I’VE BEEN IN Kuala Lumpur and Singapore this week for two conferences, including the inaugural ASEAN Fixed-Income Summit (aka AFIS 1) put together by IFR. They were fabulous events with a lot of insightful content around the key regional themes for the development of Asia’s bond markets – not least a highly-charged discussion around creating a buffer from global market volatility and self-serving US and European policy, something that never fails to get the blood pumping in the region.
While we spent more time in KL discussing local currency regional bond market solutions, Singapore was a more broad-based affair, running through international and domestic drivers of primary activity across SSAR, corporate high-grade, high-yield and FIG markets, plus some perhaps more speculative discussions around the development in Asia of Green and project bonds.
The general case for growth in Asian corporate debt markets was well articulated by Kaushik Rudra, head of credit and rates research at Standard Chartered. Plotting their explosive growth over a 15-year-plus period, Rudra estimates that bonds will represent around 40% of the US$25trn Asian annual corporate funding mix by 2017.
That’s partly predicated on the roadblocks put up by regulators that will crimp bank lending. But unlike in Europe and the US, the diminished relevance of direct bank lending to corporates is less a story of deleveraging and more about the fact that moderate increases in lending will simply be insufficient to fund growth. The bond market will be looked on increasingly to fill that gap.
WHILE LOCAL CURRENCY markets are developing apace, the need for a combination of hard and local currency solutions will remain intact. Hard currency financings will do a lot of the heavy lifting as the crossover bid from the US and other regions remains robust – and in a horses-for-courses pricing context, dollar funding can offer better economics. Asia G3 ex-Japan ex-Australia volumes at US$143bn in the first nine months of 2014, a new record and double the amount of five years ago, tells its own story.
On the local currency vs G3 debate, I have been and continue to be dismissive of the amount of time and effort ASEAN governments and the Asian Bond Market Initiative are expending (under the APT umbrella) on what I consider to be a rather fruitless quest to build a cross-currency pan-ASEAN bond market that lacks a robust pull from the trenches of realpolitik.
On the basis of that time-honoured if-it-ain’t-broke-don’t-fix-it cliché, I don’t think there’s a natural need for a market of this type. There are simply too many impediments standing in its way: too many currencies, too many regulatory regimes, too much rivalry and – beyond the posturing – insufficient political will to make it happen. Domestic markets are developing apace and that’s where ongoing developmental efforts should lie.
Forget the Dim Sum market: the very name suggests a parochial backwater
THERE IS, HOWEVER, a screamingly obvious answer to the regional conundrum: China. Just as the stockpiles of US dollars left in European banks post-World War II ended up anchoring the multi-trillion dollar Eurobond market centred in London from the 1960s on, Asia has a mouthwatering opportunity to create first a regional market and second a global market anchored on the RMB. Forget the Dim Sum market: the very name suggests a parochial backwater. This is going stratospheric: introducing … RMB AsiabondsTM.
Ah, you might say, the currency isn’t fully convertible. I say that matters less in stage one. The growing volumes of RMB on deposit around the world in jurisdictions falling over themselves to promote themselves as hubs, and the huge growth in the use of the Chinese currency for trade settlement with China – and over time for third parties between themselves – offer nice parallels with the US dollar/Eurobond experience.
You’ve all seen the SWIFT data on world payments so you don’t need me to run through it all here. Suffice it to say RMB is seventh in the league table of world payment currencies, equivalent to 17% of all payment flows, set to rise to 30% next year. That’s staggering.
And it isn’t just data: “When we price Asian corporate and high-yield debt, we now always encompass RMB pricing,” a senior HK-based banker told me on Friday. “First because there are some pricing advantages to be achieved; second because the natural buyers (credit funds) have developed big pockets of investment in RMB.” He said some of the big asset managers now have 15%–20% of the funds they manage in Asia in RMB and they collect more than half their new money in the Chinese currency.
“Singapore and Hong Kong are now fully under the influence of RMB for asset management and private banking; Seoul is now embracing it and I expect other local markets to move toward the Chinese currency. Where previously they looked to the Aussie dollar for currency stability, we now see them shifting to RMB.” Using feedback from potential World Bank and UK trades, my interlocutor identified 20 central banks with reserves in RMB investing in bonds, and seven are working on setting up funds as part of their reserve management strategies.
In summary, the theme of AFIS 2 – location to be determined – is in the bag.
