian economies have fared relatively well in terms of containing COVID-19. In particular, the PRC, which is a major engine of growth for the region, has seen normality return to everyday life after successfully containing COVID-19. As a result, its economic recovery is gathering momentum and becoming more broadbased. Most promisingly, whereas the recovery in Q2 2020 was driven by public infrastructure investment and exports, consumption began to show signs of life in the third quarter as the PRC's retail sales rose by 3.3% y-o-y in September.
The key takeaway for Asia from Europe's second wave is that economic performance is intimately linked to the state of public health. Furthermore, the European experience suggests that even an apparently robust recovery is powerless in the face of sudden and unexpected worsening of the COVID-19 situation. Therefore, if the PRC and other emerging East Asian economies suffer a sharp spike in cases and deaths that tests their public health capacity, it is likely that economic growth and financial stability will also be tested.
The main upside risk is the rapid development of a safe and effective COVID-19 vaccine. The mere news of a breakthrough vaccine would sharply lift business and consumer confidence. Overall, there is cause for optimism as several candidates have already reached Phase 3 clinical trials, which typically involve thousands of participants to confirm and evaluate the overall risks and benefits of a vaccine. At the same time, the temporary suspension of clinical trials by AstraZeneca and Johnson & Johnson due to sick participants suggests that there is still some work left.
While COVID-19 dominates all other risks, there are nevertheless some significant risks besides the pandemic. The conflict between the PRC and the US, which seems to be rooted in structural differences, shows no signs of abating. On a positive note, tensions between the two have not become noticeably worse in recent months. Emerging East Asian economies depend on close economic links with both the PRC and the US. As such, persistent conflict between the two economic giants represents a significant source of risk and uncertainty. Political and social instability due to various factors is another source of risk and uncertainty. In many countries, central governments are grappling with growing opposition from the general population and regional governments to lockdowns and other COVID-19 restrictions. In the US, there are widespread concerns about whether the government transition following the presidential election on 3 November can be completed smoothly and without major disruption. Any prolonged legal disputes over the election outcome could harm US and global financial stability. Other countries, such as Thailand, are experiencing political instability due to country-specific factors. Finally, as always, a number of geopolitical risks, including geopolitical tensions in the Middle East, loom on the horizon.
The outstanding amount of local currency bonds in emerging East Asia reached USD18.7 trillion at the end of September.
At the end of September, the size of emerging East Asia's local currency (LCY) bond market reached USD18.7 trillion. 3 The region's bond market growth moderated to 4.8% quarter-on-quarter (q-o-q) in the third quarter (Q3) of 2020 from 5.0% q-o-q in the second quarter (Q2) (Figure 1a). The slowdown in growth was primarily driven by a weaker expansion in corporate bonds. Governments continued to issue sovereign debt to finance economic relief measures amid the economic fallout brought about by the coronavirus disease . Meanwhile, risk-off sentiment amid the protracted economic slowdown led to weaker growth in the region's corporate bond markets.
All nine bond markets posted positive q-o-q growth in Q3 2020. The region's smaller bond markets-Viet Nam, Indonesia, and the Philippines-posted the highest growth rates, while Singapore; Malaysia; the Republic of Korea; and Hong Kong, China recorded the slowest expansions. Compared with Q2 2020, the q-o-q growth rate accelerated in six of the region's nine bond markets, including Hong Kong, China; Indonesia; Malaysia; the Philippines; Thailand; and Viet Nam. However, q-o-q growth dropped in three bond markets including the two largest-the People's Republic of China (PRC) and the Republic of Korea-leading to slower regional q-o-q growth.
On a year-on-year (y-o-y) basis, emerging East Asia's LCY bond market growth accelerated to 17.4% in Q3 2020 from 15.5% in Q2 2020 ( Figure 1b). All markets in the region posted positive y-o-y growth in Q3 2020. Indonesia, the Philippines, and the PRC posted the fastest y-o-y growth rates, while the rest of the region posted moderate growth rates. Hong Kong, China recorded the weakest y-o-y expansion in Q3 2020. Except for Singapore, all markets in the region posted higher y-o-y growth in Q3 2020 than in Q2 2020.
The PRC's LCY bond market remained the region's largest with an outstanding bond stock of USD14.5 trillion at the end of September. The PRC's share of the regional bond market increased to 77.5% in Q3 2020 from 77.1% in Q2 2020. Growth in the PRC's LCY bond market moderated to 5.4% q-o-q in Q3 2020 from 5.6% q-o-q in Q2 2020. The slower growth in Q3 2020 was driven by a deceleration in corporate bond market growth, as interest rates continued to rise. Growth in the government bond segment continued to accelerate, rising to 6.6% q-o-q in Q3 2020 from 5.4% q-o-q in the previous quarter.   However, its share of the regional total slipped to 11.9% in Q3 2020 from 12.3% in the previous quarter. Growth in the Republic of Korea's total bond stock dropped to 1.9% q-o-q in Q3 2020 from 3.1% q-o-q in Q2 2020, driven by weaker growth in both the government and corporate bond segments. Government bonds outstanding rose 3.0% q-o-q in Q3 2020, down from 4.6% q-o-q in Q2 2020. Growth in the corporate bond stock also slowed to 1.1% q-o-q in Q3 2020 from 2.1% q-o-q in the previous quarter. On a y-o-y basis, the Republic of Korea's LCY bond market growth inched up to 9.8% in Q3 2020 from 9.5% in Q2 2020.
Hong Kong, China's LCY bonds outstanding reached USD295.1 billion at the end of September. Growth in the total bond stock inched up to 0.9% q-o-q in Q3 2020 from 0.5% q-o-q in the prior quarter. The government bond segment posted marginal growth of 0.1% q-o-q in Q3 2020, a slight recovery from the 1.1% q-o-q decline in Q2 2020. The growth was driven largely by an expansion in the outstanding amount of Hong Kong Special Administrative Region bonds. Growth in the corporate bond segment moderated to 1.6% q-o-q in Q3 2020 from 2.3% q-o-q in Q2 2020. On an annual basis, Hong Kong, China's LCY bond market rose 1.0% in Q3 2020, reversing the 0.8% contraction in Q2 2020. Hong Kong, China's bond market posted the slowest pace of q-o-q and y-o-y growth among emerging East Asian markets in Q3 2020, as the deepening economic contraction brought about by political uncertainties and COVID-19 continued to impact its financial markets.
The total amount of LCY bonds outstanding of the member economies of the Association of Southeast Asian Nations (ASEAN) reached USD1.7 trillion in Q3 2020, up from USD1.6 trillion in Q2 2020. 4 Overall growth accelerated to 4.7% q-o-q in Q3 2020 from 3.2% q-o-q in Q2 2020. The total government bond stock amounted to USD1.2 trillion, while the total corporate bond stock reached USD0.5 trillion at the end of September. Thailand, Malaysia, and Singapore remained the three largest bond markets among all ASEAN members.
Thailand's LCY bonds outstanding amounted to USD443.7 billion at the end of September. Overall growth picked up in Q3 2020, rising to 4.2% q-o-q from 2.1% q-o-q in Q2 2020. The faster expansion stemmed from stronger growth in the government bond segment combined with a recovery in the corporate bond segment. Growth in outstanding government bonds accelerated to 5.4% q-o-q in Q3 2020 from 4.1% q-o-q in Q2 2020, as the government continued to issue sovereign debt to help fund stimulus measures. Corporate bonds outstanding increased 1.1% q-o-q in Q3 2020, reversing the 2.6% q-o-q decline in the prior quarter. On a y-o-y basis, Thailand's bond market growth jumped to 8.3% in Q3 2020 from 3.2% in Q2 2020.   growth of 1.9% q-o-q and 6.1% y-o-y. Growth in the outstanding government bond stock moderated to 2.3% q-o-q in Q3 2020 from 3.2% q-o-q in Q2 2020. The corporate bond segment rose 1.3% q-o-q in Q3 2020, up from 0.2% q-o-q in the previous quarter amid a slight recovery in investor sentiment.
Malaysia is home to the largest sukuk (Islamic bond) market in emerging East Asia, with a total of USD239.0 billion sukuk outstanding at the end of September. In Q3 2020, the stock of government sukuk totaled USD96.5 billion, or 47.3% of total government bonds. Outstanding corporate sukuk reached USD142.4 billion, or 80.5% of total corporate bonds.
The outstanding amount of Singapore's LCY bonds amounted to USD358.5 billion at the end of September. Growth in total outstanding bonds dropped to 1.8% q-o-q in Q3 2020 from 2.9% q-o-q in Q2 2020, driven by weaker growth in the government bond segment. Government bonds outstanding rose 2.0% q-o-q in Q3 2020, down from 4.4% q-o-q in the prior quarter. Meanwhile, growth in outstanding corporate bonds jumped to 1.6% q-o-q in Q3 2020 from tepid growth of 0.3% q-o-q in Q2 2020. On a y-o-y basis, Singapore's bond market expansion moderated to 9.8% in Q3 2020 from 13.2% in Q2 2020.
Indonesia's LCY bond market reached a size of USD264.8 billion at the end of September, with growth rising to 9.9% q-o-q in Q3 2020 from 7.8% q-o-q in Q2 2020. The faster growth in Q3 2020 was supported by a strong expansion in the government bond segment and a recovery in the corporate bond segment. Growth in the outstanding stock of LCY government bonds quickened to 10.9% q-o-q in Q3 2020 from 9.5% q-o-q in the previous quarter. Indonesia posted the fastest growth in its government bond stock in emerging East Asia in Q3 2020, bolstered by heightened issuance of government debt to finance economic relief measures. Corporate bonds outstanding rose 2.6% q-o-q in Q3 2020, reversing the 3.0% q-o-q drop in the prior quarter. On an annual basis, Indonesia's LCY bond market expanded 22.4% y-o-y in Q3 2020, up from 16.8% y-o-y in Q2 2020.
The outstanding amount of LCY bonds in the Philippines reached USD167.8 billion at the end of September. Overall growth quickened to 8.8% q-o-q in Q3 2020 from 5.2% q-o-q in Q2 2020, supported by faster growth in the government bond segment and a recovery in the corporate bond segment. Outstanding government bonds rose 10.1% q-o-q in Q3 2020, up from 6.8% q-o-q in the prior quarter on increased issuance due to heightened financing needs for stimulus measures. The corporate bond market expanded 3.8% q-o-q in Q3 2020, recovering from a 0.4% q-o-q contraction in Q2 2020. On a y-o-y basis, overall LCY bond market growth almost doubled to 21.5% in Q3 2020 from 11.5% in Q2 2020.
Viet Nam's LCY bond market reached a size of USD65.3 billion at the end of September, with overall growth of 11.6% q-o-q in Q3 2020 reversing the 1.4% q-o-q contraction in Q2 2020. The recovery in q-o-q growth was driven by a resurgence in government bond market growth in Q3 2020. Government bonds outstanding rose 9.1% q-o-q in Q3 2020, a reversal of the 7.8% q-o-q drop in the previous quarter. Meanwhile, growth in outstanding corporate bonds slowed to 26.9% q-o-q in Q3 2020 from 68.9% q-o-q in Q2 2020. On an annual basis, Viet Nam's LCY bond market growth jumped to 17.0% y-o-y in Q3 2020 from 9.8% y-o-y in the prior quarter.
At the end of September, government bonds continued to account for the majority of emerging East Asia's LCY bond stock, representing a 61.6% share. In nominal terms, the outstanding stock of government bonds in the region reached USD11.5 trillion on growth of 6.1% q-o-q and 17.3% y-o-y ( Table 1). The PRC and the Republic of Korea maintained their positions as the two largest government bond markets in the region with a combined share of 88.4% in Q3 2020. ASEAN economies accounted for 10.3% of aggregate government bonds outstanding in emerging East Asia at the end of Q3 2020. Among ASEAN economies, Thailand had the largest stock of LCY government bonds at the end of September at USD324.7 billion. Indonesia, Singapore, and Malaysia followed with outstanding LCY government bonds of USD235.2 billion, USD228.3 billion, and USD204.1 billion, respectively. The Philippines and Viet Nam had the two smallest government bond stocks at USD134.1 billion and USD54.7 billion, respectively.
LCY corporate bonds outstanding in emerging East Asia totaled USD7.2 trillion at the end of September. The growth in the region's aggregate corporate bonds outstanding slowed to 2.7% q-o-q in Q3 2020 from 4.7% q-o-q in Q2 2020. The slower growth stemmed 20 Asia Bond Monitor  primarily from a growth slowdown in the PRC and the Republic of Korea, the region's two largest corporate bond markets. Corporate bond market growth also slowed in Viet Nam and Hong Kong, China in Q3 2020 compared with Q2 2020. The rest of the emerging East Asia's corporate bond markets posted faster growth in Q3 2020 than in Q2 2020, but the weaker growth in the PRC and the Republic of Korea curtailed the region's overall growth in Q3 2020.
ASEAN economies accounted for 7.0% of emerging East Asia's corporate bond market at the end of September. Among ASEAN economies, Malaysia, Singapore, and Thailand had the largest corporate bond markets with outstanding bond stocks of USD176.9 billion, USD130.2 billion, and USD118.9 billion, respectively. The Philippines and Indonesia followed, with outstanding bond stocks of USD33.7 billion and USD29.6 billion, respectively. Viet Nam remained home to the region's smallest corporate bond market, with an outstanding stock of USD10.6 billion at the end of September.
Emerging East Asia's total LCY bond market was equivalent to 95.6% of the region's gross domestic product (GDP) at the end of September, climbing from 91.6% at the end of June and 82.5% at the end of September 2019 ( Table 2). The share of government bonds to GDP, expressed as a percentage, increased to 58.8% at the end of Q3 2020 from 55.7% at the end of Q2 2020, while the corporate bonds-to-GDP share increased to 36.8% from 35.9%. The rising bonds-to-GDP share in Q3 2020 is attributed to the expansion of all bond markets in the region during the quarter, largely due to governments raising funds for their COVID-19 responses, while economic output continued to experience moderate to negative growth due to the lingering adverse impact of the pandemic.
The bond markets of the Republic of Korea, Malaysia, and Singapore were the largest in the region, measured as a percentage of GDP, at the end of Q3 2020, with their GDP shares each exceeding 100%. The Republic of Korea's bond market had the highest GDP share in the region at 141.7%. Indonesia and Viet Nam accounted for the smallest bond market shares at 25.0% each. All economies saw increases in their bond-to-GDP shares between Q2 2020 and Q3 2020. increase in foreign holdings. Moreover, the PRC published new draft rules in September making foreign access to the LCY bond market easier to further boost the market's development. Foreign investor demand was also driven by news that PRC government bonds would be included in the FTSE Russell World Government Bond Index in October 2021.
Malaysian government securities continued to attract foreign participation in the bond market with the share of offshore holdings climbing to 23.6% at the end of September from 22.7% at the end of June. Favorable yields amid high global liquidity and signs of domestic economic recovery supported the bond market's appeal to foreign investors. The increase in Malaysian government bonds' weight in the Government Bond Index-Emerging Markets Global Diversified Index as well as the decision to keep Malaysia's bonds in the FTSE Russell World Government Bond Index, with another review to follow in March 2021, has also lent a boost to demand. Malaysia has the second-largest share of foreign-held government bonds in the region.
Foreign ownership of government bonds in Indonesia and in the Philippines further declined in Q3 2020. Indonesia reached a share of 27.0% at the end of September, a record low dating to June 2012, over concerns about Indonesia's debt monetization plan. The share of offshore holdings has fallen about 10 percentage points from the start of the year. Foreign investor sentiment toward the local bond market remained weak in Q3 2020 as evidenced by low to negative monthly fund flows. The massive borrowings by the government to fund its pandemic response were mainly absorbed by domestic investors, resulting in the slide in the share of foreign holdings. Despite the decline, Indonesia continued to have the highest foreign holdings share in the region. In the Philippines, foreign ownership of government bonds dropped to its lowest level since data are available, falling to 1.5% at the end of September from 1.9% at the end of June. While foreign funds returned to the government bond market in September, the inflow was merely enough to have a small offsetting impact on past outflows. Domestic investors are the main participants in the local government bond market expansion.
Foreign participation in Thailand's government bond market has not fully recovered from the initial impact of the COVID-19 pandemic. The decline in the share of debt paper held by foreign investors continued to decline in By segment, Singapore had the highest government bonds-to-GDP share in the region at 66.0%, while the Republic of Korea had the largest corporate bonds-to-GDP share at 83.5%. Viet Nam had the lowest government bonds-to-GDP share at 20.5%, while Indonesia had the lowest corporate bonds-to-GDP share at 2.8%.

Foreign Investor Holdings
The foreign holdings share of LCY government bonds declined in most markets in Q3 2020.
The foreign investor holdings share at the end of Q3 2020 was lower than at the end of Q2 2020 in Indonesia, Thailand, the Philippines, and Viet Nam, while it increased in the PRC and Malaysia ( Figure 2). Lingering uncertainty and risk surrounding the COVID-19 pandemic weighed down foreign investor sentiment, negatively impacting investment in most markets in the region.
Foreign investors continued to increase their holdings of the PRC's government bonds. The share of foreign holdings increased to 9.4% at the end of September from 9.1% at the end of June. Government bonds in the PRC have higher returns compared to advanced economies such as the United States (US) and Japan, resulting in sustained foreign interest in the domestic bond market. The stability of the Chinese yuan is also a factor in the Q3 2020, as increases in debt were largely absorbed by domestic investors. The foreign holdings share was down to 14.0% at the end of September, its lowest level since December 2016, even as monthly fund flows have been positive since June.
In Viet Nam, the share of foreign ownership was practically unchanged in Q3 2020, remaining at 0.6% at the end of September. The foreign holdings share in Viet Nam is the smallest in the region.
The uptrend in the foreign holdings share in the Republic of Korea's government bond held through the end of June. Foreign investors held 13.0% of Korean government bonds, up from 12.8% at the end of March and the highest level of foreign ownership share since data are available. The appeal of government bonds is owed to high returns as well as sound fiscal and financial conditions in the economy.

