Chen Sen and Liu Simin also contributed to the article.
Review and Outlook of the Asian Bond Market from 2023 to Mid-2024
In 2023, the size of Asian bond market has returned to the growing track. China remained the largest bond market in Asia, far ahead of Japan, the runner-up; monetary policies of various countries were differentiated. Except for China and Vietnam, the yields of treasury bonds of other countries witnessed a rise; the overall vitality of the bond market has been boosted, with China and Indonesia’s bond markets being much more active than other countries; a slight recovery in the inflow of overseas funds was seen as a whole, mainly increasing the holdings of local currency treasury bonds of Malaysia, South Korea and Indonesia; the Chinese Mainland, Hong Kong, China and Japan have blazed a new trail by launching innovative business such as green bonds and digital bonds, and the Asian bond market has further enhanced its international influence.
I. Overview[1]
1. Size and structure
The size of Asian bond market has returned to the growing track. At the end of 2023, the bond market stock of representative Asian economies (including China, Japan, South Korea, Singapore, Thailand, Malaysia, Indonesia, the Philippines and Vietnam, the same below) totaled USD34.5tn, up 3.5% YoY. The stock of the bond market reached a size equal to 123.8% of GDP, up 2.3 percentage points YoY.
By bond type, government bonds still dominated the market, while debenture bonds ushered in a rapid growth. At the end of 2023, [2]the stock of government bonds in representative Asian economies hit USD24.3tn, accounting for 70.5%, up 2.7% from 2022; the stock of debenture bonds was USD9.6tn, accounting for 27.8%, up 5% from 2022.
By region, China and Japan were taking the lead. At the end of 2023, the bond markets in the Chinese Mainland and Japan amounted USD19.8tn and USD9.7tn respectively, remaining the two leaders in Asia; South Korea ranked third with USD2.5tn, while all other economies were less than USD600bn. Indonesia and Singapore’s bond market grew at a faster pace, at 11.9% and 10.1%, respectively; the Philippines, the Chinese Mainland, Thailand and South Korea posted moderate growth, at 8.1%, 7.1%, 6.9% and 6.5%, respectively; Vietnam and Malaysia grew at a relatively low rate of 3.5% and 3.1%, respectively; in Japan, although the size of JPY denominated bond market has slightly increased (up 2.3%), that of the USD denominated bond market has decreased by 4.9% due to the depreciation of the exchange rate.
Source: Asian Bonds Online (ABO), sorted out by China Bond Research and Development Center.
Figure 1 Stock size in the Asian bond market
Source: Asian Bonds Online (ABO), sorted out by China Bond Research and Development Center.
Figure 2 Stock size of different types of bonds in Asia
2.The trend of yields showed differentiation
Monetary policies in Asia have diverged. In 2023, the monetary policies of Asian countries diverged against the backdrop of waning global economic growth momentum and disinflation efforts. Thailand, the Philippines and Indonesia adopted tightening policies and raised benchmark interest rates by 125BP, 100BP and 50BP, respectively; South Korea and Singapore maintained their monetary policy stance unchanged; while Vietnam and China implemented loose monetary policies.
By trend, treasury bond yields in most Asian countries, except for China, Japan and Vietnam, rose first and then fell. From January to October 2023, the persistent high interest rate environment and relevant expectations drove a soaring of the yields of 10-year treasury bonds in South Korea and Thailand, exceeding 70BP; in contrast, Singapore, Indonesia, and the Philippines saw an increase less than 30BP; from November to December 2023, ECB and the Fed suspended rate hikes, pulling down the treasury bond yields of major Asian economies forcefully. The 10-year government bond yields of the Philippines and South Korea plunged by 107BP and 86BP, respectively, while those of Singapore, Indonesia and Thailand declined by 50-70BP.
In China, the yields of 10-year treasury bonds fell by 28BP from 2.84% at the end of 2022 to 2.56% at the end of 2023. In 2023, the People’s Bank of China cut the reserve requirement ratio twice, releasing more than CNY1tn of long-term funds, and lowered the policy interest rate twice. Overall, China’s macro policy environment and relatively loose capital funds have led to the continuous decline in bond market yields.
