China and India opening their bond markets threatens to lure funds from the rest of Asia, pushing up regional borrowing costs.
The yuan’s likely ascent to the IMF’s reserves basket is to lure US$1 trillion of foreign money to Chinese debt in the coming years, Goldman Sachs Group Inc said.
Overseas investors hold around 1 percent of the US$3.6 trillion of Chinese local-currency government notes, compared with 40 percent in Indonesia, 32 percent in Malaysia and 17 percent in Thailand.
India, with outstanding sovereign paper equivalent to US$639 billion, announced in September a plan to lift the cap on foreign ownership to 5 percent by early 2018 from 3.8 percent.
A drop in demand would be an additional headwind for Asian nations that have already seen borrowing costs soar on the prospect of higher US interest rates, slower global economic growth and plunging commodity prices.
Ten-year bond yields have risen by more than 3 percentage points in Indonesia over the last three years and by almost 90 basis points in Malaysia, compared with declines in China and India.
“There is a risk of lower liquidity as foreign investors choose to express their views on Asian bonds via China and India,” said Manu George, Asian fixed-income director at Schroder Investment Management (Singapore Ltd), whose bond team oversees US$10 billion.
“So the liquidity premium is likely to rise” and smaller markets with lower yields including Taiwan, Hong Kong and the Philippines would probably be most affected, he said.
Greater availability of Chinese sovereign debt might affect countries with similar credit ratings and yield levels the most.
China is rated “Aa3” at Moody’s Investors Service, the fourth-highest investment grade, the same credit assessment as Taiwan and South Korea.
Thailand and the Philippines have yields that are comparable to China’s, where 10-year notes pay a return of 3.16 percent.
Foreign holdings of Indian local debt could definitely reach 10 percent over the next few years and this would pose a threat to similarly-rated Indonesia, said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.
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