Asian fixed income – diverse markets with unique dynamics

The first half of 2022 has proven to be an extremely challenging period for the international bond market. The US Federal Reserve is tightening its monetary policy, inflation remains a live issue in many parts of the world, and the prices of key commodities are rising. But despite these significant headwinds, investors still need to find returns, and issuers will look to raise capital.

This can be achieved by fully capitalising on the opportunities presented by Asia’s fixed income market. For issuers, this could mean new funding sources in both G3 and local currencies, while investors can allocate capital to markets that are relatively isolated from global macro trends.

At HSBC’s 6th Asia Credit Conference, there were a series of panels that discussed a selection of the region’s largest and most dynamic markets – including Australia, China, India, and South Korea. By shining a spotlight on these countries, these sessions presented a detailed picture of the diversity and connectivity within Asia’s bond market.

G3 and local currency issuance

Australian issuers have a long history selling G3 and local currency debt to investors in Asia, with Hong Kong dollars, Japanese yen and Singapore dollars all popular currencies among issuers. Investment grade issuers in particular, are regular users of private placements, and they are open to reverse enquiries from investors across tenors and structures.

Asian investors help create a diversified funding base, which reduces the dependence on any single source of capital. Another benefit of having these investors in a deal is that it strengthens a global offering as it is sold in different markets.

South Korea is another market where issuers have been able to complete sizeable deals, despite the challenges created by the pandemic. In a panel focused on South Korea, Export-Import Bank of Korea (KEXIM) discussed its recent issuance activity. In 2021, it issued two green bonds raising USD 1 billion and EUR 850 million¹. Over its history, it has issued in 29 currencies worldwide².

The size of the deals can be explained by the growth of South Korean businesses. As they increase in size, so too their funding needs, and since these companies have truly global footprints, it is typically more efficient to fund them in the currency of the market where the funds will be deployed.

India – a standout emerging market

Another important bond market in Asia is India, where from an economic perspective, the worst of the pandemic is over. It is a country that could benefit from the broad disruption in the emerging market universe, where the growth outlook in many economies has weakened. India by contrast, stands out due to its healthy economic outlook.

Indian issuers are also in a strong position to raise capital. The US dollar market is currently unattractive to Indian companies due to high funding costs. But domestic liquidity remains strong, which means corporates can issue in Indian rupees and borrow from banks that want exposure to high-quality assets. So, despite the turmoil in global markets, Indian companies with steady cash flows still have access to capital.

Unique opportunities in China

China, which is home to world’s second largest bond market, was the subject of a discussion at the Asia Credit Conference that focused on what makes its onshore standout from other markets.

In terms of monetary policy, China is notable due to its current loose policy stance, along with stimulus measures to support the economy. This goes against the global trend of central banks tightening policy. For Chinese issuers, it reduces borrowing costs, but at the same time reduces returns for investors.

China also offers securities unavailable in other markets. Local Government Financing Vehicles (LGFVs) for example, are significant issuers of debt, and they can be considered as hybrids that are partly sovereign and partly commercial. They can however be challenging to analyse, requiring a very on-the-ground approach to research.

Trading dynamics are also unique in China’s onshore bond market, due to the dominance of commercial banks. As traders, they tend to have very similar risk appetites and tend to move in the same direction as a group. One investor on the panel described how this uniform behaviour creates buying and selling opportunities for other traders.

Opportunities from diverse markets in Asia

HSBC’s 6th Asia Credit Conference highlighted the diversity of Asia’s fixed income markets. The region contains both developed and emerging markets, issuance options in G3 and local currencies, as well as markets like China and Japan, where monetary policy remains loose. In the current challenging environment, investors and issuers can consider the opportunities presented by this diverse region to find yield and raise capital.