In Japan, yields of treasury bonds remained on the upswing. In July 2023, the BOJ once again widened its target range for the yields of 10-year treasury bonds from ±0.5% to ±1%. The market echoed to this move with a rapid surge in the yields of 10-year treasury bonds, hitting 0.82% by the end of October 2023, and falling back to 0.66% by the end of 2023.
In Vietnam, the yields of 10-year treasury bonds fell from 5.04% at the end of 2022 to 2.39% at the end of 2023, a plunge of 264BP for the year. In 2023, the Central Bank of Vietnam (SBV) maintained an accommodative monetary policy stance, cutting the refinancing rate three times, by a cumulative amount of 150BP.
In 1H2024, yields rose except for China. The People’s Bank of China (PBoC) continued to cut its policy rate and announced an adjustment to its monetary policy operating framework. The yields of China’s 10-year treasury bonds dropped by 35BP. Singapore, Indonesia, the Philippines and Vietnam 10-year Treasury bond yields rose by around 50BP on the back of the Fed’s delay in interest rate cuts and domestic inflationary pressures; BOJ ended its negative interest rate policy in March 2024 and decided to quit from its yield curve control policy. The yields of Japan’s 10-year treasury bonds rose to 0.99% at the end of June 2024.
Source: Wind, sorted out by China Bond Research and Development Center.
3.Trading vitality still needs to be boosted
By transaction size, the trading volume of government bonds in major Asian economies totaled about USD42.9tn, up 14.1% YoY. Excluding exchange rate factors, the local currency trading volume of government bonds in China, Malaysia and the Philippines increased the most, up 26.1%, 25.2% and 23.3%, respectively; trading volume in Japan and South Korea edged higher by less than 5%; while in Vietnam and Singapore, trading volume saw a decline than that in 2022.
By bid-ask spread, the average bid-ask spread for on-the-run government bonds in 2023 was 7.4BP, slightly higher than that in 2022 (7.1BP), according to AsianBondsOnline (ABO); the average bid-ask spread for off-the-run bonds was 7.5BP, unchanged from that in 2022. In 5 of the 9 Asian countries surveyed by ABO, bid-ask spread for government bond markets in the Chinese Mainland, Thailand, Malaysia, Indonesia and the Philippines were lower than that in 2022, indicating a liquidity improvement in government bonds of most countries.
By turnover rate, the Chinese government bond market has the highest turnover rate in Asia at 2.2 in 2023, followed by Indonesia (2.1), Thailand (1.3) and Japan (1.2). The turnover rate of the government bond markets in South Korea, Singapore, Malaysia, Vietnam and the Philippines was less than 1.
4. The proportion of overseas holdings of Asian local currency treasury bonds edged higher
In 2023, foreign capital maintained an overall inflow trend into the Asian treasury bond market, with a slight increase in the proportion of holdings. At the end of 2023, foreign holdings of treasury bonds of representative Asian economies amounted to about USD638.2bn, an increase of 2.7% YoY, reversing the outflow trend of foreign investment in the previous year.
There was a divergence in appetite for treasury bonds of different countries. At the end of 2023, foreign investors held the highest proportion of Malaysian treasury bonds, at 22.6%, up 0.2 percentage points YoY; the proportion of holdings of South Korean and Indonesian treasury bonds increased by 0.6 percentage points YoY. In Thailand, Japan, and China, the proportion of foreign holdings has declined significantly, down 2 percentage points, 1.4 percentage points, and 1.3 percentage points, respectively; in the Philippines and Vietnam, the decline in foreign holdings was relatively small, by 0.3 percentage points.
II. Innovations
1. Sustainability bonds
Green bonds, social bonds, sustainable development and sustainability linked bonds (SLB) are collectively referred to as “sustainability bonds”.