Foreign Bond Flows
Foreign buying of government bonds was sustained in most emerging East Asian markets in Q3 2020.
Inflows of foreign funds into government bond markets continued in Q3 2020 in most emerging East Asian economies after rebounding in Q2 2020 ( Figure 3). This resulted in total net inflows of USD29.9 billion in the region during the quarter. Ample global liquidity, highyielding government debt, and some signs of recovery among emerging East Asian economies amid progress in COVID-19 containment measures were the key factors driving the positive flows. The highest monthly net inflows in the region during Q3 2020 were recorded in July, amounting to an aggregate of USD11.7 billion, with only the Philippines experiencing outflows. Foreign buying, however, decelerated in succeeding months, registering only USD7.9 billion in aggregate net inflows in September, with Indonesia and the Republic of Korea registering outflows.
The PRC attracted USD23.3 billion in foreign funds in Q3 2020, its highest quarterly inflow total to date. Its largest monthly inflows during the quarter occurred in August with USD9.0 billion. Attractive yields, initiatives to open up its financial markets to international investors, and the PRC bond market's inclusion in investing indexes have fueled foreign participation in the LCY debt market. The PRC had the highest fund inflows among all emerging East Asian economies during the quarter.
In the Republic of Korea, cumulative net inflows amounted to USD2.7 billion in Q3 2020, which was partially offset by the foreign sell-off in September. The fund outflows in September, amounting to USD26.5 million, were the first since the start of the year. Profit-taking by investors, following 8 months of foreign buying, mainly caused the outflows.
Overseas investors continued to pour funds into the Malaysian and Thai government debt markets in Q3 2020. Malaysia received total inflows of USD2.9 billion during the quarter, with the bulk occurring in July before slowing in August and September. In Thailand, total inflows amounted to USD1.4 billion during the quarter with the highest monthly total occurring in September at USD0.8 billion. Relatively higher returns in these markets, especially as real interest rates were pushed higher by deflation, drove the continued foreign buying.  Indonesia saw foreign fund outflows in Q3 2020 as concerns about the struggle to contain COVID-19 persisted. Indonesia had total net outflows of USD0.3 billion during the quarter due to fund withdrawals in August and September that offset the foreign buying in July. Investor concerns about a potential weakening of Bank Indonesia's independence also sparked the capital outflows. In September, Indonesia's parliament received a recommendation to give government ministers voting rights at monetary policy meetings and to allow the central banks to fund fiscal deficits.
In the Philippines, net foreign funds outflow amounted to USD0.3 billion in Q3 2020, an improvement from the previous quarter's USD2.0 billion withdrawals. Foreign investors sold Philippine government bonds from March to August. In the months of Q3 2020, outflows in July amounted to USD0.2 billion, tapering off in August to USD92.0 million, before registering inflows of USD46.9 million in September. This improvement was likely brought about by some optimism with the gradual reopening of the economy and progress in COVID-19 containment as evidenced by declining daily cases.

Local Currency Bond Issuance
Total LCY bond sales in emerging East Asia climbed to USD2.2 trillion in Q3 2020, as governments borrowed to support large-scale stimulus programs.
LCY bond issuance in emerging East Asian markets continued to expand in Q3 2020, buoyed by governments seeking to fund large-scale stimulus programs and recovery measures amid the COVID-19 outbreak. Total bond sales reached USD2.2 trillion in Q3 2020 on a 6.4% q-o-q expansion ( Table 3). Growth, however, moderated due to a high base effect following the 21.5% q-o-q issuance hike posted in the preceding quarter. Issuance in Q3 2020 was largely driven by higher sales of Treasury instruments and other government bonds. Central bank issuance also contributed to the growth but to a much lower extent. In contrast, the volume of issuance by corporates fell short of the previous quarter's volume. Seven out of nine emerging East Asian bond markets posted a higher issuance volume in Q3 2020 than in the previous quarter, with the Republic of Korea and Malaysia as the exceptions. Both markets recorded q-o-q declines in issuance in Q3 2020 vis-à-vis Q2 2020.
On an annual basis, issuance growth expanded at a faster pace of 39.8% y-o-y in Q3 2020 compared with 32.5% y-o-y in Q2 2020. Except for Viet Nam, all regional bond markets recorded y-o-y increases in bond issuance in Q3 2020. Viet Nam was the sole market that posted a y-o-y contraction in issuance.
Government bonds continued to account for a larger share of issuance than corporate bonds, representing 61.2% of the region's issuance total during the quarter, up from the previous quarter's 58.5%. In Q3 2020, LCY government bond issuance totaled USD1,374.1 billion on growth of 11.4% q-o-q and 51.8% y-o-y. Driving much of the growth in government bond issuance was Treasury instruments and other government bonds, which comprised 75.2% of the total government bond issuance during the quarter. The markets of the PRC, Indonesia, the Philippines, Thailand, and Viet Nam saw q-o-q increases in their issuance of Treasury and other government bonds during the quarter. On the other hand, lower issuance volumes of Treasury and other government bonds were observed in Hong Kong, China; the Republic of Korea; and Malaysia. Singapore maintained the same volume of issuance in Q3 2020 compared with the previous quarter.
Central bank issuance recovered in Q3 2020, with growth rising 8.2% q-o-q after contracting 1.4% q-o-q in Q2 2020. Most of the region's central banks increased their issuance in Q3 2020, particularly in Hong Kong, China; Indonesia; the Philippines; Singapore; and Thailand. On the other hand, the Bank of Korea and Bank Negara Malaysia reduced their issuance, while the State Bank of Vietnam had no issuance.
In contrast, corporate bond issuance across the region declined a marginal 0.6% q-o-q to USD870.7 billion. On a y-o-y basis, however, corporate bond issuance grew 24.3% in Q3 2020, which was lower than the previous quarter's 38.8% rise. The PRC and the Republic of Korea, which are home to the region's first-and second-largest corporate bond markets, respectively, each recorded a low volume of issuance during the quarter. Corporates from Singapore and Viet Nam also had less issuance during the quarter.
The PRC continued to dominate LCY bond issuance in the region, constituting 70.1% of emerging East Asia's aggregate issuance volume in Q3 2020. Total bond sales reached USD1,573.5 billion in Q3 2020, of which Bond Market Developments in the Third Quarter of 2020 25  55.1% was government bonds and the remaining 44.9% was corporate bonds. Growth moderated to 6.9% q-o-q in Q3 2020 after surging 31.2% q-o-q in Q2 2020 as the government continued to stimulate the economy, leading to a high base effect. Government bond issuance drove much of the growth, particularly Treasury bonds and local government bonds, driven by government directives for increased spending to support fiscal policies and pursue projects that were derailed by the COVID-19 pandemic. The government also increased its quota of local government bonds by CNY1.6 trillion in 2020 compared to last year's and pushed local governments to tap the quota for issuing bonds in a bid to boost economic recovery. Local governments were also required to complete their 2020 issuances by October.
Corporate bond issuance posted marginal growth of 0.2% in Q3 2020 from 15.9% q-o-q in Q2 2020 due to rising interest rates. On an annual basis, the PRC's issuance activities quickened to 52.5% y-o-y in Q3 2020 from 48.2% y-o-y in Q2 2020.
LCY bond issuance in the Republic of Korea totaled USD189.2 billion in Q3 2020, down 11.5% q-o-q following a 4.0% q-o-q hike in the preceding quarter. All bond segments recorded declines in issuance during the quarter. Government bond issuance slowed by 14.5% q-o-q, but with the volume still relatively high, as the government sought to finance its supplemental budgets. Issuance of central bank instruments also dropped during the quarter, falling 10.5% q-o-q as the Bank of Korea added liquidity. For the third consecutive quarter, the volume of new corporate bond issuance decelerated, falling 8.9% q-o-q as corporates reconsidered their borrowing plans due to uncertainties in the economy. On a y-o-y basis, bond issuance moderated to 12.6% in Q3 2020 from 16.2% in Q2 2020.
In Hong Kong, China, bond issuance climbed to USD144.7 billion in Q3 2020 on growth of 5.2% q-o-q that followed a 1.4% q-o-q hike in the prior quarter.  quarter, rising 11.2% q-o-q following a decline of 0.4% in the previous quarter. Corporate bond issuance also recovered, rising 27.4% q-o-q in Q3 2020 after contracting 23.7% q-o-q in the previous quarter. LCY bond issuance in Thailand rebounded on growth of 23.4% y-o-y following a decline of 14.1% y-o-y in Q2 2020.

Issuance of Exchange Fund Bills and Exchange Fund
In Indonesia, LCY bond issuance remained active as issuance reached USD41.4 billion in Q3 2020, with growth accelerating to 44.3% q-o-q from 37.5% q-o-q in Q2 2020. Growth was boosted by increased issuance of Treasury instruments as the government expedited fiscal spending to pump-prime the economy in response to the adverse impact of the COVID-19 pandemic. Issuance of central bank bills also climbed during the quarter, rising 17.9% q-o-q. Corporate bond sales were quite active during the quarter, as issuance rose more than four-fold in Q3 2020. On a y-o-y basis, issuance volume slightly dipped to 78.5% from 79.4% in Q2 2020.
LCY bond sales in Malaysia totaled USD21.6 billion in Q3 2020 on a 4.5% q-o-q contraction. The decline in issuance stemmed from lower bond sales of Treasury instruments and the absence of Bank Negara Malaysia issuance during the quarter. On the other hand, corporate bond issuance climbed 12.1% q-o-q in Q3 2020 after declining 15.7% q-o-q in the preceding quarter. On a y-o-y basis, bond issuance grew 6.3% in Q3 2020 following a 16.7% contraction in Q2 2020.
In the Philippines, LCY bond sales nearly doubled to reach USD25.4 billion in Q3 2020. Overall growth soared 77.0% q-o-q after a decline of 19.6% q-o-q in the prior quarter. Government bond issuance grew 65.4% q-o-q on the back of a 57.9% q-o-q hike in the issuance of Treasury instruments and the resumption of issuance of central bank bills by the Bangko Sentral ng Pilipinas (BSP). Q3 2020 marked the first issuance of central banks bills by the BSP since the 1980s. Beginning on 18 September, the BSP issued central bank bills once a week as part of efforts to expand its monetary policy tools. Corporate bond issuance during the quarter also rebounded strongly, as issuance climbed more than four-fold. On an annual basis, bond issuance growth surged to 254.0% y-o-y in Q3 2020 from 58.6% y-o-y in the prior quarter.
LCY bond issuance in Viet Nam hit USD7.9 billion in Q3 2020, owing to a 34.3% q-o-q rise after a decline of 25.2% q-o-q in Q2 2020. The increase was dominated Notes picked up during the quarter, rebounding to expand 10.0% q-o-q after contracting 1.5% q-o-q in Q2 2020 due to the Hong Kong Monetary Authority's decision in the earlier quarter to reduce issuance to increase liquidity. On the other hand, the issuance of Hong Kong Special Administrative Region Bonds declined in Q3 2020. Meanwhile, corporate bond sales contracted 8.2% q-o-q in Q3 2020 following growth of 9.8% q-o-q in Q2 2020. On a y-o-y basis, LCY bond issuance surged 9.8% in Q3 2020, up from 2.2% in Q2 2020.
Total bonds sales from ASEAN economies tallied USD337.4 billion in Q3 2020, with the share of the regional total climbing to 15.0%. Aggregate bond issuance swelled to 17.5% q-o-q and 23.5% y-o-y in Q3 2020 from 4.8% q-o-q and 2.1% y-o-y in Q2 2020. Five out of six ASEAN economies for which data are available recorded q-o-q increases in bond issuance during the quarter, including Indonesia, the Philippines, Singapore, Thailand, and Viet Nam. The exception was Malaysia, which pared its issuance volume in Q3 2020 compared with the previous quarter. Among ASEAN economies, the largest issuers in Q3 2020 were Singapore, Thailand, and Indonesia.
LCY bond issuance from Singapore summed to USD147.7 billion in Q3 2020, with growth inching up to 6.8% q-o-q from 6.2% q-o-q in Q2 2020. The hike stemmed from an increase in the issuance of government bonds, while corporate bond issuance contracted during the quarter. Government bond issuance edged higher on growth of 7.5% q-o-q, driven largely by the 9.3% q-o-q hike in the issuance of Monetary Authority of Singapore bills. The volume of issuance of Singapore Government Securities bills and bonds was unchanged from the previous quarter. Corporate bond issuance during the quarter weakened 16.1% q-o-q following a 50.8% q-o-q expansion in Q2 2020. On an annual basis, LCY bond issuance in Singapore slipped to 18.1% y-o-y from 19.9% y-o-y in Q2 2020.
Thailand saw total bond sales in Q3 2020 of USD93.3 billion, as growth accelerated 20.9% q-o-q from only 3.1% q-o-q in Q2 2020. Much of the q-o-q expansion stemmed from increased issuance volume by the government, particularly Treasury and other government bonds. Treasury bond issuance surged 67.1% q-o-q as the government aimed to boost economic growth through increased fiscal spending. New issuance of central bank instruments also rebounded during the by a 116.2% q-o-q gain in Treasury bond issuance, as the government sought funding for its stimulus programs. In addition, the State Bank of Vietnam has not issued central bank bills for the past 2 quarters to help maintain liquidity. In contrast, corporate bonds issuance fell 19.3% q-o-q in Q3 2020. On a yearly basis, Viet Nam's LCY bond issuance contracted 63.7% y-o-y in Q3 2020, which was slightly better than the 75.0% y-o-y contraction in Q2 2020.

Cross-Border Bond Issuance
Cross-border bond issuance in emerging East Asia reached USD1.8 billion in Q3 2020.
Intraregional bond issuance in emerging East Asia reached USD1.8 billion in Q3 2020, a 39.7% q-o-q decline from the USD3.0 billion raised in Q2 2020, and amounted to only half of the aggregate issuance in Q3 2019. The decline was primarily due to tepid cross-border issuance from the PRC, whose share of the region's aggregate issuance volume plunged to 21.4% in Q3 2020 from 56.6% in Q2 2020. Hong Kong, China had the highest share in Q3 2020 at 39.4% ( Figure 4). Bond Market Developments in the Third Quarter of 2020 29 5 G3 currency bonds are denominated in either euros, Japanese yen, or US dollars. USD31.6 million. In Singapore, Nomura International Fund issued 5-year CNY-denominated bonds worth USD10.0 million.
The top 10 issuers of cross-border bonds in the region had an aggregate issuance volume of USD1.7 billion in Q3 2020 and accounted for 91.6% of the regional total.
Half of the list comprised firms from Hong Kong, China, which issued a total of USD684.7 million. The PRC's China Construction Bank was the largest issuer in the region at USD366.2 million, followed by Malayan Banking at USD195.1 million. The remaining firms on the top 10 list were from the Republic of Korea and had an aggregate issuance volume of USD416.4 million.
The Chinese yuan was the predominant currency of cross-border bonds in emerging East Asia in Q3 2020, surpassing the Hong Kong dollar, with a total of USD1.2 billion and a share of 63.5% of the regional total ( Figure 5). Firms that issued in this currency were from Hong Kong, China; the Republic of Korea; Malaysia; and Singapore. The second-most widely used currency in Q3 2020 was the Singapore dollar with a total of USD395.5 million and share of 21.8%. Other cross-border issuance currencies included the Hong Kong dollar (USD236.3 million, 13.0%) and the Thai baht (USD31.6 million, 1.7%).

G3 Currency Issuance
Total G3 currency bond issuance in emerging East Asia amounted to USD288.7 billion in January-September.
The value of G3 currency bonds issued in emerging East Asia from January to September totaled USD288.7 billion, an increase of 12.3% y-o-y from USD257.1 billion in the same period in 2019 ( Table 4). 5 The expansion was driven by higher G3 issuance volumes in all of the region's economies compared with a year earlier, except in Viet Nam, which did not issue any G3 bonds during the review period.
Of all G3 currency bonds issued during the review period, a total of 93.0% was denominated in US dollars, 6.3% in euros, and 0.7% in Japanese yen. In January-September, a total of USD268.5 billion worth of bonds denominated in US dollars was issued in emerging East Asia, representing a jump of 12.4% y-o-y. The equivalent of USD18.2 billion of EUR-denominated bonds was issued during the review period, an increase of 70.0% y-o-y, as more economies issued such bonds. Bonds issued in Japanese yen totaled USD2.0 billion, a decline of 73.3% y-o-y from a high base that was largely driven by Malaysia's samurai bond issuance in March 2019. In addition, most of the region's economies opted not to issue in Japanese yen during the review period.
The PRC continued to dominate the region's issuance of G3 currency bonds, totaling USD171.9 billion during the January-September period, mainly supported by issuances in US dollars. This was followed by Hong Kong, China with USD27.1 billion and Indonesia with USD24.3 billion, both issuing mainly in US dollars as well.
In the first 9 months of 2020, G3 currency bond issuance increased on a y-o-y basis in the Philippines (115.2%); Thailand (55.0%); Indonesia (54.4%); Malaysia (40.1%); Singapore (16.1%); the Republic of Korea (7.7%); the PRC (4.5%); and Hong Kong, China (3.9%). Cambodia issued G3 currency bonds during the January-September period after not issuing any during the same period in 2019. On the other hand, Viet Nam chose not to issue any G3 currency bonds in January-September 2020 after issuing during the same period in 2019.   Filinvest Development offered a USD-denominated 5-year bond, proceeds from which will be used to refinance debt obligations and invest in green projects and information technology infrastructure.
Singapore's share of G3 currency bond issuance in emerging East Asia was 3.3% in January-September, comprising USD9.5 billion in US dollars and the equivalent of USD0.1 billion in euros. Oversea-Chinese Banking Corporation increased its USD-denominated bonds outstanding in August and September after issuing two bonds with tenors of 4 years and 10 years. In September, commercial aircraft sales and leasing company BOC Aviation raised USD0.8 billion from a 10-year callable bond denominated in US dollars. The issuance was drawn from its global medium-term note program.
During the January-September period, 1.5% of all G3 currency bonds issued in the region were from Thailand, comprising USD3.9 billion worth of bonds denominated in US dollars and USD0.5 billion in euros. In September, Bangkok Bank (Hong Kong, China) issued a USD-denominated perpetual callable bond. The issuance will be part of the bank's Basel III additional Tier 1 capital.
Cambodia issued USD0.4 billion worth of G3 currency bonds in July, contributing a 0.1% share of such bonds issued in the region during the review period. The USDdenominated bond issuance from casino and resort operator Nagacorp has a tenor of 4 years and a coupon rate of 7.95%. Proceeds from the issuance will be used to redeem part of the company's outstanding bonds. Figure 6 presents the monthly G3 currency issuance in emerging East Asia for the period September 2019 to September 2020. G3 issuance has been quite active since June of this year. However, a dip in issuance was observed in August, before spiking in September. The decline in August was mainly due to the drop in G3 currency bond issuances in Indonesia, the Republic of Korea, and the Philippines. On the other hand, September issuances jumped mainly due to significant increases from the PRC; Hong Kong, China; the Republic of Korea; and Singapore. August and September saw several issuances of bonds, with tenors ranging from 10 years to 40 years, as institutional investors sought longer-term bonds to match the duration of their long-term liabilities.

