Overview
We estimate that Asia’s (ex-Japan) bond market capitalisation
amounted to approximately USD4.3trn at the end of 2008 – an
increase of 25% over 2007. Since 2001, Asian markets have offered
superior returns and low correlations versus developed markets.
Most Asian markets have yield curves exceeding 10 years, with
foreign investor access facilitated by improving clearing and
settlement systems, tax reforms and available onshore hedging.
HSBC’s Asian Local Bond Index (ALBI) tracks liquid local currency
bonds in 10 regional markets.

Market developments
􀀗 Asia (ex-Japan) local currency bond markets have increased further over the past year to USD4.3trn, an increase
of USD900bn (+25%). Much of the increase has been on account of strong growth in the Chinese bond market –
both of government and corporate bonds – and of bonds issued by central banks for sterilisation purposes.
􀀗 Asian local currency bond markets have offered superior returns as well as low historical correlations with
developed markets over the past eight years, thus establishing these markets as a unique and attractive asset
class.
􀀗 These markets started to develop rapidly when governments began to realise the importance of strengthening
their financial sectors by reducing over-dependence on the banking sector for funding. Capital markets are more
transparent and offer borrowers access to longer-term funding in local currencies.
􀀗 Most of the markets in the region now offer liquid yield curves that exceed 10 years. Infrastructure has improved
significantly with the introduction of more efficient settlement and clearing systems, rapidly developing
derivative markets, imposition of mark-to-market rules, liberalisation of interest rates and the elimination of
interest withholding taxes in many countries.
􀀗 China’s local market is poised to become more important to foreign investors. Aside from the recent increase in
Qualified Foreign Institutional Investor (QFII) quota from USD10bn to USD30bn, the emergence of corporate
bonds without bank guarantees (including medium-term notes) and increasing trading volumes in onshore
interest rate swaps (IRS) are the main factors that will push the local debt market to a new level. Total MTN
issuance may hit CNY1trn in 2009, while the amount of interest rate swap contracts exchanged in the first 11
months of 2008 increased sharply to CNY386.8bn.
􀀗 Since January 2001, HSBC’s Asian Local Bond Index (ALBI) has tracked the total returns on liquid bonds
denominated in local currencies in China, HKSAR, Malaysia, India, Indonesia, Korea, the Philippines,
Singapore, Taiwan and Thailand. While each individual local bond index is designed to serve the needs of both
domestic and external investors, the ALBI was created to serve international investors’ need for a regional
benchmark index for domestic bond markets and to assist their global asset allocation decisions.

Individual economies are weighted in the ALBI based on size, liquidity and impediments to offshore investors.
ALBI’s economy weightings are undergoing major changes due to rapid developments in recent years across the
region, for example, the strong growth of foreign investor interest in Indonesian Treasury bonds and the
introduction of QFII in China. Moreover, new bond markets are opening up to foreign investors in, e.g. Vietnam,
Mauritius, Pakistan and Sri Lanka, even when their small size and lack of liquidity do not (yet) merit their
inclusion in the ALBI index.
Tapping Asia’s vast pool of investment opportunities
Asia’s local currency bond markets offer a wide range of opportunities for investors. The total outstanding amount
(ex-Japan) currently exceeds USD4.3trn, as compared to the USD98bn market capitalisation of the HSBC ADBI
index, which tracks USD-denominated fixed-rate Asian bonds.
On top of a vast pool of assets, these markets also offer diversity, ranging from low yielding currencies (Singapore
and Taiwan), pegged currencies (Hong Kong) and high yielding currencies (Philippines, Indonesia, Sri Lanka and
Vietnam), thereby providing diversification benefits for international portfolio managers. Although the region’s
export orientation means that linkages with the US market are inevitable, correlations have traditionally been very
low in Asia (and negative in some cases), enabling investors to derive diversification benefits (see Figure 1).
Market background
Local currency bond markets took off rapidly after the 1997-98 Asia financial crisis as governments around the
region recognised the importance of strengthening their financial sectors to make them less vulnerable to future
financial crises. The most important issue to address was to reduce the concentration of corporate risk in the banking
sector. In many cases, capital markets provide far better transparency, liquidity, price discovery and risk-sharing
attributes that are largely unavailable in the region’s banking sector. In addition, capital markets offer borrowers
access to longer-term funding.
Since the Asian crisis, financial disintermediation has increased across Asia with the proportion of Asian local
currency bonds outstanding versus commercial bank loans (ex-China) currently standing around 50%. Much of the
drive came from the government sector in response to the crisis. Governments across the region ran large budget
deficits (averaging 3% of GDP) after the crisis, while in Korea, Thailand and Indonesia, bank recapitalisations
resulted in a massive build-up in public sector debt. Although the latter factors have disappeared as sources of supply

