IN less than 10 years East Asia's bond market could top US$1 trillion in size, according to the World Bank, which predicts a cumulative regional gross domestic fixed investment of US$8 trillion over the same period. In a report released to coincide with a conference hosted by the bank and the Hong Kong Monetary Authority, the World Bank said the region's bond markets were set to explode, and said private sector bonds would predominate, while government bonds would diminish except for China and the Philippines. The bank predicted that the government bond sector in East Asia would dip about 33 per cent by 1999, with corporate bond issuance growing from US$77 billion in 1994 to more than US$500 billion by 2004. The World Bank, predicted a surge in mutual funds to about US$400 billion as part of this increased debt issuance by non-governmental entities. 'If recent trends continue, the size of the East Asian bond market would most likely cross the trillion US dollar mark by 2004, from about US$338 billion at the end of 1994,' the bank said. Monetary authority chief executive Joseph Yam said the region was at an important stage of development and the market was moving closer to disintermediation - in which borrowers and lenders increasingly do business directly with each other, bypassing bankers and using debt securities to finance growth and investment. 'As elsewhere in the region, the development of banking institutions has come first, followed by the emergence of equity markets,' Mr Yam said. 'We have now reached a stage when the bond market has an important role to play in enhancing liquidity and reducing intermediation costs.' The World Bank predicted that East Asia's rapid growth would continue over the next decade and financing this growth would mean mobilising massive amounts of resources for corporate expansion. 'Regional gross domestic fixed investment is expected to average about 36 per cent of GDP, which translates to a cumulative investment of US$8 trillion - including US$5 trillion in private investment between 1995 and 2004,' the bank said. World Bank managing director Gautam Kaji was bullish on the future of the region's bond markets despite a slow start. 'Bond markets have been slow to develop, but with the right measures, we expect the bond markets in these countries to grow very rapidly and become a major source for financing investments in industry and infrastructure, which are essential for sustaining rapid development in the world's most dynamic region,' Mr Kaji said. The bank said East Asia would become more dependent on domestic debt financing for four major reasons. The region needed to mobilise massive resources to finance infrastructure and housing, both of which required long-term fixed-rate debt capital; It was moving away from labour-intensive manufacturing to capital-intensive industries; New requirements were placing increasing pressure on the regional banking system's ability to meet long-term financing needs; and Institutional investors' appetite from long-term fixed-income investment vehicles had risen. The bank has predicted strong growth in the mutual fund industry. 'Their development has been strongest in Hong Kong, Malaysia, and notably Thailand, whose industry expanded tenfold to about US$10 billion between 1992 and 1994,' it said. 'If East Asia can maintain its projected growth rate of 7.7 per cent over the next decade and financial sector reforms programmes are not reversed, the size of these institutional investors should increase to about US$400 billion by the year 2004. 'Since the supply of government securities will be limited in all countries except China and the Philippines, these institutions will have to seek out other investment opportunities,' the bank said.