Government Bond Yield Curves
Government bond yield curves shifted down between 31 August and 30 October in most markets in emerging East Asia.
COVID-19 continued to weigh on market outlook between 31 August and 30 October, creating a highly uncertain economic outlook. In particular, rising COVID-19 cases, such as in the US and the euro area are placing pressure on the economic recovery. Additionally, uncertainties regarding the direction of the US economic policy and stimulus also dampened investor sentiment.
yields trended downwards, with the exception of the PRC, Singapore, and Thailand. The PRC's 2-year yield has consistently risen as its economy recovers after having successfully dealt with the COVID-19 epidemic (Figure 7a). Both Singapore and Thailand's 2-year yields rose as investors shunned shorter tenors, preferring longer ones (Figure 7b).
In contrast to the 2-year yield movements, 10-year yields climbed among a majority of markets. The steepest rise came from the PRC and the Philippines. The PRC's 10-year yield moved upward 16 basis points (bps) between 31 August and 30 October, on continued economic growth (Figure 8a). In contrast, continued investor uncertainty regarding the direction of the Philippine economy led to a jump of 17 bps in its 10-year yield (Figure 8b). Hong Kong, China's; the Republic of Korea's; and Malaysia's 10-year yields also rose, but the increases were marginal.
The largest decline in 10-year yields was seen in Viet Nam, with a 33-bps drop for the review period as its     central bank was the only one to reduce rates in October. Indonesia's 10-year yields also plunged, as investor interest returned in October, following the passage of an Omnibus Law, which provided easing regulations for businesses and labor.
Singapore's 10-year yield fell, the opposite of its 2-year yield, as the economy is expected to slow down into the fourth quarter as the resurgence of cases in other economies will cap external demand. Similarly, Thailand saw an increase in the 2-year yield but a drop in its 10-year yield, as concerns over debt oversupply dissipated. The government announced that it would only borrow THB1.47 trillion for the fiscal year beginning 1 October 2020, which is 11% lower than the preceding year.
Yield curves overall shifted downward for most markets in emerging East Asia, but the rationale for each market's movement was different ( Figure 9). The PRC, with the entire yield curve shifting upward, and Malaysia, whose yield curve movements were mixed, were the exceptions.
Viet Nam's entire yield curve shifted downward following the central bank's easing, while Indonesia's yield curve shifted downward for nearly all tenors amid renewed investor interest. Singapore's yield curve also shifted downward for most tenors over a lack of inflationary pressures and uncertainty over the global economic recovery. In the Republic of Korea, yields largely fell for most maturities amid fears of new wave of COVID-19 cases.
In the Philippines, yields at the shorter-end fell, but rose at the longer-end, due to higher investor risk aversion. In Thailand, yields rose at the shorter-end but fell at the longer end, buoyed by a recovery in bond inflows in October.
The 2-year versus 10-year yield spreads were mixed across the region ( Figure 10). The PRC, Indonesia, Singapore, Thailand, and Viet Nam showed a decline in the spread. All other emerging East Asian economies showed a rising yield spread during the review period.
While economic growth remains a concern, some economies' GDP recovered in Q3 2020. In the PRC, GDP growth accelerated to 4.9% y-o-y in Q3 2020 from 3.2% y-o-y in Q2 2020, reflecting steady but gradual recovery. Viet Nam's economy likewise recovered in Q3 2020, with GDP growth rising to 2.6% y-o-y from 0.4% y-o-y in the previous quarter, the only market in the region which consistently posted positive growth despite the COVID-19 pandemic. The remaining markets continued to post negative y-o-y growth rates in Q3 2020, but at a slower pace compared to the previous quarter. This includes Hong Kong, China (-3.5% from -9.0%); Indonesia (-3.5% from -5.3%); the Republic of Korea (-1.3% from -2.7%); Malaysia (-2.7% from -17.1%); the Philippines (-11.5% from -16.9%); and Thailand (6.4% from -12.1%).
The overall weak economic environment led to a decline in inflation in August and September in most emerging East Asian markets for which data are available. In particular, Hong Kong, China; Malaysia; and Thailand remained in deflationary territory during the review period, while Indonesia's inflation was stable ( Figure 11a).
The main exception to the regional trend was the Republic of Korea, which has experienced a steady rise in inflation since having moved out of deflation in June ( Figure 11b).
Despite declines in inflation, central banks in the region have largely held off on raising policy rates during the review period after having aggressively eased monetary policy in previous months. During the review period, the Philippines reduced rates by a cumulative 175 bps ( Figure 12a). In July, Bank Negara Malaysia and Bank Indonesia further reduced rates. The lone exception was Viet Nam, whose central bank reduced its policy rate on 1 October by 50 bps, for a cumulative rate reduction of 200 bps year-to-date through 30 October ( Figure 12b). Subsequently, both Bangko ng Sentral ng Pilipinas and Bank Indonesia implemented a surprise rate cut of 25 bps on 19 November.
The movement of corporate spreads was largely mixed across the region.
AAA-rated corporate versus government yield spreads fell in the PRC between 31 August and 15 October as the economy continued to recover from the impact of COVID-19. Corporate spreads also narrowed in Thailand during the review period. Yield spreads rose for longer tenors in Malaysia and shifted upward in the Republic of Korea (Figure 13a).
For lower-rated corporate bonds, spreads fell in both the PRC and Malaysia, while they rose in Thailand, and were unchanged in the Republic of Korea (Figure 13b).  -.

The Republic of Korea Announces New Fiscal Rules
On 5 October, the Government of the Republic of Korea announced new fiscal rules to address the rapid increase in national debt. Although the economy's fiscal soundness and debt ratios are still considered low compared to its similarly rated peers, the government aims to maintain its fiscal sustainability. One rule is to maintain the government-debt-to-GDP ratio below 60% and the consolidated fiscal balance deficit at 3% or less of GDP. Implementation is expected to take effect starting in 2025 after a transition period of 3 years.

FTSE Russell Keeps Malaysia in Its FTSE World Government Bond Index
On 24 September, FTSE Russell decided to keep Malaysia in its FTSE World Government Bond Index, but the economy remained on the data provider's FTSE Russell Fixed Income Watch List for possible exclusion. In its September 2020 fixed-income review, FTSE Russell acknowledged Bank Negara Malaysia's policy reforms to enhance secondary market bond liquidity and improve foreign exchange market structure. FTSE Russell will continue to monitor developments in the Malaysian bond market as Bank Negara Malaysia's policies take effect and assess whether these regulatory reforms translate into practical improvements for international participants.

Bangko Sentral ng Pilipinas Issues Central Bank Securities
The Bangko Sentral ng Pilipinas (BSP) started issuing BSP securities on 18 September as an additional instrument to manage liquidity in the financial system. According to the BSP, this initiative will help the central bank shift to more market-based monetary operations and support the implementation of monetary policy under the interest rate corridor framework. The addition of BSP securities to the supply of risk-free financial instruments in the banking system could help in the development of the local currency bond market. The BSP securities will be one of the monetary policy tools to mop up excess liquidity. Initial offerings will be small in volume and have shorter tenors but will eventually be scaled up and have longer maturities. The issuance of the securities is allowed under the New Central Bank Act that was signed in February 2019.

Financing a Sustainable Recovery
This special section discusses the importance of developing green and social finance in ensuring a sustainable recovery from the global recession triggered by the outbreak of coronavirus disease (COVID-19).
A global economy that is more resilient to shocks will help people around the world to live a better life.
Before the outbreak of COVID-19, emerging Asian economies were progressing in their pursuit of the United Nations Sustainable Development Goals through various policies. Climate change, which poses a longterm challenge to sustainable development, has hit the poor especially hard and could potentially push more than 100 million people back into poverty by 2030.
There is now plenty of evidence showing that negative environmental and social externalities have significant negative impacts on economic development. Box 5 reviews extant knowledge on how various environmental and social challenges can hamper economic growth.
The pandemic has sharply curtailed global economic growth and worsened social conditions worldwide. Furthermore, COVID-19 poses a disproportionately larger threat to poor and vulnerable groups such as low-income households and small and medium-sized enterprises. In many economies, the process of sustainable development has been disrupted by falling fiscal revenues and increased expenditures to contain COVID-19 and mitigate its negative economic impacts. Nevertheless, global policy makers are aware that pursuing a sustainable development path is important to prevent future shocks. With limited policy scope, mobilizing private financial resources for green and inclusive investments becomes vital to achieving a sustainable recovery.
The importance of environmental and social externalities is now widely acknowledged in financial markets. Amid the market turmoil caused by COVID-19 during the first quarter of 2020, environmental-and socialthemed financing instruments showed resilience and even outperformed conventional funds. As a result, more attention is being paid to financing that integrates social impacts such as social bonds, sustainable bonds, sustainable loans, and sustainability-linked bonds. Box 6 reviews the development of green and social finance during the COVID-19 pandemic.
While conventional wisdom may have once suggested that investors only care about financial returns and therefore do not consider environmental and social externalities, this is no longer the case. Box 7 reviews existing knowledge and outlines a few reasons why externalities matter, including lower systematic and idiosyncratic risks, client demands and fund flow concerns, hedging for climate-related risks, and social pressure.
In addition to investors, existing evidence shows that sustainable finance also benefits other stakeholders by delivering economic benefits in terms of rising shareholder value, lower funding costs, a broader investor base, innovation, and increased growth and employment. Box 8 summarizes the findings in the literature and details the positive economic impacts of green and social finance.
Financing a Sustainable Recovery 43

Box 5: Environmental and Social Externalities and Economic Growth and Development
Rapid population growth and economic development is upsetting the world's ecological balance. a Environmental degradation is evident in air, water, land, and noise pollution, as well as in the loss of natural habitat. Environmental deterioration has given rise to reproductive, mental health, and other public health problems. The 1997 Kyoto Protocol, which was succeeded by the Paris Agreement in 2016, required countries to make concrete commitments in the fight against global climate change. The agreements reflect a growing recognition that the international community must mitigate the disastrous effects of climate change and environmental destruction, including natural hazards and occurrences of infectious diseases, to achieve the United Nations (UN) Sustainable Development Goals (SDGs).
Rapid environmental pollution has been linked to climate change. It also directly affects health, as evident in rising morbidity and mortality rates. Many studies find evidence that air pollution leads to a deterioration of productivity and growth. Air pollution is a silent killer since the poisonous pollutants are invisible to the human eye. While most studies document outdoor air quality, the World Bank (2019) has also found that many people die from poor indoor air quality, especially in developing economies, where households are exposed to dirty fuels. A study of the People's Republic of China (PRC), the world's most populous country and a manufacturing powerhouse, show that a decline in air pollutants can translate into higher labor productivity. Fu, Viard, and Zhang (2017) estimate that reducing PM2.5 (sulfur dioxide) by 1% through methods other than lowering manufacturing output would generate annual productivity gains of CNY57,600 (110.5) for the average firm and CNY9.2 billion (17.6), or 0.06% (0.12%) of the PRC's gross domestic product (GDP), across all firms. b The effect of pollutants is not unidirectional. Ho, Oueghlissi, and el Ferktaji (2019) find that there is bidirectional causality between GDP and carbon dioxide emissions. This implies that either a virtuous or a vicious cycle can ensue between a country's environmental state and its economic growth. The negative externalities from polluted cities harm neighboring cities, where nearby cities that stand in the way of wind from a polluted city show increased pollution. In addition, air pollution can induce an exodus of highly skilled workers from urban areas who want to avoid such pollution, as the harmful effects of air pollution impair the productivity of the workforce and its quality of life (Fu, Viard, and Zhang 2017). Air pollution also harms mental health. As the average concentration of particulate matter increases, the probability that the exposed population will experience a deterioration of mental health also rises. Chen, Oliva, and Zhang (2018) estimated that, in the PRC, the annual increase in health expenditures resulting from air pollution totaled USD22.88 billion in 2014-2015.
Water pollution, which is known to affect ecosystems, agriculture, and health, is an important driver of economic growth. According to Damania et al. (2019), when the biological oxygen demand, an indicator of water pollution, exceeds 8 milligrams per liter then the annual GDP growth of downstream regions is reduced by 0.83 percentage points relative to a mean growth rate of 2.33% used in the study ( Figure B5). Access to water is important since shortages limit economic growth and job creation. The UN (2016) has estimated that about 50% of the world's workers are employed in eight key water-based and natural-resourcedependent industries. An improved water supply in Africa, for example, could generate an estimated economic return of about USD28.4 billion a year, or nearly 5% of the continent's GDP. There is also evidence that water quality exceeds the effect of water quantity on growth. El Khanji and Hudson (2016), using a panel of 177 economies covering the period continued on next page a This box was written by Cynthia Castillejos-Petalcorin (Senior Economics Officer) and Donghyun Park (Principal Economist) in the Economic Research and Regional Cooperation Department of the Asian Development Bank. b PM 2.5 is particulate matter (PM) that have a diameter of less than 2.5 micrometers that can be inhaled and cause serious health problems.  1960-2009, found out that the quality of water affected economic growth in both the short and long run to a greater degree than water quantity. Thus, the study suggests that improving water quality will also strengthen economic growth.
Social development can contribute to sustainable economic growth. Investment in areas such as education, sanitation, health care, gender equality, and affordable housing fosters social development, which in turn fosters economic development. An especially important contribution of social investment is that it promotes the type of inclusive growth that enables vulnerable groups to take part in and benefit from development.
Small and medium-sized enterprises (SMEs) comprise a vulnerable group that plays a vital role in economic development. In particular, SMEs are an engine of job creation and a catalyst for mobilizing local resources for rural development. The World Bank (2020) has estimated that formal SMEs contribute up to 40% of GDP in many emerging economies. SMEs also contribute to the achievement of the UN Sustainable Development Goals via income distribution and poverty alleviation. In Asia and the Pacific, SMEs have also greatly contributed to the growth of exports (Jabbour et al. 2020).
Another vulnerable group is women. Reducing gender inequality benefits social development and inclusive growth. Based on indicators of education performance in science, technology, engineering and mathematics, labor market activity, wages, and work-life balance, the European Institute for Gender Equality (2017) found that measures to improve gender equality would add about 10.5 million jobs and lift per capita GDP by 4%-10% in the European Union by 2050. In Asia and the Pacific, reducing barriers to female participation in the labor force would mitigate the negative economic impact of population aging on the region's economic growth (Asian Development Bank 2011). However, Kabeer and Natali (2013) found that while promoting gender equality fosters growth, there is no guarantee that economic growth will foster gender equality on its own in the absence of supportive measures such as promoting female education. Girls and women often suffer from unequal access to education, health care, finance, and technology, especially in developing economies.
Many economies have yet to tap the full potential of female participation in the workforce. A vast literature on gender inequality shows that female labor participation contributes tangibly to social development and inclusive growth. The United Nations Children's Fund (UNICEF) (2019) reported that 132 million school-aged girls are currently not in school, and about 14.95 million girls are married off as child brides. The economic cost of child marriage may be as high as USD1.7 billion in Niger relative to delaying the girls' marriage age to 20 (World Economic Forum 2018, World Bank 2019). Using industry-level data for a group of developing economies in the 1990s, Bertay, Dordevic, and Sever (2020) found that allocating female labor to more productive uses significantly boosts economic growth. As such, increased female labor participation is imperative and should be given high priority in the public policy agenda.
Poor sanitation and lack of access to affordable housing are social problems that reduce human well-being and social and economic development ( While a healthy and productive workforce is an important ingredient of sustainable and inclusive economic growth (UN 2019), COVID-19's persistent effects will impact the productivity of the workforce in many economies.
Encouragingly, many economies have begun to adopt sustainable and socially responsible practices. Economylevel evidence points to a significant and positive impact According to the United Nations Economic and Social Commission for Asia and the Pacific, developing Asia needs to invest USD1.5 trillion annually to achieve the United Nations (UN) Sustainable Development Goals by 2030. a The Asian Development Bank's climate-adjusted annual investment requirement over the same period is USD200 billion. b Public sector resources alone are insufficient to finance such huge investments. This means that the region must leverage and mobilize resources from the private sector to finance investments promoting green and inclusive economic growth that reduces poverty, benefits vulnerable groups, and decreases inequality.
Extant environment, social, and governance (ESG) debt instruments can be broadly classified into two major categories: bonds and loans. Widely used bond instruments include green bonds, social bonds, sustainability bonds, and sustainability-linked bonds. These are fixed-income products designed to fund investments that generate positive environmental and social outcomes. On the other hand, ESG-themed loans such as green loans and sustainabilitylinked loans (SLLs) are bank products that finance or refinance, in whole or in part, new and/or existing eligible projects with clear benefits to the environment and social sustainability.
Before the outbreak of the coronavirus disease (COVID-19), green and social financing was clearly on the rise, making it one of the most promising areas in development finance. c Green bonds were the forerunner of ESG bonds. The total global value of green bonds grew from USD1.5 billion to USD257.5 billion between 2007 and 2019. Green bonds comprised the largest category of ESG bond issuances in 2019, accounting for more than half (56%) of issuance in the sustainable debt market. Figure B6.1 shows the growth of global green bonds, which have gained traction in Asia and the Pacific, with the region now accounting for 12% of global green bonds. According to Climate Bonds Initiative (CBI) data, the issuance of green bonds in Asia and the Pacific reached USD33.1 billion in 2019. In Southeast Asia, which accounts for about 25% of the regional total, issuance nearly doubled to USD8.1 billion in 2019 from USD4.1 billion in 2018.
Amid the COVID-19 pandemic, a slowdown in the green bond market's expansion has been observed and attributed to investors' shifting appetite toward social and sustainability  bonds that address public health and economic inequalities. During the first half of 2020, global green bond issuance stood at USD91.8 billion, down about 22% from the same period in 2019. In Asia and the Pacific, the CBI noted that issuance in the second quarter (Q2) fell to its lowest level since the first quarter (Q1) of 2017, with January-June 2020 green bond issuance amounting to only USD10.7 billion. Despite the market downturn in 2020, green bonds have still held up better than investment-grade corporate credit. d Even as green bond issuance slows, the COVID-19 pandemic has heightened the need to support vulnerable groups and improve public health and sanitization, underscoring the urgent need for social and sustainability financing. There has been significant growth in social and sustainability bond issuance as sovereigns and corporates tap the debt market. Social bond issuance rose from a mere USD277 million in 2014 to USD20.0 billion in 2019, according to the CBI. In the first half of 2020, social bond issuance reached USD10.9 billion in Q1 2020 and then tripled to USD33.0 billion in Q2 2020. The relative importance of social bonds in ESG investing has clearly increased substantially in 2020 ( Figure B6.2).
Refinitiv estimates that the volume of sustainable bond issuance in January-June 2020 totaled USD194.5 billion, a 47% year-on-year increase from the same period in 2019. Issuance volume totaled USD63.6 billion in Q1 2020 before more than doubling to USD130.9 billion in Q2 2020. Consequently, Asia and the Pacific (including Japan) now accounts for 16% of the global sustainability bond market. Within the region, large social bond issuances, from both sovereigns and corporates, came from the Republic of Korea (USD9.5 billion), Japan (USD9.3 billion), the People's Republic of China (USD0.9 billion), India (USD0.5 billion), and the Philippines (USD0.4 billion). e A common use of the proceeds has been to extend loans to financially strapped small businesses and to finance development of coronavirus vaccines.
The issuance of sustainability bonds, whose proceeds are used for green and social projects, stood at USD46.0 billion in full-year 2019. With increased attention from investors, sustainability bond issuance volume exploded to USD56.7 billion during the first half of 2020, more than twice the amount issued in the first half of 2019. The number of issuances soared by 94% from the previous year, according to Refinitiv. Some of the largest issuances of sustainability bonds in Asia and the Pacific to date in 2020 include (i) Japan's Mitsubishi UFJ Financial Group issuance in September worth JPY150 billion (USD1.42 billion); (ii) the Government of Thailand's dual-tranche USD966 million bond issuance in September, the first of its kind among members of the Association of Southeast Asian Nations, which was three times oversubscribed; and (iii) a triple-tranche offer of USDdenominated bonds by the Government of Indonesia in June worth USD4.3 billion, including a USD1 billion bond with a 50-year tenor, a first in Indonesian history. f A sukuk (Islamic bond) variant of ESG-themed bonds was also issued by Indonesia in June 2020, raising another USD2.5 billion from a triple-tranche global sukuk that was 6.7 times oversubscribed. g The common theme of the aforementioned issuances is the financing of activities to help cope with the impact of the pandemic.
Interestingly, investors remain keen on pandemic-related bonds despite the risk associated with weaker global economic prospects. The interest perhaps reflects a growing awareness of sustainability in investment strategies and business practices. Moody's Investors Service revised its forecast for social and sustainability bond volumes to USD150 billion in 2020, up from its previous forecast of USD100 billion. h Similar trends have been observed for green and socialthemed loans. The demand for SLL products picked up in 2019, peaking in the fourth quarter, as this modality facilitates the entry of companies into sustainable financing. SLL lending volume jumped 89% from USD188.3 billion in 2018 to USD122 billion in 2019. i However, in the first half of 2020, sustainable lending fell to USD79.1 billion, slightly declining from the same period in 2019. During Q2 2020, a total of USD31.9 billion of SLL products was issued ( Figure B6.3).
Notwithstanding the strong demand for ESG blended bonds and loans, there are some concerns, especially as they relate to the lack of ESG ratings standardization. This should not impact the issuance of much-needed ESG financing, but rather could be a catalyst in fast-tracking efforts to harmonize and strengthen ESG ratings information. ESG financing is helping economies, in developing Asia and elsewhere, recover from the health and economic effects of the COVID-19 pandemic in an environmentally and socially sustainable way by influencing business conduct.
Finally, central banks can play a major role in supporting the development of green finance models and tools. They can also enforce policies on climate-related financial disclosure reporting. The UN has proposed a list of central bank interventions for financing development needs during the COVID-19 recovery period and beyond. These include extensions of swap lines and specific measures in monetary and financial policy frameworks that could integrate risks-including those related to sustainability, climate and environment, gender, and inequality-in financial supervision and regulation. j events, this buffering of goodwill from stakeholders will reduce negative judgement and sanctions, and reduce the loss of shareholder value. Empirical evidence shows that compared to firms following an E&S initiative, firms that do not have an E&S practice will face huge costs-which reduces capital expenditure and eventually affects their core business in the context of negative E&S incidents (Ho, Nguyen, and Vu 2020)-and experience greater reductions in firm value because of reputational damage (Aouadi and Marsat 2018). When corporates are involved in E&S scandals, investors face risk. Chen, Dong, and Lin (2020) have indicated that institutional investors can lower portfolio risk more by controlling negative externalities than by boosting positive externalities.
Third, E&S investment can be motivated by preferences and signaling for sustainability and social responsibility by various stakeholders such as managers, shareholders, clients, and society at large. Riedl and Smeets (2017) showed that both intrinsic social preference (without self-benefit) and social signaling (with self-benefit such as social image and reputation) of investors play important roles in investing in E&S assets, and investors forgo financial returns via sustainable and responsible mutual funds by bearing higher management fees and lower returns. Similarly, Białkowski and Starks (2016) found that flows into sustainable and responsible mutual funds show greater persistence than flows into conventional funds, as they are also driven by clients' nonfinancial considerations. Similarly, Ghoul and Karoui (2017) documented that fund flows are less sensitive to the performance of mutual funds that hold more assets with high social responsibility levels, which is driven by clients' nonfinancial utility. Social norms and pressures also motivate E&S investment. Dyck et al. (2019) showed that institutional investment has a causal impact on holding companies' E&S performance. This impact is more pronounced for investors committed to E&S activism and for foreign investors from countries with strong social norms.
Fourth, investing in E&S-themed assets can help manage portfolio risks during a transition to low-carbon investments. The Task Force on Climate-Related Financial Disclosures (2017) outlined key climate-related risks (transition risk and physical risk) and opportunities during a low-carbon transition that have financial implications for companies. b