In the Chinese Mainland, a total of CNY1675.5bn of “green” bonds have been issued in 2023. Specifically, the issuance size of labeled green bonds reached CNY844.8bn and non-labeled green bonds totaled CNY830.7bn. The services for “standardized green bond collateral management products” and the “expansion of eligible collateral scope” have achieved in-depth application[3]. By the end of 2023, the green bond collateral pool was nearly CNY800bn, covering more than 100 institutions. The total amount of green bond collateral management exceeded CNY100bn. China has innovated and improved the disclosure index system for environmental benefits of green bonds and the green bond database. As the first green bond database in the world to achieve full coverage of CNY green bonds both domestically and internationally by the end of 2023, a total of approximately 4,900 green bonds worth CNY9.9tn have been included in the database, involving more than 150 green sectors, providing quantifiable data references for market participants.
In addition, in 2023, Hong Kong, China issued green and sustainable bonds worth more than USD50bn[4], while Macao, China issued green bonds worth USD3.3bn[5]. To promote green development, Hong Kong, China launched the Green and Sustainable Fintech Proof-of-Concept Funding Support Scheme in June 2024, and extended the Green and Sustainable Finance Grant Scheme until 2027. As at June 2024, the HKSAR Government has granted about HKD250mn for green and sustainable debt instruments.
In Japan, in November 2023, Japan released the Japan Climate Transition Bond Framework, which follows the established principles in ICMA’s Green Bond Principles (GBP)and the Climate Transition Finance Handbook (CTFH). In February 2024, the Japanese government issued two transition bonds based on the framework, namely JPY800bn of 10-year government bonds and 5-year government bonds of the same denomination, with a total size of more than USD10bn.
2. Blockchain digital bonds
According to ICMA’s report, The Asian International Bond Markets: Developments and Trends, as of March 2024, there were more than 30 outstanding blockchain digital bonds globally, of which about half were issued by Asian issuers.
In the Chinese Mainland, in 2022, CCDC made the cut into China’s national blockchain innovation application pilots and launched a public platform for blockchain digital bond issuance. By the end of 2023, CCDC has facilitated the issuance of nine blockchain digital bonds with a total size of CNY84.54bn, covering financial bonds, corporate bonds and offshore bonds; it has issued 2 enterprise standards, namely, the Specification for Blockchain Digital Bond Issuance Platform and the Interface Specification for Blockchain Digital Bond Issuance Platform. The exploration and practice of CCDC fully confirmed the potential and feasibility of blockchain application in the bond market, and also formed a good demonstration effect in the digital transformation of the global bond market.
In addition, in early 2023, the HKSAR Government issued the first batch of tokenized green bonds denominated in HKD, with a total issue amount of HKD800mn. Under the leadership of the HKMA, the program completes the delivery of tokenized bonds and cash tokens on a digital platform on a delivery versus payment (DvP) basis. The HKMA’s Central Moneymarkets Unit (CMU) serves as the settlement and delivery system for the program. In February 2024, the HKSAR Government issued another HKD6bn digital green bonds, expanding the issuance denominating currency to HKD, CNY, USD and EUR. Adopting a “native” issuance model, bookkeeping pricing, initial registration, information disclosure, etc. are all completed on the blockchain. With the help of CMU and investor links such as Euroclear and Mingxun, it is convenient for global investors to participate in token bond business.
In Japan, in March 2020, NRI used the blockchain platform for the first time to directly issue digital bonds to investors in a private placement; in June 2022, Marui Group issued digital bonds to individual investors in a private placement; in the same month, JPX issued the first digitally tracked green bond for the wholesale market; in December 2023, Hitachi issued Japan’s second digital green bond; in February 2024, Daiwa Securities publicly issued securities token bonds to individual investors. From a practical perspective, the blockchain platforms currently used for Japan’s digital bonds are developed by commercial organizations or technology companies, with a limited issuance size, mostly targeted at specific investors.
