MANILA, Philippines

FOREIGN money poured into emerging East Asia’s bond markets in the third quarter, boosting local currency bonds on issue to US$5.1 trillion despite government efforts to slow a tide of cash they worry is pushing their currencies too high.

The Asian Development Bank (ADB) report released Monday said the value of local currency bonds outstanding was up from US$4.8 trillion at the end of the April-June quarter and 17.2 per cent higher than a year earlier.

The increase was driven by corporate bonds while growth in sales of government bonds slowed as economic stimulus spending was wound down, the ADB said.

“Companies are taking the opportunity to raise money in Asia’s local currency bond markets because of the growing demand from investors,” said Iwan Azis, who heads ADB’s Office of Regional Economic Integration.

Azis said foreign investors were attracted to Asian bonds because of the region’s strong economic growth and its higher interest rates compared with developed economies where rates remain at record lows in the aftermath of the global recession.

Emerging East Asia comprises China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam

Azis said bond investors had not been deterred by measures taken by some governments to slow the amount of foreign capital entering their markets. Export-reliant countries worry the inflows will contribute to pushing their currencies higher, making their products more expensive overseas, or that rapid reversal could endanger their financial systems.

South Korea in early November indicated it would impose a tax on foreign investment in government bonds. Indonesia in July announced a minimum holding period for foreign investment in short-term government debt to deter speculators and Thailand in October slapped a tax on foreign investment in bonds.

There were US$1.556 trillion of emerging East Asia corporate bonds outstanding at the end of September. In local currency terms, this was up 5.7 per cent from the previous quarter and 23.8 per cent higher than the year before.

The corporate bond market now comprises 30 per cent of emerging East Asia’s total local currency bonds outstanding.

“What we are seeing is a fundamental change in the investor make-up in emerging East Asia’s bond markets, Azis said. “Having now become familiar with these markets, foreign investors are likely to see them as a core part of their portfolios.”

Local currency government bonds reached US$3.550 trillion, 14.6 per cent higher year-on-year and 1.9 per cent higher quarter-on-quarter but slowing from a 5.1 per cent increase in the second quarter from the first quarter.

As the People’s Bank of China and authorities in Indonesia, Korea, Hong Kong, Thailand and Vietnam limited sales of bonds, the growth of emerging East Asia’s government bond market slowed in the third quarter, the report said.

Corporate bonds, after rapid growth in recent years, now account for 30 per cent of the region’s overall bond market and have become the driver of its growth, it said.

China and Indonesia had the fastest-growing corporate bond markets at the end of September, both of which grew 10.9 per cent on a quarter-on-quarter basis, followed by Singapore, which grew 7.1 per cent quarter-on-quarter.