Box 7: Why Environmental and Social Externalities Matter for Financial Markets
Green and social finance refers to investments that integrate environmental and social (E&S) impacts. It has become one of the fastest growing areas in development finance in recent years. a Green and social finance helps address E&S issues such as food security, renewable and clean energy, affordable and accessible housing, healthcare, quality jobs, environmental protection, and education, among others (Camilleri 2020). By allocating capital to socially responsible and environmentally sustainable projects, and pricing the risks of negative externalities, green and social finance can guide investments toward generating positive externalities for the natural environment and vulnerable groups.
The literature has discussed the different motivations of investors to avoid negative green and social externalities. First, E&S practice serves as insurance against systematic risk in the economy. Lins, Servaes, and Tamayo (2017) suggested that (i) corporates can build social capital via practicing social responsibility, and (ii) a high level of social capital strengthens the perception of trustworthiness and thus boosts trust among stakeholders. Lins, Servaes, and Tamayo (2017) found that social capital pays off during a crisis when overall confidence is low and the value of trust increases. Specifically, they document that, during a crisis, firms with a higher level of social responsibility show superior performance than their peers in terms of profitability, productivity, and fund-raising ability, as they are supported by stakeholders' commitment to help such as through credit lines and sales. Hence, investments with positive E&S externalities offer insurance benefits against systematic risk such as a financial crisis or a pandemic. Similarly, Albuquerque, Koskinen, and Zhang (2019) developed a model showing that firms with social responsibility policies have lower profit elasticity in response to aggregate shocks, resulting in less systematic risk and higher firm valuations. They document supportive empirical evidence for this prediction.
Second, E&S compliance helps hedge against negative corporate events and the idiosyncratic risks of firms. E&S practices serve as reputation capital that help cushion against shocks or future E&S negative incidents. Godfrey, Merrill, and Hansen (2009) found that businesses' voluntary actions to improve social conditions create moral capital that provides insurance-like benefits and gains positive attribution from stakeholders. Facing negative corporate a This box was written by Shu Tian (Economist) and Mai Lin Villaruel (Economics Officer) in the Economic Research and Regional Cooperation Department of the Asian Development Bank. b Transition risk includes policy and legal risks due to changes in regulations and litigation, technology risk due to creative destruction in green technology, market risk due to climate-related changes in market supply and demand, and reputation risk due to stakeholders' changing perceptions toward green development. Physical risk includes acute risk from disasters and chronic risk driven by climate change patterns. Opportunities include resource efficiency and energy sources to save costs, products and services with low-emission features, markets with new opportunities, and resilience to better respond to climate-related risks.

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Financing a Sustainable Recovery 51 Dafermos, Nikolaidi, and Galanis (2018) found that climate change will harm both the financial and nonfinancial sectors by weakening the economic fundamentals of firms, thereby leading to financial instability. Dikau and Volz (2020) indicated that climate-related risks challenge monetary and financial stability, which has led central banks to consider incorporating climate-related risks into their macroprudential policy framework to safeguard macro-financial stability. For example, climate change may adversely affect price stability by influencing food and energy prices, which indirectly affects core inflation (Volz 2017).
In recent years, climate-and social-related risks have attracted attention that may challenge financial stability and thus invite new macroprudential policies. The Bank for International Settlements (2019)  Green and social finance helps mobilize funding resources for investments with environmental and social impacts. a Aside from contributing to positive social externalities, it is important for policy makers, companies, investors, and various stakeholders to also understand the economic consequences of green and social finance. Such knowledge will facilitate policy making and increase market participation in green and social finance for sustainable development.
The literature has extensively discussed the economic impact of green and social finance from different aspects such as company value, cost of funding, employment, green innovation, and investor base. From the business and shareholder perspective, tapping green and social finance has positive impacts on firm value, and it therefore benefits shareholders. The literature has also documented that firms with superior social responsibility and environmental, social, and governance (ESG) performances have a lower cost of capital, a better credit rating, and improved financial performance (Goss andRoberts 2011, Chava 2014). Green and social finance provides direct funding for companies to make clean investments in climate change mitigation and adaptation, and signals a commitment to emissions reduction and sustainable production. With increasing awareness of social responsibility among the investor community, such signals generate positive feedback from financial markets, which benefits companies through higher firm values, lower funding costs, and a broadened investor base.
Evidence has shown that tapping green and social financing is related to higher firm values. Tang and Zhang (2020) showed that when companies announce a green bond issuance, their stocks witnessed an average 1.72% cumulative abnormal return over a 20-day event window and had about 7% more liquidity compared with matched firms. The authors attribute this favorable market reaction to positive signaling, better information transparency, greater investor attention, and an expanded investor base. Flammer (2020) also documented how positive stock market reactions to green bond issuance announcements are stronger for first-time green bond issuers and certified green bond issuers. Zhou and Cui (2019) found that companies' green bond issuances are associated with improved profitability such as return on invested capital, net profit margin on sales, and return on assets.
As a leading green and social finance instrument, the cost of green bonds has attracted extensive discussion. Green bonds are documented to generate similar or lower costs compared to matched conventional bonds (Ehlers and Packer 2017, Baker et al. 2018, Hachenberg and Schiereck 2018, and Zerbib 2019. A strong environmental commitment-as evidenced by green labels, green bond certification, and independent verification-also generates significant cost advantages for green bond issuers. Such issuers benefit from a yield reduction of 8 basis points compared to conventional bonds (Gianfrate and Peri 2019) and 6 basis points relative to peer green bonds (Hyun, Park, and Tian 2020). One key driver for the yield benefit on green bonds is the high demand for green bonds given their limited supply. b The Climate Bonds Initiative has frequently reported oversubscriptions for new green bond offerings in its series of market monitoring reports, indicating prevailing investor perceptions of excess demand for green bonds relative to supply.
The cost convenience of green bonds also holds when compared to bank loans. Alonso-Conde and Rojo-Suárez (2020) evaluated the impacts of green bonds versus conventional bank loan financing on the profitability of an environmentally friendly project. They found that investments financed by green bonds earn a higher internal rate of return for shareholders, which was driven by the lower financing costs of green bonds relative to bank loans. They argue that green finance provides economic and financial incentives for shareholders of green projects and helps align shareholders' objectives with the United Nations Sustainable Development Goals.
In addition to higher firm values and lower costs, tapping green and social financing has been shown to broaden the issuer base and attract new types of investors such as ethical investors and socially responsible investment funds. Giudice (2017) summarized a number of studies conducted by major investment banks and found that around 89% of all investors expressed an interest in or are familiar with sustainable investments, and 65% of them are already conducting sustainable investing. Rising awareness of sustainable investments enables the broadening of the investor base as companies signal their environmental and social commitment by tapping social and green finance. Empirical evidence indicates that green bond issuances help sovereigns and corporates attract new investors and that these green bond investors have a long-term investment horizon. By issuing green bonds, companies see increased bond ownership among long-term and ethical investors (Flammer 2020). From the investor perspective, instruments that feature environmental and social impacts not only deliver positive externalities but also offer greater resilience during shocks and help hedge against systematic risk, idiosyncratic risk, and climate-change-related risk. Nemoto and Lian (2020) showed that Japanese firms with higher corporate social responsibility rankings demonstrated greater resilience amid market turmoil in the first quarter of 2020 resulting from the coronavirus disease (COVID-19) outbreak. Amundi (2020) found that during the market sell-off in March 2020, ESGthemed funds showed greater resilience than conventional funds, with 62% of large ESG funds outperforming the MSCI World Index.
In addition, investing in green-and social-themed instruments helps investors to meet client demand and preferences for sustainability and responsibility. During the past decade, increasing awareness of climate change has directed more funding into many sustainability-themed sectors, such as clean energy, green building, sustainable transport, energy efficiency, pollution prevention, climate adaptation, and sustainable agriculture (Lee, Thwing-Eastman, and Marshall 2020). Such awareness among stakeholders has also directed investors, especially institutional investors, to invest in environmental initiatives. Recent developments in the green and social finance market-such as international standards, principles, and independent certifiers-has strengthened investor confidence in terms of reputation risk.
Green and social finance also provides funding to support a low-carbon transition. Policy makers face complex decisionmaking scenarios in which some sectors will be negatively affected during the redistribution of investment toward a low-carbon economy. Evidence shows that green and social finance contributes to economic development by directing investment toward high value-added sectors. Glomsrød andTaoyuan (2016, 2018) found that green finance (i.e., labeled green bonds) can help shift investment from coal industries to other high value-added industries, which will increase future savings and investment, and lead to a 1.6% increase in gross domestic product among sample economies. The reallocation of investment via green finance also leads to a 2%-4% lower rate of return on capital, as well as income redistribution since income is shifted from investors to wage earners. The income redistribution also contributes to demand and gross domestic product growth.
Employment is a key factor to consider as the energy sector experiences low-carbon reform. Renewable energies are widely recognized for their potential for green job creation, given their less capital-intensive and more labor-intensive business nature. Ram, Aghahosseini, and Breyer (2020) argue that renewable technologies can create jobs during the low-carbon transition. Under the assumption that the world's electricity generation will be entirely from renewable sources by 2050, they project that the number of jobs directly related to energy will be 35 million globally, or 1.5 times as high as the 2015 level of around 21 million jobs, with solar photovoltaic replacing coal as the leading job-creating technology in the electricity sector and accounting for around 64% of total jobs in the sector by 2050. Green finance through the direct funding of low-carbon investments will contribute to employment and local economic development. Using both computable general equilibrium and input-output models, Perrier and Quirion (2018) find that shifting investment toward low-carbon sectors yields jobs if the investment is directed to sectors with relatively lower wages and a higher share of labor in value added. They suggest that a double dividend (employment and environmental) can be achieved by encouraging the development of low-carbon, laborintensive sectors.
Another important issue that matters for economic development is innovation. Green and social finance can provide funding to facilitate innovation in green technologies. For example, Zhou and Cui (2019) showed that green bond issuance is positively associated with the innovation capacity of companies, as evidenced by year-on-year growth in total research and development expenses, and in research and development expenses as a share of total operational income. Green innovation has also been found to be positively related to firms' profitability (Aguilera-Caracuel and Ortiz-De-Mandojana 2013).
Green and social finance can facilitate the transition to an environmentally friendly and inclusive future. Besides the positive externalities it delivers, green and social finance can also provide the world with economic benefits. However, given the huge amount of funding needed to meet the pledged climate change targets, the size of green and social finance remains relatively small. Action is needed to develop the market and mobilize more resources to address social and environmental challenges. Bank Efficiency and Bond Markets: Evidence from Asia and the Pacific Financial intermediation promotes economic growth, creating liquidity and extending credit to facilitate resource allocation and risk sharing. 7 The efficiency of the banking sector is a major concern of regulators and policy makers, and it remains a topical issue in the literature. While most existing empirical studies focus on various factors that affect bank profit and/or cost efficiency, this study adds to the literature by examining how bond market development is related to bank profit and cost efficiency.
Banks are an indirect financing channel that primarily provide credit to the private sector, while bond markets serve as a direct financing channel that provide credit to both the public and private sectors. Bond market development can affect bank efficiency in many aspects. First, bond markets compete with the banking sector not only for loans but also for deposits. Government bonds serve as an alternative risk-free investment vehicle for depositors; therefore, banks need to increase deposit rates to attract more funding. Meanwhile, corporate bond markets provide an alternative source of financing for the private sector, which becomes a potential competitor of banks. Firms with the highest credit quality have the option to tap bond markets for financing via corporate bond issuances. Hence, a large bond market will force banks to improve the efficiency of their asset allocation to maintain profitability and challenge banks' cost efficiency given possible higher funding costs. Second, bond markets offer more investment instruments for banks' asset portfolios. Banks can invest in government bonds and high-rated corporate bonds, thus better managing the liquidity and credit quality of their asset portfolios, albeit at the cost of lower returns. Third, banks can issue corporate bonds to obtain stable financing with the desired maturity, which can mitigate the duration gap between assets and liabilities on banks' balance sheets, albeit with higher funding costs. Fourth, bond markets provide market-based benchmarking for banks to price their loans and deposits. Hence, bond market development affects banks' operation in terms of assets and liability management, as well as liquidity risk management.
While many developing economies' financial systems remain largely bank-centered, recent decades have seen the rapid development of capital markets. Thus, it is important to understand how bond market development is related to the profit and cost efficiencies of commercial banks. This study constructs a sample of commercial banks from 27 economies in Asia and the Pacific from 2004 to 2017 and considers how their efficiency is related to three bond market development indicators: (i) aggregated bond market size as a share of gross domestic product (GDP), (ii) government bond market size as share of GDP, and (iii) corporate bond market size as a share of GDP. In addition to bond market development, a number of other related variables are also considered in this study, including economic, bankingindustry, and bank-specific attributes such as GDP growth, inflation, income level, banking sector openness and regulation, bank size, and leverage ratio. This study utilizes parametric stochastic frontier analysis to estimate bank efficiency. This technique provides unbiased systematic estimates for an unbalanced panel data sample during which bank efficiency can be influenced by country-specific and bank-specific factors, and thus is widely used in cross-economy studies. The dependent variable is bank profit or cost inefficiency; thus, the negative sign of a coefficient will indicate that the variable has a positive impact on bank profit or cost efficiency.
The empirical results are presented in two parts. The first is the effect of overall bond market development. The development of all three bond market types Bank Efficiency and Bond Markets: Evidence from Asia and the Pacific 57 (i.e., aggregate, corporate, and government) has a positive effect on bank profit efficiency but a negative effect on bank cost efficiency. The results are robust when control variables are introduced. The effect is persistently significant for the total bond market and the government bond market, but not for the corporate bond market. The results indicate that banks are generally more profitefficient, but less cost-efficient, in an economy with a relatively more developed bond market (Figure 14). This finding confirms the competitor role of bond markets. When large clients can tap corporate bond markets for financing, banks are forced to lend to smaller clients by improving asset management skills and profitability. Meanwhile, a larger government bond market means deposit pricing is more market-based, which will increase banks' funding costs. In addition, when banks issue bonds to finance themselves, they also face higher costs. Thus, a developed bond market is associated with lower cost efficiency. Consistent with the relevant literature, the results show that banks are generally more efficient in economies with a higher degree of capital account openness, more constraints on cross-border investment, faster economic growth, a lower inflation rate, and higher income levels. As for bank attributes, larger banks are more profit-efficient but less cost-efficient, and a higher capital ratio reduces (increases) bank profit (cost) efficiency. Banking-industry specific characteristics have a mixed effect on bank efficiency. Less stringent banking entry requirements, higher asset concentration, greater supervisory independence and private monitoring power, and a higher rate of foreign ownership of banks all help to improve bank profit efficiency, while the impacts of these factors on bank cost efficiency are trivial.
The second part of the results looks beyond the level of bond market development and examines the impact of bond market structure on bank profit and cost efficiencies. The result shows that while total bond market development has a positive and significant impact on bank profit efficiency, the share of corporate bonds to total bond market size has a positive but insignificant effect on bank profit efficiency ( Figure 15). Furthermore, a larger share of local currency (LCY) corporate bonds as share of total LCY bonds is found to significantly improve bank profit efficiency, while the positive and significant impact of total bond market size remains. The structure of the corporate bond market has a mixed effect on bank cost efficiency. The role of total bond market size on banks' cost efficiency remains insignificant, but a larger share of corporate bonds to total bonds shows a significant role in improving banks' cost efficiency. However, when LCY corporate bonds as a share of total LCY bonds is considered in the analysis, total bond market size showed a significant negative impact on bank cost efficiency.
Overall, we find that bond market development has important implications for the banking sector. Bond GDP = gross domestic product. Notes: The dependent variable is bank profit (cost) inefficiency. A negative impact indicates improved bank profit (cost) efficiency, while a positive impact indicates reduced bank profit (cost) efficiency. The ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively. Source: Authors' calculations.  -. -. -.