III. Opportunities and challenges
1. Opportunities
First, international funds are poised to flow back to the Asian bond market if the Fed starts rate cuts. Driven by expectations of a rate cut by the Fed and thriving export growth in Asian regions, international funds are expected to continue to increase its holdings of Asian bonds. On the one hand, the market generally expects the Fed to initiate rate cuts in September 2024, which will have a positive impact on the Asian bond market. On the other hand, major Asian economies have showcased strong resilience against the backdrop of increasing global economic uncertainty.
Second, the opening up of the Asian bond market has increased, fostering a stronger appeal to international funds. Against the backdrop of China’s overall accommodative monetary policy, factors such as low financing costs and policy conveniences have pushed up the issuance size of various types of cross-border bonds. In 2023, Panda Bonds totaled an issuance size of over CNY150bn, an increase of more than 60% YoY, a record high. In 2023, the Free Trade Zone offshore bonds (“Pearl Bonds”) were issued for CNY83.7bn (equivalent), with a cumulative scale exceeding CNY100bn, realizing normalized secondary market spot settlement. Thanks to the introduction of a slew of innovative measures such as the custodian agency mechanism, further improvements have been achieved in institutional construction and market expansion. In addition, Hong Kong, China’s dim sum bonds have also maintained a dominant position in offshore CNY bonds.
Third, the Asian bond market has been vigorously innovating and developing, and its international influence has continued to rise. China has built the world’s first green bond database, launched a blockchain digital bond issuance platform, and successfully supported offshore bonds issuance in free trade zones to facilitate investment from overseas institutions. The blockchain digital bond platform in Hong Kong, China is exploring support for multi-currency bond issuance and is interconnected with international central custody institutions to support investment from overseas institutional investment.
2. Tests and challenges
First, compared with the U.S, Asia is still lagging behind in terms of market size and vitality. The size of the Asian bond market has grown rapidly and the market vitality has gradually increased. However, compared with the US bond market, there is still room for improvement in Asian bond market’s size and turnover rate. BIS data show that the US bond market sized 196% to GDP in 2023, boasting a turnover rate of more than 5 times.
Second, the US interest rates are still high, while Asian currencies remain under depreciation pressure. In 1H2024, the exchange rates of Asian countries have all depreciated to varying degrees, especially those of Japan, Thailand, India and the Philippines, which have depreciated by more than 5%. In 2H2024, even if the Fed starts rate cuts, US interest rates will remain high, sustaining the depreciation pressure on Asian currencies, which will affect foreign investment in the Asian bond market.
Third, the Asian bond market needs to open wider, and the application of cross-border collateral is still insufficient. Most government bonds, other than those of Japan and South Korea, do not qualify as collateral in cross-border funding. Inadequate application of bond collateral affects market liquidity and exacerbates financial market volatility in times of crisis. When a crisis occurred, due to lack of bond collateral, central banks mainly boost the domestic currency through currency swaps to prevent capital flight, thus forming a financial system with a high dependence on USD and exacerbating the impact of US policy adjustments on the Asian bond market.
IV. Suggestions for further development
1. Expanding the issuance scale of local currency treasury bonds
With the exception of Japan, other Asian countries have low government debt ratios. Asian countries can expand the issuance scale of local currency treasury bonds so as to actively respond to various risks and challenges facing economic development. In 1H2024, Asian economy as a whole demonstrated a trend of moderate growth and slow recovery. However, coming to 2H2024, affected by factors such as the super election year, prolonged geopolitical tensions, and divergent monetary policies among major economies, the uncertainty facing the Asian economy will remain high, protruding a great challenge for Asia’s growth.
2. Facilitating connectivity within the Asian bond market
Facilitating the connectivity within the Asian bond market helps enhance regional synergy and advance common prosperity. In front of us are two routes to reach the goal: the first is to build an Asian bond market investment information exchange platform, with all countries directly connected, and cross-border investment instructions can be transmitted through this platform; the other route is to encourage the interconnection of bond market infrastructures between Asian countries. Regardless of which route is taken, emphasis should be placed on ensuring safe development, following the principle of penetrating supervision, and avoiding arrangements for mixed accounts.
