The European Union is accelerating its drive to integrate the bloc’s capital markets in the wake of US President Donald Trump’s tariff shocks and their impact on financial markets. Asia’s plans are not as well advanced yet, but the growth of the region’s bond markets over almost three decades have been spectacular.
The total size of local currency bond markets in the ten-member Association of Southeast Asian Nations (ASEAN) plus China and South Korea has surged from virtually zero in 1997 to US$25 trillion now, the Asian Development Bank (ADB) says.
This exceeds the size of European bond markets and is comparable to the US Treasury market, according to Satoru Yamadera, adviser in the economic and development impact department of the ADB.
It suggests a coming challenge to the long-held belief that only the broad and liquid US markets can meet Asia’s strong need for current and capital finance, Yamadera said at a recent presentation to the Foreign Correspondents Club of Japan in Tokyo.
He said that this is important “because if something happens, like a global financial crisis, those countries can finance themselves by issuing local debt. They don’t need to tap the US dollar offshore market. Instead, they can finance themselves and conduct their own policies”.
Rethinking US exposure
The exponential growth of the Asian local currency bond market dates to nearly 30 years ago when many banks relied on short-term US borrowings to finance the region’s so-called economic miracle, while lending long in local currencies. This created a currency and maturity “double mismatch” that led to the 1997 Asian financial crisis.
Much progress has since been made to end this unsustainable reliance upon dollar markets, largely thanks to the efforts of the ASEAN plus 3 grouping comprising the ten members of the Southeast Asian bloc, together with China, South Korea and Japan.
China’s bond market is the world’s second largest at around $21 trillion, with government debt accounting for a roughly two-third share.
Although China represents the lion’s share of Asian local currency bonds, its capital demands are far greater than those of its neighbours, so this does not negate the argument that Asia is becoming more financially self-sufficient.
But Asia lacks a regionwide and integrated bond market that is subject to common legal and regulatory requirements and does not have a common currency in which debt can be issued in order to attract investors from not just inside but also outside the region.
By contrast, the European Union has a common currency and is promoting greater integration within its 26 trillion euro ($29.4 trillion) bond markets.
As Reuters reported on May 22, “increasing US policy risk is prompting the rest of the world to rethink its exposure to US assets, including Treasuries”.