Profit Cost
Total bonds ( of GDP) Corporate bonds ( of total bonds) Local currency ( of total bonds) Corporate local currency ( of total currency bonds) ** ** ** ** *** markets serve as a competitor for bank depositors and borrowers, an investment asset pool with government bonds and corporate bonds as portfolio assets, and an alternative financing vehicle in the form of bank bond issuances. They also offer asset and liability pricing benchmarks. On the assets end, the competition and asset pool effects benefit banks with higher profit efficiency as banks improve asset allocation and build capacity to extend more loans to smaller clients that do not have access to capital markets that could increase returns on assets. Meanwhile, a larger bond market lowers banks' overall cost efficiency because government bonds compete for depositors and force banks to raise costs on deposits, and bank bond issuance also comes with higher costs than deposits. The structure of the bond market also matters to bank efficiency as government bonds and corporate bonds have different implications for banks.
The findings of this paper have important policy implications for economies with a very low level of bond market development, or those without a functioning bond market, and for economies with a high level of bond market development but an unbalanced bond market structure. The bond market works like a double-edged sword for bank management. On the asset side, banks can invest in the corporate bond market to diversify risk in their asset portfolios, but they also face competition from the corporate bond market in that some clients will use direct financing from the bond market. On the liability side, banks may obtain stable funding from the corporate bond market, but they need to pay higher financing costs as government bonds compete for deposits and lead to higher funding costs for bank bond financing. Policy makers need to ensure a wellfunctioning and balanced bond market to better finance economic growth and development.

Market Summaries
People's Republic of China

Yield Movements
The People's Republic of China's (PRC) yield curve for local currency (LCY) bonds shifted upward between 31 August and 30 October (Figure 1). The largest shift in yields was seen in the 3-month tenor, which rose 43 basis points (bps). Other tenors that showed a strong rise were the 1-year and 2-year tenors. The 2-year tenor rose 33 bps, while the 1-year tenor rose 22 bps. The other remaining tenors rose between 4 bps and 16 bps. As a result, the 2-year versus 10-year yield spread narrowed from 50 bps to 34 bps between 31 August and 30 October.
The PRC's yields rose as its economy continued to grow, following the successful containment of its coronavirus disease (COVID-19) outbreak. The PRC's gross domestic product (GDP) growth rate accelerated from 3.2% year-on-year (y-o-y) in the second quarter (Q2) of 2020 to 4.9% y-o-y in the third quarter (Q3) of 2020. Growth in all three major sectors of the PRC's economy accelerated in Q3 2020. The fastest y-o-y acceleration was in the tertiary sector (from 1.9% to 4.3%), followed by the secondary sector (from 4.7% to 6.0%). The primary sector's growth accelerated from 3.3% y-o-y to 3.9% y-o-y.
The PRC's industrial production growth momentum also continued. In September, industrial production growth rose to 6.9% y-o-y from 5.6% y-o-y in August. The PRC's industrial production was negative in Q1 2020 and had a growth rate of 3.9% in April. The PRC's inflation rate fell to 1.7% y-o-y in September from 2.4% y-o-y in August.
Government bonds. The PRC's government bond market growth accelerated in Q3 2020 to 6.6% q-o-q from 5.4% q-o-q in Q2 2020 as the central government continued to fund its fiscal stimulus programs. The growth rate of Treasury bonds outstanding sped up to 8.7% q-o-q from 5.5% q-o-q during the same period.
While local governments continued to issue special bonds and received a quota increase in 2020 of CNY1.6 trillion compared with 2019, growth slowed slightly to 6.1% q-o-q in Q3 2020 from 6.2% q-o-q in Q2 2020 due to a high base effect. Growth in policy bank bonds accelerated to 5.0% q-o-q from 4.2% q-o-q in the same period.
Corporate bonds. The PRC's corporate bond market's growth slowed to 3.2% q-o-q in Q3 2020 from 5.9% q-o-q in Q2 2020. The slowdown in growth was largely due to the increased cost of funding as interest rates rose.
Rising interest rates led to a decline in commercial paper outstanding of 4.6% q-o-q in Q3 2020 ( Table 2). Higher interest rates make the refinancing of shortterm commercial paper more expensive. Other types of   CNY5.9 trillion. China Railway, the top issuer, had more than three times the outstanding amount of bonds as the second-largest issuer, Agricultural Bank of China. The top 30 issuers included 16 banks, which continued to generate funding to strengthen their capital bases, improve liquidity, and lengthen their maturity profiles amid ongoing uncertainty resulting from the COVID-19 pandemic. Table 4 lists the largest corporate bond issuances in Q3 2020. The top issuers consisted largely of financial institutions as they sought to improve their capital bases and liquidity in light of the ongoing economic impact of COVID-19. corporate bonds outstanding showed a q-o-q increase, with listed corporate bonds growing the fastest.
Issuance of commercial paper declined in Q3 2020, leading to a decline in commercial paper outstanding. Issuance of medium-term notes also declined during the quarter ( Figure 2).
The PRC's LCY corporate bond market continued to be dominated by a few big issuers (

Investor Profile
Among the major government bond categories, banks were the single-largest holder at the end of September (Figure 3), with banks holding about 66% of Treasury bonds, 57% of policy bank bonds, and 57% of local government bonds. The share of banks in local government bonds was a significant drop from its previous share of 88% in the same period a year ago.

Liquidity
The volume of interest rate swaps rose 17.3% q-o-q in Q3 2020. The 7-day repurchase agreement remained the most used interest rate swap, comprising an 83.1% share of the total interest rate swap volume during the quarter (Table 5).

Policy, Institutional, and Regulatory Developments The People's Republic of China Eases Foreign Capital Entry Rules
In September, the PRC streamlined the existing regulations for the Renminbi Qualified Foreign Institutional Investor program and the Qualified Foreign Institutional Investor program. The new rules combined the two existing regulations into one and also made application requirements easier and simplified procedures. The new regulations took effect on 1 November.

The People's Republic of China Issues USD-Denominated Bonds
In October, the Government of the PRC issued USD6.0 billion worth of 3-year, 5-year, 10-year, and 30-year bonds. The bonds are the first USD-denominated bonds issued by the Government of the PRC since 1996 that are marketed to US investors under 144a Rules. The USD1.25 billion 3-year bond was issued with a coupon rate of 0.40%, while the USD2.25 billion 5-year bond was issued with a coupon rate of 0.55%. The USD2.0 billion 10-year bond was issued with a coupon rate of 1.2%, and the USD0.5 billion 30-year bond was issued with a coupon rate of 2.25%.

Yield Movements
Movements in Hong Kong, China's local currency (LCY) bond market yields were mixed between 31 August and 30 October (Figure 1). Yields fell at the shorter-end of the yield curve as bonds with maturities of 3 years or less shed an average of 6 basis points (bps). The 2-year tenor showed the largest drop at 12 bps. Yields rose at the longer-end of the curve, with the yield for the 10-year tenor inching up 1 bp, while the 15-year tenor gained 12 bps. The spread between the 2-year and 10-year tenors widened from 32 bps to 45 bps during the review period.
Heightened uncertainty, brought about by the lingering impact of the coronavirus disease (COVID-19) and exacerbated by political risks, led to the drop in yields at the shorter-end of the curve. The rise in yields at the longer-end of the curve reflected concerns about the debt burden implied by the rising cost of the government's relief efforts to boost the economy.
Declining yields also reflected the lingering weakness in Hong Kong, China's economy. Hong Kong, China's gross domestic product fell 3.5% year-on-year (y-o-y) in the third quarter (Q3) of 2020, a narrower decline than the 9.0% y-o-y contraction in the second quarter (Q2). The improvement stemmed mainly from increased exports, particularly to the People's Republic of China (PRC). Merchandise exports rose 3.9% y-o-y in Q3 2020, rebounding from the 2.2% y-o-y decline in the prior quarter. Although the economy is showing initial signs of improvement amid the PRC's recovery and the local containment of COVID-19, economic performance is still below its level prior to the recession. Unemployment reached a 16-year high of 6.4% in Q3 2020.
Demand for the Hong Kong dollar, fueled by high profile initial public offerings, continued to surge during the review period. High demand continued to push the Hong Kong dollar to the strong-side of its trading band against the US dollar, prompting repeated interventions from the Hong Kong Monetary Authority (HKMA). The HKMA's actions brought the aggregate balancean indicator of liquidity in the financial system-from HKD193.1 billion (USD24.9 billion) to a record high of HKD457.5 billion (USD59.0 billion) during the review period.
Hong Kong, China's consumer prices fell amid a deflationary stretch in Q3 2020. Consumer prices declined 2.2% y-o-y in September, following a 0.4% y-o-y dip in August and a 2.3% y-o-y contraction in July. The government's relief measures, which include waivers of public housing rents and weak demand due to the economic recession, drove deflationary pressures.
Uncertainty over the prolonged global pandemic, frictions between the PRC and the United States, and political risks continued to affect Hong Kong, China's economy and bond market.

Size and Composition
Hong Kong, China's LCY bonds outstanding amounted to HKD2,287.0 (USD295.1 billion) at the end of September, up from HKD2,267.6 billion at the end of June ( Table 1). The LCY bond market's quarter-onquarter (q-o-q) growth rose to 0.9% q-o-q in Q3 2020 from 0.5% q-o-q in Q2 2020, driven by a rebound in the government bond segment. On an annual basis, aggregate bonds outstanding increased 1.0% y-o-y in Q3 2020, reversing the 0.8% y-o-y contraction in the previous quarter. The share of government bonds to total LCY bonds outstanding slipped to 50.6% in Q3 2020 from 51.0% in Q2 2020.
Government bonds. At the end of September, LCY government bonds outstanding reached HKD1,157.6 billion, up slightly from HKD1,156.2 billion at the end of March. Although weak at 0.1% q-o-q, the growth of aggregate government bonds outstanding in Q3 2020 reversed the 1.1% q-o-q contraction in the prior quarter. Strong growth in outstanding Hong Kong Special Administrative Region Bonds was the main driver of the expanding government bonds stock. Outstanding Exchange Fund Bills (EFBs) and Exchange Fund Notes (EFNs) posted positive but weak growth in Q3 2020. On a y-o-y basis, outstanding LCY government bonds continued to contract, dropping 1.1% in Q3 2020 after a 0.7% decline in Q2 2020. All components of LCY government bonds outstanding showed a decline in y-o-y growth in Q3 2020.
Exchange Fund Bills. The outstanding stock of EFBs inched up to HKD1,042.3 billion at the end of September from HKD1,041.9 billion at the end of June. Although weak, the 0.03% q-o-q growth in Q3 2020 reversed the 1.7% q-o-q decline posted in the previous quarter. Issuance of EFBs amounted to HKD903.8 billion in Q3 2020, rising 10.0% q-o-q.
Exchange Fund Notes. Since 2015, the HKMA has limited its issuance of EFNs to 2-year tenors. In August, the HKMA issued a 2-year EFN worth HKD1.2 billion. Due to maturities during the quarter, the amount of outstanding EFNs remained steady in Q3 2020 at HKD25.8 billion. On a y-o-y basis, the outstanding stock of EFNs continued to contract, falling 9.2% in Q3 2020 after a 12.2% decline in the previous quarter.
Hong Kong Special Administrative Region Bonds. HKSAR Bonds outstanding rose 1.1% q-o-q to reach HKD89.5 billion at the end of September. The government issued a 15-year bond worth HKD1.0 billion in September under the Institutional Bond Issuance Programme. On a y-o-y basis, the 4.4% contraction in outstanding HKSAR Bonds in Q3 2020 extended the 4.5% decline posted in the prior quarter.
Corporate bonds. Corporate bonds outstanding expanded 1.6% q-o-q to reach HKD1,129.4 billion at the end of September. On a y-o-y basis, corporate bonds outstanding rose 3.2% in Q3 2020, rebounding from a 0.9% contraction in the previous quarter.
Hong Kong, China's top 30 nonbank issuers had a combined HKD256.0 billion of LCY bonds outstanding at the end of September, accounting for 22.5% of the total corporate bond market ( Table 2). Hong Kong Mortgage Corporation, Sun Hung Kai & Co., Hong Kong and China Gas Company, MRT, and Link Holdings maintained their positions as the top five issuers with outstanding LCY bonds outstanding of HKD40.7 billion, HKD18.6 billion, HKD16.1 billion, HKD13.0 billion, and HKD12.5 billion, respectively. The top 30 issuers were predominantly finance and real estate companies. Finance companies together accounted for a total of HKD105.5 billion of outstanding corporate bonds, while real estate firms had an aggregate corporate bonds stock of HKD58.0 billion. A majority of the top 30 nonbank issuers were listed on the Hong Kong Stock Exchange; only three were state-owned companies.
Corporate bond issuance totaled HKD215.2 billion at the end September, contracting 8.2% q-o-q amid weak business confidence due to economic and political uncertainties. Table 3 lists the notable corporate bond issuances in Q3 2020. Among the largest issuances   On 12 October, the HKMA announced that the countercyclical capital buffer (CCyB) would remain unchanged at 1.0%. The HKMA noted that the latest data based on Q2 2020 indicators signaled the need for a higher CCyB of 2.5%. However, the HKMA deemed that considering the high level of uncertainty facing the economy, holding the CCyB steady at 1.0% was more appropriate. A lower CCyB releases additional liquidity into the banking system by raising banks' lending capacity to support the economy. The CCyB is an integral part of the Basel III regulatory capital framework designed to increase the resilience of the banking sector in periods of excess credit growth.

Yield Movements
Local currency (LCY) government bond yields in Indonesia declined for most maturities between 31 August and 30 October (Figure 1). Yields for bonds with maturities of 4 years or less fell an average of 37 basis points (bps), while yields shed an average of 16 bps for maturities of 5 years or more. The exceptions to the declining trend in yields were the 7-year maturity, which gained by 7 bps, and the 3-year and 6-year bonds, which were unchanged during the review period. The 2-year versus 10-year spread narrowed from 219 bps on 31 August to 213 bps on 30 October.
The overall trend of declining yields was driven by expectations that Bank Indonesia would continue to maintain an easy monetary policy stance amid low inflation and a weak economic outlook. Bank Indonesia has kept its 7-day reverse repurchase rate steady at 4.00% since July. The policy rate had been lowered by a cumulative 100 bps year-to-date through the end of October. While there was still room to cut rates further, the central bank opted to utilize other monetary policy tools and macroprudential measures to ensure the stability of the Indonesian rupiah. In its meeting held on 12-13 October, Bank Indonesia's Board of Governors decided to hold its policy rate steady, while also keeping unchanged the deposit facility rate at 3.25% and the lending facility rate at 4.75%. At their current levels, the rates were deemed appropriate to ensure the rupiah's stability.
The coronavirus disease (COVID-19) outbreak in Indonesia has taken a toll on economic growth. A resurgence in the number of cases led the government to re-enforce social restrictions in September, further dampening investor sentiment in the bond market. This has led foreign investor holdings in the LCY government bond market to drop from 30.2% at the end of June to 27.0% at the end of September. In October however, investor interest picked up, leading to capital inflows for the first time since July, buoyed by the passage of the Omnibus Bill on Job Creation that is expected to improve investment climate in Indonesia.
Real gross domestic product (GDP) growth in the second quarter (Q2) of 2020 contracted 5.3% year-on-year

Time to maturity (years)
-Aug--Oct-(y-o-y) after a 3.0% y-o-y expansion in the first quarter. While economic recovery has slowly taken ground, gross domestic product growth in the third quarter (Q3) of 2020 weakened but at a slower pace. GDP declined 3.5% y-o-y in Q3 2020 compared with -5.3% y-o-y in Q2 2020. For full-year 2020, the Ministry of Finance revised downward its economic growth projection in September to between -0.6% and -1.7% from its previous estimate of between -0.2% and -1.1% in August.
Among emerging East Asian currencies, the Indonesian rupiah depreciated the most year-to-date through 30 October, falling 5.2% vis-à-vis the United States dollar.