3. Promoting the compatibility of green bond market standards
Governments have reached consensus on promoting sustainable development. First, we should explore a unified list of green industries and form a common list of green bond programs in Asia; second, we should promote the compatibility of environmental benefit information disclosure standards for green bonds. China can share the established indicator system for environmental benefit information disclosure of green bonds with Asian countries, expand its application and jointly improve it, and promote the formation of compatible environmental benefit information disclosure standards for green bonds in Asia.
4. Deepening the innovative development of digital bonds
Given that the development of the global digital bond market has just started, the exploration and practice of the Chinese Mainland and Hong Kong, China are of high pioneering significance globally. Digital transformation is an inevitable trend in the development of the bond market, while the financial infrastructure that provides public services to the bond market has unique advantages such as professionalism, neutrality, and organizational strength in digital transformation. We should give to full play of financial infrastructure. We should deepen exploration and practice in building Asian regional financial infrastructure, strengthen exchanges and cooperation in the field of digital bonds, and promote the development of regional standards for digital bonds.
5. Promoting cross-border application of bond collateral
Cross-border collateral can enhance liquidity in the Asian bond market and contribute to financial stability. There are two approaches to promote the cross-border application of bond collateral. One is for central banks in Asian countries to reach a consensus on the qualification standards for bond collateral. A cross-border mutual recognition system should be established for bond collateral, allowing central banks to accept bond collateral denominated in foreign currencies. But in doing so, such central banks may be domestically exposed to unnecessary credit risks. The other approach is to choose bonds as collateral in a market-oriented manner through connectivity of financial infrastructure. In comparison, the second approach is more feasible and more market-oriented.
6. Expanding the application of digital currency in the bond market
The R&D practices in digital currencies by central banks in China, Japan, South Korea, Thailand and other countries have attained positive progress. In particular, PBOC’s digital currency is in a world-leading position. The multilateral central bank digital currency bridge program under joint efforts of the Bank of Thailand, the Central Bank of the United Arab Emirates and the HKMA has entered real transaction pilot stage. But in practice, current R&D applications are still mainly in the retail market. In the future, the application of central bank digital currency in the bond market can be gradually expanded to enrich bond trading settlement methods and improve trading settlement efficiency.
[1] Analyses in this article are mainly based on data from 2023. To reflect the latest situation and enhance readability, analyses of the situation in 1H2024 have been added as appropriate, subject to availability of data.
[2] Specifically, government bonds in the Chinese Mainland are composed of treasury bonds, local government bonds and policy financial bonds; government bonds in Japan, South Korea, the Philippines, Thailand and Vietnam include bonds issued by government departments and state-owned enterprises. The same below.
[3] The services for “standardized green bond collateral management products” and the “expansion of eligible collateral scope” were created by the CCDC.
[4] Speech by Christopher Tui, head of the Secretary Financial Services and the Treasury Bureau of HKSAR, at the Hong Kong Green and Sustainable Financial Development Forum in July 2024.
[5] Source: CCDC.
【This article is AFCA Working Paper No. 2025-03/194】
Expert Biography
Feng Yuan, the Deputy Director Fellow of Asian Financial Cooperation Association Think Tankers Committee, an expert in the Debt Management Talent Pool of the Ministry of Finance, is currently the Deputy General Manager of the ChinaBond Research and Development Center of the Central Government Bond Depository & Clearing Co., Ltd. He focuses on research in related fields such as the bond market and financial infrastructure. He formerly served in the Treasury Department of the Ministry of Finance, engaging in system research and reform promotion.
Chen Sen and Liu Simin from the ChinaBond Research and Development Center of the Central Government Bond Depository & Clearing Co., Ltd. also contributed to this article.
About AFTTC
No. 2025-01/192 Liu Xiaoshu, Review and Outlook of the Asian Currency Market from 2023 to Mid-2024
