Asian USD bond market - China's new local market

The Asian USD bond market is changing - Mainland China has now overtaken Asia's developed countries to be the region's largest investor and issurer of Asian USD bonds.

May 25, 2017 | Ken Hu

The marketplace for the issuance and trading of US dollar-denominated bonds in Asia, the “Asian US dollar bond market,” has long been dominated by the major developed economies of the region. But the structure of this market has transformed in recent years. While the predominant players were once countries such as South Korea and Hong Kong, they have now been largely surpassed in importance by mainland China.

In the last five years, mainland China has overtaken Asia’s major developed countries as the region’s largest source of investment in and issuer of Asian US dollar bonds. Mainland Chinese issuers now account for 47% of outstanding US dollar bonds in Asia ex-Japan, 60% of gross new supply and 72% of net new supply (new issuance minus maturing amount). And while US and European investors once comprised half of the market’s investor base, Asian investors now regularly take up the bulk of new US dollar issuance in the region, with much of the absorption attributed to China.

In some ways, Asia’s US dollar bond market has become an extension of China’s “local market.” We believe this structural change has implications for investors. In particular, we believe the changing issuer and investor landscape, especially the sharp rise in Chinese investor demand, may have impacted the market’s performance in recent years, particularly the market’s overall lower levels of volatility and higher risk-adjusted returns compared to US and emerging market (EM) credit markets.

China has dominated Asian US dollar bond supply and demand
China’s share of the Asian US dollar bond market in terms of value of bonds outstanding has grown sharply since 2010. China’s share increased from only 10% in 2010 to 47% by the end of the first quarter of 2017. Including Hong Kong, Greater China now accounts for 57% of outstanding bonds in the Asian US dollar bond space.

Mainland Chinese issuers’ share of new issuance has also experienced enormous growth since 2010. China’s market share of the primary market jumped from 17% in 2010 to 60% as of the end of 2016. Excluding new issuance for refinancing purposes, mainland China’s share in net new supply was even higher, at 72% as of the end of 2016. Combined with net new issuance out of Hong Kong, Greater China currently accounts for 85% of net new supply, with other Asian countries sharing the remaining 15%.

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