Size and Composition
The LCY bond market in Indonesia continued to expand to reach a size of IDR3,940.6 trillion (USD264.8 billion) at the end of September ( Table 1). Overall growth accelerated to 9.9% quarter-on-quarter (q-o-q) in Q3 2020 after rising 7.8% q-o-q in Q2 2020. The faster growth stemmed largely from the expansion in government bonds, particularly Treasury bills and bonds, due to the government's increased borrowing needs to support its stimulus measures and recovery efforts amid the COVID-19 pandemic. Corporate bonds also contributed to growth, albeit to a lesser extent. On the other hand, the stock of central bank bills and bonds contracted during the review period. On a y-o-y basis, growth in the LCY bond market of Indonesia quickened to 22.4% in Q3 2020 from 16.8% in the previous quarter, making it the fastest-growing bond market in the region.
Government bonds continued to dominate the bond market, constituting nearly 90% of the entire stock of the Indonesian bond market at the end of September. About 11% of total bonds was accounted for by corporate bonds. The bulk of the aggregate bond stock comprised conventional bonds with a share of 82.6%. Sukuk (Islamic bonds) had a share of 17.4% at the end of the review period.
Government bonds. At the end of September, the stock of government bonds had expanded to a size of USD3,499.8 trillion. Growth accelerated to 10.9% q-o-q and 25.8% y-o-y amid increased issuance by the government. Driving growth was the increase in the stock of central government bonds, similar with the first 2 quarters of 2020.
Central government bonds. The outstanding stock of central government bonds totaled IDR3,461.4 trillion on double-digit growth of 11.4% q-o-q and 29.9% y-o-y in Q3 2020. This was up from the 9.6% q-o-q and 22.7% y-o-y expansions in Q2 2020. The uptick in size was due to active issuance by the government to fund stimulus and relief measures in its bid to shield the economy from further fallout due to the COVID-19 outbreak.
Total issuance of Treasury bills and Treasury bonds reached IDR445.5 trillion during the quarter. Issuance volume rose 45.7% q-o-q and 140.4% y-o-y. In addition to issuing in large sizes during the weekly Treasury auctions, the government also sold bonds through private placements of select government bonds. Issuance during the period also included government bond sales directly to Bank Indonesia, as part of their debt monetization agreement for this year. Also, the government sold conventional retail bonds and retail sukuk during the quarter, raising IDR18.3 trillion and IDR25.7 trillion, respectively. More active borrowing was necessitated by the need to fund large-scale stimulus and relief measures by the government.
Central bank bonds. At the end of September, the outstanding size of central bank bills and bonds reached IDR38.4 trillion. This represented a decline of 22.6% q-o-q in Q3 2020 following a 2.5% q-o-q hike in Q2 2020. On a y-o-y basis, the central bank bond stock declined 67.1% y-o-y in Q3 2020 after contracting 59.2% y-o-y in the preceding quarter. In Q3 2020, issuance of central bank bills and bonds summed to IDR133.2 trillion, up 17.9% q-o-q and 15.0% y-o-y.
Corporate bonds. The outstanding stock of corporate bonds totaled IDR440.7 trillion at the end of September, up 2.6% q-o-q in Q3 2020 following a decline of 3.0% q-o-q in the prior quarter. In the same period, corporate bonds grew a marginal 0.7% y-o-y after rising 70 Asia Bond Monitor 3.0% y-o-y. While issuance rebounded strongly in Q3 2020, maturities capped the overall bond total.
The 30 largest issuers of corporate bonds in Indonesia had aggregate bonds of IDR321.0 trillion at the end of September, up from IDR318.7 trillion at the end of June (Table 2). Collectively, the top 30 issuers accounted for a 74.7% share of the aggregate corporate bond stock at the end of the review period. Firms from the banking and financing industry continued to dominate the list of top 30 issuers. Other institutions were from highly capitalized industries such as energy, telecommunications, construction, and transportation. Out of the 30 firms on the list, 18 were state-owned firms and 16 institutions had their shares listed on the Indonesia Stock Exchange.
Remaining in the top spot was state-owned energy firm Perusahaan Listrik Negara, whose outstanding bonds climbed to IDR36.0 trillion due to a multitranche issuance in September. Keeping its ranking from the previous quarter in the second spot was Indonesia Eximbank, with its bond stock rising to IDR29.6 trillion following a new bond issuance in July. Sarana Multi Infrastruktur rose to the third spot at the end of September from the fifth spot at the end of June, following its issuance of a triple-tranche bond in July. Dropping to the fourth spot was Bank Rakyat Indonesia (IDR20.9 trillion), while Sarana Multigriya Finansial (IDR17.5 trillion) rose to the fifth spot via its issuance of a triple-tranche bond in July.
In Q3 2020, new issuance of corporate bonds totaled IDR37.7 trillion, a more than four-fold hike from issuance in Q2 2020. Corporates accelerated their issuance of new bonds amid the low-interest-rate environment, which made it conducive to borrow. A total of 38 firms borrowed funds via the debt market and added 116 new bond series to the corporate bond total during Q3 2020. There were 23 new series of sukuk that were issued, 14 series of which were structured as sukuk ijarah (Islamic bonds backed by lease agreements). The remaining nine series were structured as sukuk mudharabah (Islamic bonds backed by a profit-sharing scheme from a business venture or partnership). New bonds issued during the quarter had maturities ranging from 367 days to 15 years.
Among the new corporate debt issues in Q3 2020, the largest was state-owned pawnshop Pegadaian with total issuance amounting to IDR5,255 billion ( Table 3). Its  Banks .
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issuance comprised both conventional bonds and sukuk mudharabah, which were issued as multitranche bonds in July and September. Next was Global Mediacom's multitranche issuance of conventional bonds and sukuk ijarah totaling IDR2,503.5 billion. It was followed by Sarana Multigriya Finansial with a triple-tranche issuance amounting to IDR2,456.0 billion.

Investor Profiles
Net bond outflows in Indonesia totaled USD0.3 billion during Q3 2020. July was the only month during the quarter that experienced net bond inflows, which amounted to USD0.6 billion. However, bond outflows were recorded in August and September, with the largest outflows observed in September at USD0.6 billion.
As a result, the share of foreign holdings to bonds outstanding declined to 27.0% in Q3 2020 from 38.6% in Q3 2019 ( Figure 2). The amount held by foreigners fell to IDR933.1 trillion from IDR1,029.4 trillion during the same review period. The share of foreign investors fell much more dramatically as government bonds outstanding growth accelerated as Indonesia issued more to fund its COVID-19 stimulus programs. The exodus of foreign investors was largely due to concerns regarding Indonesia's rising debt levels, debt monetization policy, and economic slowdown.  At the end of Q3 2020, foreign investor bond holdings were largely focused in tenors with maturities of between more than 5 years to 10 years, with a share of 35.3% ( Figure 3). Bonds with maturities greater than 10 years were the next largest target of foreign investment, with a share of 31.2%. The share of bonds held by foreign investors with tenors of less than 1 year was 6.2%.
With the share of foreign holders declining in Q3 2020, Indonesian banks took up the slack as their share of total holdings shot up to 37.2% at the end of September from 23.9% a year earlier. Banks also bought significantly more government bonds in 2020 than in the previous year, with the amount held by banks rising to IDR1,289 trillion at the end of September from IDR637 trillion a year earlier.
The share of other institutional investors declined slightly on a y-o-y basis. The share of insurance companies fell to 15.1% from 17.5% during the review period, while the share of mutual funds dipped slightly to 4.3% from 4.7%. The share of Bank Indonesia rose to 6.8% at the end of Q3 2020 from 6.3% at the end of Q3 2019. The share of other investors also rose to 9.6% from 8.9%.

Policy, Institutional, and Regulatory Developments Bank Indonesia and the People's Bank of China Establish Framework on the Use of Local Currencies
In September, Bank Indonesia and the People's Bank of China signed a memorandum of understanding to promote the use of the Indonesian rupiah and the Chinese yuan for the settlement of trade and direct investment. The agreement calls for the availability of direct quotation and interbank trading of the two currencies. In addition, information sharing and periodic discussions will be initiated by the respective central banks.

Indonesia's Parliament Approves 2021 State Budget
In September, the Indonesian Parliament approved the 2021 state budget, which calls for a deficit equivalent to 5.7% of GDP. The 2021 state budget estimates revenue will reach IDR1,743.7 trillion, while state spending is expected to total IDR2,750.0 trillion. The underlying macroeconomic assumptions for the 2021 state budget include (i) economic growth of 5.0%, (ii) average inflation of 3.0%, (iii) an exchange rate of IDR14,600 per USD1, (iv) an average 10-year bond yield of 7.29%, and (v) Indonesian crude oil price of USD45 per barrel.

Yield Movements
Between 31 August and 30 October, the Republic of Korea's local currency (LCY) government bond yield curve barely moved. Government bond yields remained range-bound during the review period, with yield changes almost negligible (Figure 1). Yields for 1-year, 5-year, and 10-year bonds rose 2 basis points (bps) on average. Meanwhile, the yield for tenors of less than 1 year fell 1 bp on average, and the yield for the remaining tenors fell 2 bps on average. The spread between the 2-year and 10-year yield inched up to 73 bps from 69 bps during the review period.
Yields at the shorter-end were almost unchanged amid expectations of the Bank of Korea maintaining the base rate in its October monetary policy meeting. Meanwhile, yield movements in the rest of the curve were minimal given continued supply-demand imbalances in the government bond market and uncertainties in the economic policy measures of major developing economies.
Oversupply concerns continued to impact market sentiment amid expectations of increased bond issuance following the approval of the fourth supplementary budget and the release of the proposed 2021 fiscal budget.
In September, yields for tenors of more than 1 year saw a decline, albeit by only 10 bps on average, as the announcement of the Bank of Korea in the early part of the month-of plans to purchase up to KRW5 trillion of Korea Treasury Bonds by the end of 2020-was not enough to ease supply concerns. The pessimistic outlook on the Republic of Korea's economic growth also contributed to the downward trend. However, this trend was almost reversed in October leading up to the monetary policy meeting and as market players awaited the result of elections in the United States (US).
On 22 September, the National Assembly approved the fourth supplementary budget to be used to provide support to various sectors hit by the coronavirus disease (COVID-19) pandemic. The approved budget amounted to KRW7.8 trillion, bringing the aggregate supplementary budgets to KRW62.2 trillion. Earlier in the month, the government also submitted its 2021 fiscal budget plan of KRW555.8 trillion, an 8.5% increase from the original -Aug--Oct-2020 budget. In October, the Ministry of Economy and Finance announced fiscal rules to address the rapid increase in national debt resulting from increased bond issuances.
On 14 October, the Bank of Korea decided to leave the base rate unchanged at 0.50% amid uncertainties that could affect the global and domestic economic outlook. The global economic recovery has slowed due to a resurgence in virus cases and uncertainties in economic policy measures to be implemented in major developing markets. The same trend has been observed in the domestic economy. Despite the recovery in exports, private consumption was dampened by the reimposition of lockdown measures as the number of new virus cases rose. The Bank of Korea expects risks to the economic outlook to remain elevated, maintaining its August forecast of a 1.3% contraction in economic growth in full-year 2020.
The Republic of Korea's economy rebounded in the third quarter (Q3) of 2020, posting growth of 1.9% quarteron-quarter (q-o-q) in real gross domestic product (GDP) growth, based on advance estimates from the Bank of Korea, following a contraction of 3.2% q-o-q in the second quarter (Q2) of 2020. This was largely driven by the 15.6% q-o-q jump in exports in Q3 2020 after a sharp 16.1% q-o-q decline in the previous quarter. However, both government and private consumption declined in Republic of Korea 75 Q3 2020. Private spending fell 0.1% q-o-q in Q3 2020, a reversal from the 1.4% q-o-q increase in Q2 2020, as stricter lockdowns were re-implemented. Government spending also posted a decline of 0.1% q-o-q from 1.5% q-o-q growth in the previous quarter. Meanwhile, gross fixed capital formation fell at a faster pace of 1.9% q-o-q versus 0.4% q-o-q during the same period in review. Consumer price inflation turned positive in July, reaching 0.3% y-o-y before gradually rising to 0.7% in August and 1.0% in September.
The Republic of Korea's LCY bond market registered its first net foreign outflows for the year in September at KRW31 billion as foreign investors took profits, particularly for short-term securities with tenors of less than 1 year. The outflows from this category surpassed the foreign buying volume of mid-to long-term tenors.

Size and Composition
The size of the Republic of Korea's LCY bond market inched up 1.9% q-o-q to KRW2,602.1 trillion (USD2,223.7 billion) at the end of September ( Table 1).
The marginal growth was lower than the 3.1% q-o-q growth posted in Q2 2020. Growth for the quarter continued to be mainly driven by the government sector, particularly the rise in the stock of central government bonds, while the corporate segment rose at a slower pace. Compared with the same period in 2019, the Republic of Korea's domestic bond market rose 9.8% year-on-year (y-o-y), almost at par with the 9.5% y-o-y increase posted in Q2 2020.

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Investor Profile
Insurance companies and pension funds remained the largest holders of the Republic of Korea's LCY government bonds at the end of June 2020 with a share of 34.2%, almost at par with its share of 34.4% in June 2019 ( Figure 2). Banks surpassed the general government as the second-largest investor group at the end of Q2 2020. However, both of their respective shares declined from a year earlier, with banks' share falling to 16.7% at the end of Q2 2020 from 17.3% and the general government declining to 16.5% from 17.5%. Meanwhile, the share of other financial institutions rose to 16.0% from 15.1% during the review period. Foreign holdings of LCY government bonds also increased to 13.0% at the end of June 2020 from 11.9% a year earlier.
Other financial institutions surpassed insurance companies and pension funds as the largest investor group of the Republic of Korea's LCY corporate bonds at the end of June 2020, with its share rising to 37.4% from 35.5% in the same period in 2019 ( Figure 3). Meanwhile, the share of insurance companies and pension funds declined to 37.2% from 38.0% during the review period. The share of the general government was almost unchanged at 13.5%, while the share of foreign holders remained negligible.

Republic of Korea 79
Foreign investors continued buying the Republic of Korea's LCY bonds in August, albeit at a smaller value of KRW997 billion versus a monthly average of KRW3,521 billion in the first 7 months of the year ( Figure 4). However, this was reversed as the bond market registered net foreign outflows of KRW31 billion in September, due to profit-taking by foreign investors, particularly for securities with tenors of less than 1 year. Selling in this category surpassed net inflows registered in bonds with mid-to long-term tenors.

Ratings Update
On 6 October, Fitch Ratings affirmed the Republic of Korea's sovereign credit rating at AA-with a stable outlook. The rating agency cited the Republic of Korea's "steady macroeconomic performance, robust external finances, and sufficient fiscal headroom" as the reasons behind the rating affirmation. These, along with other government policies to control the spread of the virus, have helped mitigate the economic impact of the COVID-19 pandemic, especially in comparison with its similarly rated peers. In addition, the rating agency also forecast a 1.1% economic contraction in 2020, based on a gradual recovery in the second half of the year supported by the rebound in exports in recent months. The fiscal deficit for 2020 is also expected to widen to 4.4% of GDP in 2020 given the rise in government debt following financial stimulus to address the economic impact of the virus, but it is still considered modest compared to its peers.
Policy, Institutional, and Regulatory Developments

The Republic of Korea Announces New Fiscal Rules
On 5 October, the Government of the Republic of Korea announced new fiscal rules to address the rapid increase in national debt. Although the economy's fiscal soundness and debt ratios are still considered low compared to its similarly rated peers, the government aims to maintain its fiscal sustainability. One rule is to maintain the government-debt-to-GDP ratio below 60% and the consolidated fiscal balance deficit at 3% or less of GDP. Implementation is expected to take effect starting in 2025 after a transition period of 3 years.

The Bank of Korea and the People's Bank of China Renew Currency Swap Agreement
On 22 October, the Bank of Korea and the People's Bank of China signed the renewal of the Korean Won-Chinese Yuan Bilateral Currency Swap Agreement for another 5 years. The swap amount was also increased to KRW70 trillion-CNY400 billion from KRW64 trillion-CNY360 billion.

Yield Movements
Between 31 August and 30 October, Malaysia's local currency (LCY) government bond yield movements were mixed (Figure 1). Yields of tenors from 1 month to 6 years declined an average of 10 basis points (bps). The longer-end of the yield curve (from 7 years to 15 years) increased an average of 2 bps, while the 30-year tenor jumped 17 bps. The yield spread between 2-year and 10-year government bonds expanded from 84 bps to 96 bps during the review period.
The decline in yields at the shorter-end of the curve can be attributed to the effect of Bank Negara Malaysia's (BNM) cumulative 125-bps reduction in the overnight policy rate year-to-date through 30 October. Attractive real yields, which are driven by persistent consumer price deflation and high liquidity in the financial system, also contributed to high demand for government securities. Adding to the demand were foreign capital inflows after Malaysian Government Securities (MGS) and Government Investment Issues were given a higher weight in the JP Morgan Government Bond Index-Emerging Market Index in September.
On the other hand, the low demand for long-term securities reflects some investors' flight to safety amid uncertainties caused by the coronavirus disease (COVID-19) pandemic. Excess supply concerns may also be a factor as Malaysia's fiscal deficit is projected to increase following the government's stimulus programs that will be funded through domestic borrowing. In August, Malaysia's Parliament raised the government's debt ceiling to 60% of its gross domestic product from 55% as part of measures to counter the effects of the COVID-19 pandemic.
BNM's monetary policy committee previously reduced its policy rate in July but decided to keep it steady at 1.75% during its latest meeting in September given the committee's cautiously optimistic outlook for the economy. Despite some resurgence in COVID-19 cases, analysts expect BNM to maintain its policy rate during its meeting in November as its accommodative and stimulus packages are deemed sufficient to support the economy during the pandemic.
Malaysia's economy contracted 2.7% year-onyear (y-o-y) in the third quarter (Q3) of 2020, an improvement from the contraction of 17.1% y-o-y in the second quarter (Q2) of 2020, as economic activities resumed after the easing of Movement Control Order measures. The sharp decline in Q2 2020 prompted the World Bank in September to downgrade its fullyear 2020 economic growth forecast for Malaysia to -4.9% y-o-y from -3.1% y-o-y in June. This was in line with BNM's forecast for growth of between -5.5% y-o-y and -3.5% y-o-y. BNM and the World Bank are cautiously optimistic about the economy's gradual recovery in the second half of 2020 as economic activities resumed in May. Analysts, however, are still wary that recent spikes in COVID-19 cases will greatly affect Malaysia's economic recovery, especially as restrictions may be reintroduced.
Prices of basic goods and services in Malaysia decreased 1.4% y-o-y in September, the same rate of decline recorded in August, after contracting 1.3% y-o-y in July. Consumer prices were pulled down by declines in the cost of transport; housing, water, electricity, gas, and other fuels; and clothing and footwear. BNM expects negative inflation for full-year 2020 due to falling global oil and other commodity prices.

