ONE trillion US dollars is a sizeable sum. According to HSBC Markets, it represents the likely value of the domestic currency bond markets of China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand in five years. Those markets' are now worth less than $400 billion, and HSBC Markets says much of the growth will be driven by the private sector. Despite the size of the numbers, HSBC Markets is not the only financial institution which predicts great things for the region's bond markets. According to a report issued in June, the World Bank believes East Asia's bond market could top $1 trillion in size in 10 years. It predicts a cumulative regional gross domestic fixed investment of $8 trillion over that period. But traditional sources of investment - bank loans, equity markets and Western investment - will not be able to meet this highly ambitious target. Like HSBC Markets, the World Bank expects that private sector bonds will predominate, while government bonds will diminish, except for China and the Philippines. The bank predicts the government bond sector in East Asia will fall about 33 per cent by 1999, with corporate bond issuance growing from $77 billion last year to more than $500 billion by 2004. It said recently: 'Regional gross domestic fixed investment is expected to average about 36 per cent of GDP (gross domestic product), which translates to a cumulative investment of $8 trillion, including $5 trillion in private investment between 1995 and 2004.' Suddenly, HSBC Markets' numbers look relatively conservative. Even if the size of bond markets as a percentage of regional GDP is unchanged, they still will balloon on the back of the region's strong economic growth. The trouble is that the rest of the world has yet to wake up to the value in the region's bond markets. As HSBC Markets points out, the region's credit outlook has improved considerably since the early 1990s, but yields have not fallen to reflect this. In many cases, yields of more than 500 basis points (five percentage points) above US treasuries can be achieved on Asian bonds, although many Asian currencies frequently outperform the US dollar. In other words, strong, well-run economies with budget and trade surpluses and good growth are being charged the sort of junk bond interest rates being imposed in eastern Europe, the Middle East and Africa, and parts of Latin America. Countries which pay such high rates are being penalised because they do not know how to run an economy, or they are in default on debt payments, or have defaulted in the past. Most of this is hard to apply to East Asian nations of the last 10 years. They know how to foster economic growth, they favour trade and budget surpluses, they are not in default - even if some have defaulted - and they plan for the long term. That means the sins of other emerging market economies are being visited on the only region in the world that is getting things right. Look at the numbers. According to the World Bank's managing director, Gautam Kaji, the region's bond market capitalisation of $338 billion at the end of last year was less than one third of the region's equity market capitalisation, and about two per cent of total world bond market capitalisation. So the region's economic base is strong and growing by the day, its equity markets are strong, its manufacturing base sound, but its bond markets are stunted, or at least lagging. As Mr Kaji puts it, the region's bond markets are still 'the Cinderella of capital market development in Asia'. East Asia desperately needs funds - the World Bank estimates infrastructure expenditure in the region at $1.5 trillion by 2000, including energy, telephones, transport, clean water and sanitation. But when East Asia's blue-chip corporates, governments or government-owned entities borrow, they pay over the odds. The only sensible solution is for countries in the region to follow Hong Kong's example and work to develop sophisticated, transparent, well-regulated bond markets. A fully operational debt market cuts government cost of funds and costs to domestic borrowers in general. Not only will it provide them with a stable source of long-term funding, it will also help protect them from the whims of foreign investors and from debacles such as the one which followed the collapse of the Mexican peso.