in recent years, this was replaced by a sharp increase in bonds and bills issued for sterilisation purposes in countries
such as Korea, India, Thailand and China, while an improved balance of payments position supported a shift in
public funding from offshore to domestic sources in the Philippines.
These trends may reverse somewhat in line with the financial re-intermediation trends seen elsewhere. Moreover,
sterilisation issuance has gone into reverse during 2H 2008 as a result of foreign capital outflows, a trend that may
well continue in 2009. Together with illiquidity in corporate bond markets across the region, this may contribute to
modest growth of Asian bond markets in 2009, unless there is a further pick-up in government bond issuance to fund
fiscal stimulus measures.
Asian governments have also been active in developing their bond markets. Most of the markets in the region now
have “risk-free” yield curves extending beyond 10 years – in many instances extending to 20 years. Liquidity and
transparency have made steady improvements as better market infrastructure was put in place (eg, the introduction of
book-entry and delivery-versus-payment systems, the development of repo, bond futures and interest rate derivative
markets). Moreover, several governments (e.g. in Malaysia, the Philippines and Indonesia) are seeking to increase
the liquidity of their bond curves by creating liquid benchmark bonds through debt switches and tap reopenings,
besides issuing new instruments such as inflation-linked (Korea) and callable bonds (Malaysia).
The introduction of mark-to-market rules has also encouraged more active trading, while the liberalisation of interest
rates (by varying amounts in each market) has allowed the yield curve to be driven more by market forces.
Trading volume in Asian government securities (excluding Japan) has risen markedly with the market-cap weighted
average turnover ratio1 of 3.3x in 2008 – up from 3.1x in 2007 – although turnover ratios vary significantly from as
low as 0.7x in China to as high as 39x in Taiwan.
The development of Asia ex-Japan’s corporate local bond market has continued in recent years. As a proportion of
the local bond market, private issues now comprise one-third of all issues, a significant increase from 27% last year.
The sophistication of corporate bond markets varies by market. Generally, the importance of corporate issues is
higher in more developed markets with a strong semi-public sector (eg, Hong Kong, Singapore and Malaysia). Still,
relative to the public sector bond market, the corporate bond market is still characterised by poor liquidity and
transparency due to small issue sizes, lack of credible ratings systems and market practices and infrastructure that
inhibit liquidity. In addition, the global credit crunch has hit various corporate bond markets hard with a near drying
up of market liquidity.
As a result, most of the corporate bond markets often do not price credit risk efficiently. Annual turnover ratios
remain relatively low at 0.1-1.0x, even in Asia’s more developed corporate bond markets, such as Hong Kong and

Singapore (significantly lower than their respective government bond markets). Access to the corporate bond market
tends to be limited to higher quality issuers. Key factors in developing the corporate bond market include improving
the government benchmark yield curve and developing a more transparent legal infrastructure.
In this respect, the Asian Development Bank (ADB) – under the auspices of ASEAN+3 governments – has
developed a roadmap to develop regional bond markets further – with a particular focus on local corporate bond
markets.

目录

China 10
Hong Kong 26
India 37
Indonesia 49
Korea 61
Malaysia 75
Mauritius 91
Pakistan 97
Philippines 105
Singapore 115
Sri Lanka 126
Taiwan 133
Thailand 142
Vietnam 157
Disclosure appendix 167
Disclaimer 168