Size and Composition
Malaysia's LCY bond market expanded 1.9% quarteron-quarter (q-o-q) in Q3 2020 to reach a size of MYR1,583.7 billion (USD381.0 billion), up from MYR1,554.8 billion at the end of Q2 2020 ( Table 1). The growth corresponds to a 6.1% y-o-y jump from MYR1,493.1 billion at the end of Q3 2019. The growth in the LCY bond market in Q3 2020 was supported by expansions in both LCY government and corporate bonds, which accounted for 53.6% and 46.4%, respectively, of the total LCY bonds outstanding at the end of September. Total outstanding sukuk (Islamic bonds) at the end of the review period stood at MYR993.2 billion on growth of 1.7% q-o-q from MYR976.2 billion at the end of the previous quarter, spurred by increased stocks of government and corporate sukuk.
Government bonds. The LCY government bond market grew 2.3% q-o-q to MYR848.4 billion in Q3 2020, up from MYR829.0 billion in the previous quarter. The growth was due to the 2.9% q-o-q increase in outstanding central government bonds, which comprised 96.7% of total outstanding LCY government bonds. Outstanding central bank bills, which comprised a 0.5% share of total LCY government bonds outstanding at the end of September, contracted 20.0% q-o-q as some bills matured. The outstanding stock of Sukuk Perumahan Kerajaan (2.8% of total outstanding LCY government bonds) declined 10.1% q-o-q from the previous quarter.
LCY government bonds issued in Q3 2020 fell 14.0% q-o-q to MYR51.6 billion from MYR60.0 billion in the previous quarter, as issuance of Treasury bills declined and no central bank bills were issued during the quarter. The lack of issuance of Bank Negara Monetary Notes may be attributed to the central bank's liquidity enhancement measures. Another move to expand liquidity in the LCY bond market was the increased issuance of MGS from the previous quarter, as MGS switch auctions were conducted in September. The government redeemed some illiquid bonds and replaced them with more liquid benchmark MGS. The high level of MGS issuance may also be attributed to the government's funding needs for its economic programs to battle the COVID-19 pandemic. On the other hand, issuance volume of Government Investment Issues slightly declined from the previous quarter.
Corporate bonds. LCY corporate bonds outstanding expanded 1.3% q-o-q to MYR735.3 billion in Q3 2020 from MYR725.8 billion in Q2 2020. Outstanding corporate sukuk rose 1.7% q-o-q to MYR592.0 billion at the end of September from MYR582.3 billion in the prior quarter.
The top 30 corporate bond issuers in Malaysia accounted for an aggregate MYR445.9 billion of corporate bonds outstanding at the end of Q3 2020, or 60.6% of the total corporate bond market ( Table 2). Government institution Danainfra Nasional continued to dominate all issuers with outstanding LCY corporate bonds amounting to MYR71.6 billion (9.7% of total LCY corporate bonds outstanding). By industry, finance comprised the largest share (53.1%) of the top 30 issuers with MYR236.9 billion   in outstanding LCY corporate bonds at the end of September.
Issuance of LCY corporate bonds increased 12.1% q-o-q to MYR38.4 billion in Q3 2020 from MYR34.2 billion in Q2 2020. The growth may be attributed to corporations taking advantage of, and investors chasing yields in, a lowinterest-rate environment.
Danainfra Nasional issued the most tranches of Islamic medium-term notes (MTNs), issuing six tranches with tenors ranging from 7 years to 30 years (

Investor Profile
Foreign holdings of LCY government bonds in Q3 2020 jumped to MYR575.2 billion from MYR518.5 billion in Q2 2020, with monthly holdings increasing during the quarter, an extension of the trend of expanded monthly holdings in place since May (Figure 2). A total of MYR12.0 billion in net capital inflows were recorded in Q3 2020, with most of the inflows coming in July. The September inflows were driven by increased foreign holdings of MGS after the JP Morgan Government Bond Index-Emerging Market Index gave more weight to Malaysian debt securities. The net inflows in Q2 2020 and Q3 2020 were due to improving global investor sentiment and a sustained nonresident investor base in the Malaysian LCY bond market. However, investors remain cautious as FTSE Russell retained Malaysia on its fixed-income watch list for possible exclusion from its FTSE World Government Bond Index. As a share of LCY government bonds, foreign holdings increased to 23.6% at the end of Q3 2020 from 22.7% at the end of Q2 2020.
At the end of Q2 2020, financial institutions and social security institutions led all investors in LCY government bond holdings with 35.5% and 30.1% of the total, respectively ( Figure 3). Financial institutions held a larger share at the end of June compared to the same month in 2019, while the share of social security institutions dropped. Foreign holders slightly increased their share of total holdings to 22.6% from 22.3% during the review period. The holdings share of insurance companies remained unchanged at 4.5% between Q2 2019 and Q2 2020, while the share of total holdings of BNM increased to 1.5% from 1.0%.

Policy, Institutional, and Regulatory Developments Japan and Malaysia Sign Bilateral Swap Agreement
On 18 September, the Bank of Japan and BNM signed a bilateral swap agreement allowing the two central banks to swap their Japanese yen and Malaysian ringgit, respectively, for United States dollars. The swap agreement provides up to USD3.0 billion each for Japan and Malaysia. The agreement supports stability in the financial markets of both economies, and strengthens ties and economic cooperation between the two economies.

FTSE Russell Keeps Malaysia in Its FTSE World Government Bond Index
On 24 September, FTSE Russell decided to keep Malaysia in its FTSE World Government Bond Index, but the economy remained on the data provider's FTSE Russell Fixed Income Watch List for possible exclusion. In its September 2020 fixed-income review, FTSE Russell acknowledged BNM's policy reforms to enhance secondary market bond liquidity and improve foreign exchange market structure. FTSE Russell will continue to monitor developments in the Malaysian bond market as BNM's policies take effect and assess whether these regulatory reforms translate into practical improvements for international participants.

Yield Movements
The yield curve of local currency (LCY) government bonds in the Philippines steepened between 31 August and 30 October (Figure 1). Yields on bonds with 1-month, 3-month, and 2-year maturities dropped on an average of 7 basis points (bps). The remaining tenors all saw increases in their yields. Bond yield for 1-year tenor increased the least at 0.6 bps, while those for 6-month and 3-year to 10-year tenors increased an average of 15 bps. Larger yield increases were seen in 20-year and 25-year maturities at 45 bps and 29 bps, respectively. This steepening led to a widening of the yield spread between 2-year and 10-year tenors during the review period from 69 bps to 89 bps.
The decline in government bond yields at the shorterend of the curve was due largely to the accommodative monetary policy stance of the Bangko Sentral ng Pilipinas (BSP) and the inflation rate remaining subdued.
The reverse repurchase rate was held steady at 2.25% for the second consecutive time during the BSP's monetary policy meeting on 1 October, citing easing inflation and encouraging signs of domestic economic recovery. Since the start of the year through October 2020, the central bank had slashed 175 bps from the policy rate, placing it to a historically low level. The BSP maintained the view that the pause will allow it to evaluate previous easing measures' effect in the economy. The BSP is expected to reassess its policy actions based on the third quarter (Q3) economic performance which remained sluggish. The slower-than-expected gross domestic product (GDP) growth provides room for a rate cut, while excess liquidity and negative real interest rates will likely restrain the central bank's policy space.
Consumer price inflation picked up to 2.5% y-o-y in October after easing in September (2.3% y-o-y) and August (2.4% y-o-y). The acceleration mainly came on the back of higher prices of heavily-weighted food and non-alcoholic beverages. Inflation rate averaged 2.5% for the first 10 months of the year and is within the government target of 2.0%-4.0% for full-year 2020. With domestic demand remaining weak due to the coronavirus disease (COVID-19) pandemic, the BSP has forecast inflation to average 2.3% in 2020, 2.8% in 2021, and 3.0% in 2022. 8 High liquidity in the financial system, along with a sustained preference for liquid assets, has also kept bond yields grounded at the shorter-end of the curve. The uncertainty and risks surrounding the pandemic have made investors position their funds in the more liquid portion of the curve as they await fresh developments.
On the other hand, yield increases at the longer-end of the curve stem from expectations that inflation may pick up with the further reopening of the economy and easing of quarantine restrictions that will spur economic activities. Gloomy economic growth forecasts may have also weighed on investor sentiment, leading some to trim their demand for long-term investments to avoid looming risks.
The Philippine economy remained in a recession after recording a GDP contraction of 11.5% y-o-y in Q3 2020; however, it was an improvement from the revised 16.9% y-o-y decline in Q2 2020. The doubledigit decline in growth rate can be attributed to the 2-week reimposition of stricter quarantine measures in August in some areas, including the country's economic center of Metro Manila, after daily cases of COVID-19 had escalated. Only government consumption on the expenditure side and agriculture sector on the income side saw y-o-y increases. The government expects the economy to contract between 4.5% y-o-y and 6.6% y-o-y in 2020, but will review its projections to account for the Q3 2020 figure.
The Philippine peso sustained its strength against the United States (US) dollar despite the recession and the extended community quarantine resulting from the Philippines having the highest number of COVID-19 cases in emerging East Asia. 9 The strength of the peso is generally traced to low domestic demand that reflects low imports and thus weak demand for US dollars. In October, the exchange rate movement was range-bound, prompted by the passage of the 2021 Philippine national budget, continued reopening of the economy, decline in daily COVID-19 cases, easing of some community quarantine restrictions, and ongoing negotiations over a COVID-19 pandemic stimulus package as well as elections in the US. The peso traded at PHP48.41 to the US dollar on 30 October, reflecting a year-to-date gain of 4.6%.

Size and Composition
Total LCY bond outstanding in the Philippines reached PHP8,136.4 billion (USD167.8 billion) at the end of September on growth of 8.8% quarter-on-quarter (q-o-q) and 21.5% y-o-y ( Table 1). The rate of expansion in Q3 2020 was faster than in Q2 2020 and was supported by both the government and corporate segments on the back of higher issuance volumes. At the end of Q3 2020, government bonds comprised 79.9% of the LCY bond market, and corporate bonds accounted for the remaining 21.1%.
Government bonds. LCY government bonds outstanding amounted PHP6,503.0 billion at the end of Q3 2020, increasing 10.1% q-o-q. The increase in market size was supported by Treasury bills and, in particular, Treasury bonds. The Bureau of the Treasury (BTr) issued another tranche of Retail Treasury Bonds (RTBs) to raise more funds for the government's pandemic responses. At the same time, the BSP started issuing its own securities as additional instrument for its monetary policy implementation and liquidity management operations, adding to the government's debt.
Government bond issuance in Q3 2020 strongly rebounded on growth of 65.4% q-o-q, following a decline of 6.9% q-o-q in Q2 2020. It totaled PHP1,105.8 billion, lifted by Treasury bonds and the maiden issuances of central bank securities.
Treasury bonds issued in the quarter reached PHP651.3 billion, more than triple the amount issued in Q2 2020. The high debt sales volume was due to the issuance of RTBs in August when the BTr raised a record PHP516.3 billion. The timing has been conducive for 9 This covers the period from 6 August to 15 October. 2020. COVID-19 in Charts: Where Does PH Stand in ASEAN, World? 16 October. https://www.rappler.com/newsbreak/datadocuments/coronavirus-charts-where-philippines-stands-asean-world. the government to secure a good portion of funds for its spending needs amid the COVID-19 pandemic as interest rates remain low while high liquidity in the market drew in strong demand from investors. The 5-year security is the Treasury's second RTB issuance in 2020, following its PHP310.8 billion sale in February. During the quarter, the BTr rejected bids for 10-year and 20-year Treasury bonds at two auctions subsequent to the RTB sale as investors sought higher yields and, to some extent, the government had already secured sufficient financing.
The BSP issued central bank securities totaling PHP50.0 billion in Q3 2020. The initial offerings were small in volume with short maturities, but they will be adjusted depending on market response as well as the market liquidity forecast.
Issuance of Treasury bills, on the other hand, amounted to PHP488.6 billion on a decline of 17.2% q-o-q in contrast to the double-digit growth posted in Q2 2020. The drop in debt sales was traced to lower offer volumes during the quarter. The BTr also rejected bids for 365-day Treasury bills in one of the auctions as investors demanded higher rates.
The BTr deferred its plan to issue samurai and panda bonds in 2020 as funds raised domestically were enough to cover the government's financing requirements. At the onset of the COVID-19 pandemic, the BTr considered tapping debt markets in the People's Republic of China and Japan to raise funds. However, the government's PHP540 billion advance credit from the BSP allowed the BTr to shelf this plan. Instead, the BTr will issue a second tranche of Premyo bonds to retail investors in November. 9 Corporate bonds. The LCY corporate bond market rebounded in Q3 2020 to expand 3.8% q-o-q after contracting 0.4% q-o-q in Q2 2020. Corporate bonds outstanding reached PHP1,633.3 billion at the end of Q3 2020 on the back of more bond issuances during the quarter as the economy gradually reopened.
The banking sector remained the largest segment of the LCY corporate bond market in Q3 2020. The sector's share increased to 41.7% at the end of September from 37.9% at the end of September 2019 as banks upped their issuance volume over the past year ( Figure 2). Properties and utilities companies hold the second and third spots, respectively, comprising 23.8% and 14.5% of the market; however, their shares were lower compared with September 2019. The holding firms, transport, and telecommunications sector saw lower shares in September 2020 versus a year earlier, while the share of "others" was slightly up.
The top 30 corporate issuers have an aggregate debt outstanding of PHP1,451.3 billion at the end of September or 88.9% of the total corporate bond market ( Table 2). The banking sector comprised the largest share at 43.8%, which was equivalent to PHP649.9 billion. This was

September September
Property .
Holding Firms .
Holding Firms .

10
Premyo bonds act as an investment and a ticket to win cash and noncash prizes for retail investors.

September September
Others .

CSIs and Tax-Exempt
Institutions .
Banks and Investment Houses .

Banks and Investment
Houses .
CSIs and Tax-Exempt Institutions .

Investor Profile
Contractual savings and tax-exempt institutions and banks and investment houses had nearly the same share of LCY government bond holdings as one another at the end of September, which reflected a change in the investor landscape from a year earlier ( Figure 3). Contractual savings and tax-exempt institutions' market shares rose significantly to 36.7% from 23.9% in September 2019. During the same period, banks and investment houses market share dropped to 36.2% from 42.6% a year earlier. BTr-managed funds had the thirdlargest market share with 9.6%, outpacing the "others" followed by holdings firms and property firms with shares of 20.5% (PHP304.0 billion) and 15.3% (PHP227.0 billion), respectively. The corporate issuers are Metropolitan Bank, Ayala Land, BDO Unibank, and SM Prime Holdings with bonds outstanding of over PHP100 billion each.
Bond issuance activities from the corporate sector picked up in Q3 2020 to PHP126.3 billion from PHP27.6 billion in the previous quarter. As the economy gradually reopened, even amid continued uncertainty from the COVID-19 pandemic, firms returned to tap the capital market to fund their business operations and recovery plans. The timing is favorable as firms can take advantage of the lowinterest-rate environment and abundant liquidity in the market.
Notable debt issuances in Q3 2020 were predominantly from the banking sector with the purpose largely to support their lending activities. BDO Unibank had the largest bond issuance during the quarter with a PHP36.0 billion 2-year bond ( Table 3). Another notable bond issuance was the Bank of the Philippine Islands' landmark COVID-19 response bond, which raised PHP21.5 billion. It was the Philippines' first bond issued as a direct response to the COVID-19 pandemic. The proceeds will be used to support lending activities to eligible micro, small, and medium-sized enterprises to sustain or restart their operations amid financial difficulties caused by the pandemic.
investor group and brokers, custodians, and depositories with 9.1% and 8.2% shares, respectively. Governmentowned or -controlled corporations and local government units remained the smallest investor group with only a 0.2% market share.

