I SHARED A drink with an Asia DCM veteran last week in Singapore and he was his usual convivial self, generally upbeat about the prospects for dealflow from the region this year – albeit with some nerve-jangling volatility.
The conversation started off with mutual gripes about Singapore’s move to raise duty on alcohol and cigarettes. The direct experience of that sin tax hike, introduced with almost indecent haste by the bars of Club Street and its 7-Eleven, might be like swatting off an annoying mosquito – in his case, particularly, given his undoubtedly deep pockets – but it adds to the perception that the city-state now seems conspicuously the most expensive metropolis in the world.
Singapore, we both agreed, will keep on growing regardless, much like the region’s bond markets. There is an exception however, in his opinion, and that’s China. Growth and the shadow banking industry are worries which could yet crimp issuance from the country. Throwing up any old deal in the knowledge that the quest for yield and the hunger of the private bank bid will ensure execution is last year’s thinking.
Interestingly, a few days after our meeting, the renminbi put on a disastrous showing against the dollar, posting its biggest five-day fall against the US dollar since it was unpegged in 2005. Talk that the move had been orchestrated by the Chinese financial authorities came after a week of daily declines in the Chinese unit, with analysts believing the People’s Bank of China had stepped in to cool a record inflow of foreign funds since the start of the year.
The view that the renminbi is a one-way bet is beginning to look decidedly old hat
CERTAINLY, THE VIEW that the renminbi is a one-way bet versus the greenback is beginning to look decidedly old hat. That mindset has been the key underpinning of the Dim Sum bond market and if ever there was the demonstration of the junking of received wisdom and its knock-on effect it was in the recent pulling of two Dim Sum deals after full marketing efforts had been undertaken.
Chu Kong Petroleum and China Properties each pulled three-year deals, even though juicy double-digit yields were on offer from both planned high-yield trades. It might just be that amid a generally nervy tone in the global credit markets, high-yield is not the asset class of choice, although cracks had started to appear in the Dim Sum market in late January, when Powerlong was forced to pull a fully marketed deal at a time when the offshore dollar markets were in rude health.
Another sign that investors are less than gung ho when it comes to China credit was the ultra-conservative approach taken recently by Beijing Energy on a US$300m deal. The paper was structured as a three-year, backed by a standby letter of credit from Agricultural Bank of China International, and featured some unusual acceleration and cross-default language.
At the end of last year, the talk in the markets was that China’s financial regulators were going to put the kibosh on SBLC-backed issuance, but Beijing Energy’s deal suggests that is not the case – or at least not just yet. While the authorities might well have sent a signal that they are willing to tolerate downside volatility in the renminbi, it still appears they are happy to help strategically important companies access the offshore financial markets.
The same thinking appears to apply to China’s shadow banking industry as the authorities in January bailed out China Credit Trust, averting default at the eleventh hour. It might perhaps be referred to as the “Beijing put”, although just how widespread the implementation of that put will be is anyone’s guess.
THERE’S NOW TALK among market participants, including luminaries such as Bill Gross and George Soros, that China’s traders are studying the spread between short-dated Chinese government bonds and two-year swaps to gauge the willingness of Chinese banks to lend to each other. A neat parallel is being drawn between this newly emerged habit and the close observation of Libor and overnight swaps that became the market’s obsession shortly before the 2008 financial crisis reached its peak.
Well, that spread hit a record high last week. Should it indeed become the market’s new obsession, it will have the potential to be a negative feedback loop of immense consequence.
As we puffed on our more expensive Marlboro Lights, my banker friend and I pondered the fact that Asia seems to have the ability to trundle along nicely despite all manner of scary imbalances. The question now is whether China’s authorities have anything of the Hank Paulson about them (I’m referring to letting large financial institutions fail rather than footballing skills) or whether the Beijing put is about to be implemented on what I assume to be the vast scale required.
As a large number of trust defaults loom and the interbank market appears to be entering a period of acute stress, chances are we shall find out soon enough.