In August 2018, ICMA published a report on The State and Evolution of the Asia-Pacific Cross-Border Corporate Bond Secondary Market. The report is primarily focused on the APAC cross-border corporate bond markets and largely confined to G3 (US$, EUR, GBP)1 denominated bonds of non-financial and financial corporate issuers, as defined by having issuer country of risk within the APAC region. However, to the extent that regional local currency (LCY) markets are opening up to international investors and issuers, these are also discussed in the report, in particular the Chinese onshore corporate bond market. In compiling the report, ICMA adopted a similar approach to that of the previous European based studies, combining both qualitative and quantitative research and analysis, utilising available market data2 as well as extensive interviews with a broad range of market stakeholders, including sell side, buy side, and trading venues.

Market size and growth

The Asia-Pacific G3 cross-border corporate bond market has grown significantly over the past five-to-six years, and currently stands at almost US$2.5 trillion in nominal value, including financial issuers, and just over US$900 billion in terms of non-financial corporates. In the same time, annual corporate issuance has more than trebled to over US$930 billion in 2017. Issue sizes have also become larger, with more marquee issues coming to market, and less reliance on 144A tranches. Much of the increase in issuance has been driven by Chinese onshore financial and non-financial corporates. In terms of demand, China is also a key part of the story, with the offshore offices of Chinese investment firms and securities firms, as well as Chinese private banks, providing most of the appetite for Chinese US$ issuance.

Outstanding APAC G3 corporate bond issuance nominal value (May 2018)

Source: ICMA analysis using Bloomberg data

Secondary market liquidity

The interviews paint a mixed picture on secondary market liquidity, which appears to be a relative concept. Some respondents feel that liquidity is generally good, while others posit that the market is traditionally a buy-to-hold market, and so inherently illiquid. However, it would seem that, to the extent that liquidity is healthy, it is skewed heavily to investment grade issuance, as well as to the bid side of the market, while the interviews and data suggest that secondary market activity has lagged the overall growth in market size. In terms of liquidity provision, again China is an important part of the story, with an influx of Chinese broker dealers filling the gap as some international banks scale back their trading activity.

APAC G3 secondary market quarterly and daily average trading volumes (Trax)

Source: ICMA analysis using Trax data

Repo and credit default swap markets

Both credit repo and corporate single name credit default swap (SN-CDS) markets remain under-developed, which seems to have a direct impact on the ability for dealers to provide liquidity. Respondents feel that improvements in both financing and hedging markets would help secondary market liquidity and boost activity. Short-selling is particularly difficult, not least since many regional investors have a low tolerance for settlement fails.

Regulatory impacts

In terms of regulatory impacts, these are mostly imported from US and European regulation. Basel III has put pressure on the balance sheets and trading books of international banks, as has the Volcker Rule, while MiFID II/R is being “globalized” by a number of European and international investment firms. Perhaps more significantly, regional regulators appear to be watching the impacts of MiFID with a view to introducing their own regulatory initiatives around transparency and best execution.

Market electronification

The adoption of e-trading in the market seems to be a two-speed process. While a number of banks and asset managers are trying to move as much business as possible onto trading platforms, there is a cultural reticence among many to move away from OTC trading. Relationships and personal trust are deeply ingrained in Asian markets, and so full electronification of the market could take time. For the most part, platforms are either used to identify axes or to process bilaterally agreed trades. However, for some, the means of trading are irrelevant, and the focus is more on digitalizing the order and trading process with a view to enhanced data capture.

The CNY onshore market

The internationalisation of LCY markets in the APAC region is of key interest to interviewees, in particular the opening up of the CNY domestic corporate bond market. While there remain a number of barriers to entry, in particular concerns around the transparency of issuers’ balance sheets, the absence of reliable credit ratings, and uncertainty around Chinese bankruptcy and tax law, the general view is that international inflows into the CNY bond markets are set to accelerate.3 The inclusion of China in international bond indices4 will only help to expedite these flows.

CNY corporate bond issuance

Source: ICMA analysis using Bloomberg data

Future outlook

Looking forward, many believe that China will remain the most important part of the story, in terms of US$ issuance, investment, and intermediation, as well as the ongoing internalization of its onshore CNY market. Other LCY markets are also expected to become a more prominent part of the cross-border corporate bond market. There are broad concerns of a potential marked correction in the near future, with participants citing unsustainable credit valuations, excess leverage, and the turning of the rate and credit cycle. However, the longer-term outlook for the APAC cross-border corporate bond markets would seem to be mostly positive, with plenty of opportunities for investors, intermediaries, and issuers.