Yield Movements
Between 31 August and 30 October, Singapore's local currency (LCY) government bond yields declined for most tenors (Figure 1). The shorter-end of the yield curve (from 3 months to 1 year) declined an average of 1 basis point (bp In October, MAS kept its monetary policy unchanged. The appreciation rate of the Singapore dollar nominal effective exchange rate remained at zero, and the center of the policy band was left unchanged. MAS expects the economy to continue improving in the last quarter of 2020, albeit at a weak pace. The sluggish growth is expected to continue until 2021 amid limited improvements in domestic services and cross-border travel. The central bank also factored in receding deflation risks in its monetary policy decision. The decision was in line with most analysts' expectations and the view that economic recovery would also be supported by more fiscal stimulus. Based on advance estimates, Singapore's economy contracted 7.0% y-o-y in the third quarter (Q3) of 2020, moderating from the contraction of 13.3% y-o-y in the second quarter (Q2) of 2020. On a quarter-on-quarter (q-o-q) seasonally adjusted basis, Singapore's gross domestic product expanded 7.9% y-o-y as output in manufacturing, construction, and services picked up from the preceding quarter due to the phased reopening of the economy that allowed domestic economic activities to resume. Policy stimulus also started taking effect, contributing to the rebound. The Ministry of Trade and Industry forecasts Singapore's economic growth to fall between -7.0% y-o-y and -5.0% y-o-y for full-year 2020. In June, Singapore exited from Circuit Breaker measures-measures limiting the population's movement inside the city-state to prevent the spread of COVID-19and transitioned to a planned reopening of the economy in three phases. Singapore is currently in Phase 2 in which more activities are permitted if infection rates remain stable and manageable. As cases remain low and testing and tracing scale up, Singapore may see a transition to Phase 3 by the end of 2020.
Consumer price inflation in Singapore was flat in September after falling 0.4% y-o-y in both August and July. The overall steady prices of basic goods and services was driven by smaller price declines for services, electricity, and gas, and private transport. Core inflation, which excludes the cost of accommodations and private transport, was -0.1% y-o-y, compared with -0.3% y-o-y recorded in August. Domestically, inflationary pressures are expected to remain subdued. MAS projects inflation for full-year 2020 to fall between -0.5% and 0.0%.
As the COVID-19 pandemic continues to affect the world economy, authorities in Singapore are ensuring continued support to employees and businesses by extending

Size and Composition
Singapore's LCY bond market expanded 1.8% q-o-q in Q3 2020 to reach SGD489.5 billion (USD358.5 billion) at the end of September, up from SGD480.6 billion at the end of June ( Table 1). On an annual basis, growth slowed to 9.8% y-o-y in Q3 2020 from 11.9% y-o-y a year earlier.
The expansion in the LCY bond market was supported by growth in both government and corporate bonds, which accounted for 63.7% and 36.3%, respectively, of total LCY bonds outstanding at the end of Q3 2020.
Issuance of LCY bonds in Q3 2020 increased 6.8% q-o-q to SGD201.7 billion from SGD188.8 billion in Q2 2020, driven by rising government bond issuance. This was slightly offset by a drop in the issuance of corporate bonds.
Government bonds. The LCY government bond market grew 2.0% q-o-q to SGD311.7 billion in Q3 2020 from SGD305.7 billion in the previous quarter, spurred by the new MAS floating-rate notes. On an annual basis, outstanding Singapore Government Securities (SGS) bills and bonds, which comprised 61.4% of total outstanding LCY government bonds at the end of September, jumped 17.7% y-o-y. Since July 2019, 6-month SGS bills have gradually replaced 24-week MAS bills in order to meet the demand for short-term SGD-denominated securities as SGS bills are more accessible to a wider range of investors.
LCY government bond issuance in Q3 2020 rose 7.5% q-o-q. The growth was due to an increase in MAS bills spurred by issuances of 6-month floating-rate notes meant to promote the use of the Singapore Overnight Rate Average as a benchmark in Singapore's financial market.
Corporate bonds. LCY corporate bonds outstanding increased 1.6% q-o-q in Q3 2020 to reach SGD177.8 billion at the end of September, up from SGD174.9 billion at the end of June, buoyed by the increase in outstanding corporate bonds in the real estate and finance industries.
The top 30 LCY corporate bond issuers in Singapore accounted for combined outstanding bonds of SGD88.0 billion, or 49.5% of the total LCY corporate bond market, at the end of Q3 2020 (   notable among the perpetual bonds was Ascendas REIT, as it became the first nonfinancial green perpetual bond. At 3.00%, it also achieved the lowest yield for a perpetual bond issued by a corporation outside the banking sector.
On the other hand, the effect of the COVID-19 pandemic on credit spreads was felt by AIMS APAC, REIT as it had to price its perpetual bond at a high rate of 5.65% in August. The 2-year convertible bond issued by Banyan Tree Holdings had the highest coupon rate during the review period at 7.50%.

Policy, Institutional, and Regulatory Developments
Monetary Authority of Singapore Expands Access to Liquidity Facilities On 3 September, MAS announced various measures to enhance financial institutions' access to Singapore dollar and United States (US) dollar funding. On 28 September, a Singapore Dollar Term Facility was launched to provide financial institutions flexible options in terms of SGD-denominated borrowing at longer tenors. The facility, which compliments the overnight MAS Standing Facility, offers SGD-denominated funds with 1-month and 3-month tenors. The new facility makes available more options for collateral composed of cash and other marketable securities in various currencies. For domestic systemically important banks, residential property loans may be pledged as collateral with the Singapore Dollar Term Facility. MAS also enhanced the US Dollar Facility, established in March, which allows banks to borrow US dollars by pledging SGD-denominated collateral. Similar to the Singapore Dollar Term Facility guidelines, options for collateral for the US Dollar Facility were also expanded.
In Q3 2020, issuance of LCY corporate bonds declined to SGD5.1 billion, a contraction of 16.1% q-o-q from SGD6.0 billion in the previous quarter, due to a large base effect. The high level of issuance in Q2 2020 compensated for the limited issuance in the first quarter of 2020 as companies were affected by the COVID-19 pandemic. Q3 2020 issuance was in line with typical issuance levels seen in 2019.
Insurance cooperative NTUC Income issued the single-largest LCY corporate bond in Q3 2020, an SGD800.0 million 30-year callable bond with coupon rate of 3.10% ( Table 3). Several companies issued callable perpetual bonds during the quarter, three of which were real estate investment trust (REIT) companies. Most

Yield Movements
Movements in Thailand's local currency (LCY) government bond yield curve were mixed between 31 August and 30 October (Figure 1). Bonds with maturities of 2 years or below gained 3 basis points (bps) on average, while the 3-year tenor held steady, and the 4-year tenor jumped 10 bps. Meanwhile, yields fell an average of 6 bps for bonds with maturities of 5 years or longer, with the 20-year tenor showing the steepest drop at 16 bps. Yields dropped an average of 3 bps across all tenors. The spread between the 2-year and 10-year tenors narrowed from 89 bps to 78 bps during the review period.
The rise in yields at the shorter-end of the curve reflected weakened appetite for Thai sovereign bonds amid the recession brought by the coronavirus disease (COVID-19) and rising political uncertainty. Expectations of a gradual recovery helped boost yields for tenors with maturities of 5 years or more.
Thailand's gross domestic product dropped 6.4% yearon-year (y-o-y) in the third quarter (Q3) of 2020 after declining 12.1% y-o-y in the second quarter. Economic contraction narrowed in the third quarter as easing of business lockdowns and expansion of government relief efforts boosted consumption and domestic tourism. The National Economic and Social Development Council revised its full-year 2020 gross domestic product growth forecast to -6.0% from the earlier projection of 7.3%-7.8% decline, while predicting 2021 growth to be within a range of 3.5% to 4.5%.
Consumer prices fell 0.7% y-o-y in September, marking 7 straight months of deflation. Falling energy prices, particularly retail gasoline and electric bills, as well as depressed demand due to COVID-19, drove deflationary pressures.
Thailand's benchmark interest rate remained at a record low as the Bank of Thailand (BOT) decided to leave it unchanged at 0.5% in September. The BOT previously cut the policy rate by 25 bps in May. Since the beginning of the year, the BOT has reduced the benchmark rate by a total of 75 bps in response to the COVID-19 pandemic.
Among emerging East Asian currencies, the Thai baht is among those that has depreciated the most against the United States dollar thus far in 2020. Between 1 January and 30 October, the Thai baht depreciated 3.3% against the dollar.
Rising political risks, as antigovernment protests gain momentum, pose additional threat to Thailand's economic recovery amid the global pandemic.

Size and Composition
Thailand's LCY bonds outstanding amounted to THB14,018.4 billion (USD443.7 billion) at the end of September on growth of 4.2% quarter-on-quarter (q-o-q) and 8.3% y-o-y ( Table 1). Growth in Q3 2020 accelerated from 2.1% q-o-q and 3.2% y-o-y in Q2 2020, driven by strong growth in the government bond segment as the government continued to issue debt to finance relief measures to boost the economy amid the COVID-19 pandemic. Government bonds dominate Thailand's LCY bond market, accounting for a 73.2% share at the end of September, up from 72.4% at the end of June.
Government bonds. The size of the LCY government bond market amounted to THB10,260.4 billion at the end of September, with growth increasing to 5.4% q-o-q in Q3 2020 from 4.1% q-o-q in Q2 2020. Growth 96 Asia Bond Monitor in outstanding government bonds and Treasury bills drove much of the gain, rising 8.1% q-o-q to reach THB5,735.1 billion at the end of September. BOT bonds outstanding stood at THB3,702.0 billion at the end of September, with growth moderating to 1.9% q-o-q in Q3 2020 from 4.0% q-o-q in the prior quarter. State-owned enterprise and other bonds reached THB823.3 billion at the end of September, as growth more than doubled to 3.9% q-o-q in Q3 2020 from 1.4% q-o-q in Q2 2020. On an annual basis, growth in Thailand's government bond segment accelerated to 11.3% y-o-y in Q3 2020 from 4.4% y-o-y in the previous quarter.
Total LCY bond issuance from the government amounted to THB2,624.9 billion in Q3 2020. Growth in total government bond issuance jumped to 20.2% q-o-q in Q3 2020 from 7.5% q-o-q in Q2 2020, driven by strong issuance from all government bond segments. Growth in issuance of government bonds and Treasury bills moderated to 62.7% q-o-q in Q3 2020 from 117.7% q-o-q in Q2 2020, as the government continued to issue debt to finance economic relief measures, albeit at a weaker pace than in the prior quarter. Issuance of BOT bonds expanded 11.2% q-o-q in Q3 2020, reversing the 0.4% q-o-q decline in the previous quarter. Issuance of state-owned enterprise bonds rose 124.0% q-o-q in Q3 2020, rebounding from a 38.5% q-o-q drop in Q2 2020. On a y-o-y basis, issuance of government bonds increased 32.7% in Q3 2020, a reversal of the 5.8% decline posted in the previous quarter.
Corporate bonds. Outstanding corporate bonds totaled THB3,758.1 billion at the end of September on growth of 1.1% q-o-q and 0.9% y-o-y. Growth in Q3 2020 showed modest recovery from the 2.6% q-o-q and 0.03% y-o-y contractions in Q2 2020. Corporate bond issuance recovered strongly in Q3 2020, rising 27.4% q-o-q after contracting 23.7% q-o-q in Q2 2020, as the easing of lockdown measures revived business confidence.
The LCY bonds outstanding of the top 30 corporate issuers amounted to THB2,186.5 billion at the end of September, representing 58.2% of the total corporate bond market ( Table 2). Food and beverage firms dominated the list, with an outstanding bond stock amounting to THB432.9 billion. Firms in commerce, banking, and communications industries were the next largest issuers, with bonds totaling THB305.8 billion, THB258.8 billion, and THB257.6 billion, respectively. The majority of the top 30 issuers were listed on the Thai Stock Exchange, while only four were state-owned. Due to a large issuance during the quarter, CP ALL became the top issuer in the market in Q3 2020, with a total outstanding bond stock amounting to THB183.9 billion. Siam Cement and Thai Beverage had the next largest total bond stocks at THB175.0 billion and THB170.3 billion, respectively.
In Q3 2020, PTT and CP ALL were the two largest issuers, with corporate debt issuance of THB35.0 billion and THB25.0 billion, respectively ( Table 3). PTT raised funds from seven issuances of bonds with tenors ranging from 2 years to 25 years and carrying coupons ranging from 1.21% to 3.74%. CP ALL issued bonds with tenors ranging from 2.5 years to 15.0 years and carrying coupons ranging from 1.9% to 3.9%. True Corp was the third-largest issuer during the quarter, with issuances amounting to THB23.4 billion from bonds with    tenors ranging from 1.8 years to 5.5 years and carrying coupons ranging from 3.0% to 4.4%. CPF Thailand was the next largest issuer, with multitranche issuances ranging from 4.5 years to 15 years and amounting to THB20.0 billion. Another notable issuance during the quarter was property developer Ananda's zero-coupon perpetual bond.
Central government bonds. The combined shares of the four largest holders of government bonds in Thailand dropped slightly to 89.5% at the end of September 2020 from 91.0% a year earlier ( Figure 2 Foreign investors in Thailand's LCY bond market recorded net inflows of THB45.1 billion in Q3 2020, up from THB4.6 billion in Q2 2020 ( Figure 4). The bond market saw net foreign fund outflows amounting to THB101.8 billion in the first quarter of 2020 amid the COVID-19 outbreak. The easing of lockdown measures and the government's stimulus packages provided a boost to investor confidence, resulting in net foreign inflows in June through September.

Policy, Institutional, and Regulatory Developments Thailand Issues First Sustainable Government Bonds
In August, the Public Debt Management Office issued Thailand's first sustainable government bonds. The issuance was divided in two tranches. The first tranche, amounting to THB10.0 billion, will be used to finance green infrastructure, the Mass Rail Transit's Orange (East) Project. The second tranche, amounting to THB20.0 billion, will be used to finance measures to combat the adverse effects of COVID-19, including public health measures, support for small-and mediumsized enterprises, and local public infrastructure development with social and environmental benefits.

Yield Movements
The yields of local currency (LCY) government securities in Viet Nam fell across the length of the curve between 31 August and 30 October (Figure 1). Yields on bonds with 1-year and 2-year maturities dropped 14 basis points (bps) and 10 bps, respectively, while yields on bonds with tenors from 3 years to 15 years had larger declines ranging from 31 bps to 50 bps, with 7-year bonds having the largest drop. The yield spread between the 2-year and 10-year tenors narrowed from 240 bps to 217 bps during the review period.
As elsewhere in the region, a low-interest-rate environment and abundant liquidity in the financial system, as a result of the State Bank of Vietnam's (SBV) accommodative monetary policy stance, and easing inflation drove the downward movement of the yield curve. Good volume participation was observed in bond auctions as investors continued to pick government bonds as a safe investment. Smaller yield declines for bonds with shorter maturities reflected investor interest in this portion of the curve, given the uncertainties brought about by the coronavirus disease (COVID-19) pandemic.
The SBV reduced the refinancing interest rate by 50 bps to 4.00%, effective 1 October, to sustain the domestic economic recovery. It was the third time in 2020 that the central bank had lowered the benchmark interest rate, resulting in a total rate cut of 200 bps, as part of its effort to prop up the economy amid the COVID-19 pandemic.
Weak inflationary pressures remained to keep yields floored. Consumer price inflation sustained its downtrend in October to 2.5% year-on-year (y-o-y) from 3.0% y-o-y in September, despite aggressive monetary easing by the SBV. Transport largely pulled down the inflation rate as prices declined 13.5% y-o-y. Meanwhile, the price of food and catering services increased 9.5% y-o-y. Inflation for the first 10 months of the year averaged 3.7% y-o-y, and the General Statistics Office of Viet Nam expects it to remain within the government's target of below 4.0% y-o-y for full-year 2020. Viet Nam's economic expansion gained momentum in the third quarter (Q3) of 2020 on growth of 2.6% y-o-y, up from revised growth of 0.4% y-o-y in the second quarter (Q2); however, it is the slowest pace of Q3 growth recorded since 2011. The growth was largely supported by the gradual resumption of business operations as the COVID-19 pandemic, including its partial resurgence during the quarter, was successfully contained.
The Vietnamese dong's exchange rate was stable from 1 July through 30 October, with movement in the range of VND23,165 to VND23,206 to USD1. The stability of the dong was supported by the weakness of the United States dollar and the economy's high trade surplus, which allowed the SBV to build its foreign exchange reserves and manage the exchange rate.

Size and Composition
Viet Nam's LCY bond market grew 11.6% quarter-onquarter (q-o-q) in Q3 2020, recovering strongly from a decline of 1.4% q-o-q in the preceding quarter ( Table 1). Total bonds outstanding registered VND1,514.3 trillion (USD65.3 billion) at the end of September, supported by the government and corporate bond market segments, which both expanded during the quarter. On an annual basis, growth in LCY bonds outstanding accelerated to 17.0% y-o-y from 9.8% y-o-y in Q2 2020. The LCY bond market comprised 83.8% government bonds and 16.2% corporate bonds at the end of September.
Government bonds. The size of the government bond market grew 9.1% q-o-q in Q3 2020 to VND1,268.6 trillion, after declining 7.8% q-o-q in Q2 2020. The expansion was driven by Treasury bonds, which grew 10.8% q-o-q, or double the growth rate in Q2 2020, on the back of increased issuance from the State Treasury. There were no outstanding central bank bills at the end of Q3 2020 as the SBV continued to support liquidity in the market. Government-guaranteed and municipal bonds outstanding posted a decline in Q3 2020, albeit at a slower pace of 2.7% q-o-q compared with 6.1% q-o-q in Q2 2020. On an annual basis, total government debt outstanding grew 6.9% y-o-y in Q3 2020.
Issuance of government bonds in Q3 2020 totaled VND116.9 trillion, more than doubling the amount issued in Q2 2020. The State Treasury had a higher bond offering volume as it continued to raise funds for the government's COVID-19 pandemic response. Auctions were met favorably by investors as safe assets like government bonds remained attractive amid lingering uncertainty.
Corporate bonds. Corporate bonds outstanding continued to increase in Q3 2020, reaching VND245.7 trillion, on growth of 26.9% q-o-q and 129.1% y-o-y. While the corporate bond market grew, issuance activity in Q3 2020 was rather meek. Debt sales by corporates amounted to VND67 trillion, down from VND83 billion in Q2 2020. The decline is attributed to the government's Decree No. 81/2020/ND-CP, which raises the standards for corporate bond issuance in the market. The bulk of the issuance was seen in August as firms took advantage of the time before the regulation came into effect on 1 September. In September, debt sales from the corporate sector dropped sharply by about 70% from August.
The combined bonds outstanding of the top 30 issuers in the corporate market amounted to VND189.4 trillion, or 77.1% of the total debt stock in the corporate segment ( Table 2). Nearly half of the outstanding bonds, totaling VND93.7 trillion, were from the banking sector, followed by property firms with VND47.5 trillion, or 25.1% of the total. The Bank for Investment and Development of Vietnam, Vinhomes, Masan Group, Vietnam International Commercial Joint Stock Bank, and Ho Chi Minh City Development Joint Stock Commercial Bank had the largest amounts of bonds outstanding with over VND10 trillion each.
Banking and property firms remained the largest issuers in Q3 2020, as their combined debt sales comprised almost 75% of the total corporate issuances during the quarter. Notable issuances listed in Table 3 were largely from banks and comprised of medium-term tenors. HSBC's (Viet Nam) VND600 billion issuance was the first debt sale of a foreign commercial bank in the local market. Proceeds will be used in the bank's operations and as a channel to diversify its funding sources to accelerate its business growth in Viet Nam.

Investor Profile
Banks were the major holders of LCY government bonds at the end of September, accounting for 44.8% of total government debt ( Figure 2). This share was 0.8 percentage points higher than in September 2019. Pension funds were the second-largest holders with a 43.9% share, up from 43.1% a year earlier. The shares of the remaining investor groups saw marginal declines between September 2019 and September 2020. Foreign investors held only 0.6% of government securities at the end of September 2020, which was the smallest foreign holdings share among all emerging East Asian economies. Mutual funds had the smallest holdings share in Viet Nam's LCY government bond market at the end of September at 0.01%, down from 0.14% a year earlier.

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Policy, Institutional, and Regulatory Developments
Ministry of Finance Issues Guidance on Bond Issuance Information Disclosure On 14 August, the Ministry of Finance issued Circular No. 77/2020/TT-BTC to provide guidance on its existing decrees, Decree No. 81/2020/ND-CP and Decree No. 163/2018/ND-CP, on the provision of bond issuance information in the domestic market. In particular, the circular guides the (i) information disclosure regime of bond issuers; (ii) information disclosure on the corporate bond website; and (iii) reporting regime of the stock exchange, corporate bond issuance consulting organizations, and bond depository organizations. 11