Challenges in promoting local currency corporate bonds in Asia: Evidence from international business relationships

Abstract

In Asia, in contrast to government bond markets where reliance on foreign currency bonds has diminished after proactive policy initiatives, the corporate sector still has a large share of foreign currency bond outstanding. We analyse this phenomenon by examining the driving factors behind Asian corporate bonds’ currency choice (local currencies versus US dollar). Our results suggest that, although the successful market developments reduced barriers for Asian firms to issue in local currencies, such constructive effect was inevitably limited by firms’ FX exposures induced by Asian firms’ rapid involvement in international business during the same period. In addition, US dollar bond issuances in the region are more associated with FX funding needs from the expenditure side rather than natural hedging against FX revenue, implying that the problem of currency mismatch likely still exist among Asian firms. As such, Asian policymakers should devote more attention to firms with more cross-border payments when scrutinising the corporate sector’s financial vulnerability. They should also continue fostering the development of local currency bond markets and spur the use of local currencies in invoicing regional business transactions.