More US dollar bonds have been issued in Asia Pacific this year than last, but new issues in local currencies are also booming as the market grapples with new economic realities and the potential for "dedollarisation".
The term has become popular as a handy shorthand in a world that may be reducing its reliance on the greenback. US president Donald Trump’s fiscal and trade policies have weakened the currency and more tariff hikes, with the potential to cripple economies, may yet come as the August 1 deadline nears for trade talks with most nations. In the meantime, central banks are holding fewer dollars in their reserves and foreign ownership of Treasuries has declined.
“This theme is going to be a long, drawn-out one,” said Kheng Siang Ng, Asia Pacific head of fixed income at State Street Investment Management, on the subject of dedollarisation. “No one is rushing into this, but equally no one is saying ‘let’s not think about it’.”
In Asia’s primary bond market, local currencies have become increasingly important for issuers.
“There’s been lots of talk of dedollarisation, but at least in the Asian bond markets it’s not from a geopolitical position; it's more a question of increasing competitiveness of local currency,” said Sean Henderson, co-head of DCM for APAC at HSBC. “The volumes of issuance in G3 markets are supply-side driven. That’s an issuer question: which market offers me the best solution?”
DCM bankers say the boom in local currency funding is driven more by economics than geopolitics, with changes in trade flows and reserve currencies having little or no impact on the funding currencies of choice. The local currency market growth is part of a longer trend that sees less reliance on dollar funding as local markets develop, deepen and offer more liquidity.
“There is a feeling that some of these local currency markets may incrementally become more important,” said Augusto King, vice-chairman in the capital markets group for Asia Pacific at MUFG.
Some issuers are sticking with their home markets, cutting down on the risks of funding in other currencies. Others are looking at the region’s most attractive currencies that offer cost savings, like offshore renminbi.
The Dim Sum market has seen notable growth in the last year as it has attracted more borrowers from outside Greater China. Nestle, for example, made its debut in the Dim Sum market this year with a Rmb2bn (US$277m) deal. Singapore’s Temasek Holdings raised Rmb5.5bn from a three-part bond on Wednesday that attracted orders of Rmb52.9bn.
The market, while still small, has been supported by China’s drive to internationalise the renminbi. Banks, whose reserve requirements have been eased to stimulate the economy, have liquidity to deploy and many are keen to use the southbound Bond Connect trading link, which China is expanding, said King.
“The trend is to do with an abundance of liquidity,” said King, pointing to similar examples in the Australian dollar market. MUFG worked on NextEra Energy's corporate hybrid Kangaroo debut last month that saw the US electric utility raise A$775m (US$505m) from a dual-tranche 30-year non-call five on a combined A$1.46bn book.
The past week has also seen Hungary raising its largest Panda bond and Indonesia confirming that it plans a debut Kangaroo deal.
“Some [issuers] … want to diversify in anticipation of changes in investor demand,” said Ng. He said the dedollarisation trend has come up in many investor conversations lately. Investors looking to deploy new money will likely shift their approach from, for example, about 60% dollars to 40%–50%.
Valerie Lee, co-head of Asia debt syndicate at BNP Paribas, said that for issuers that have solely relied on dollars for funding in the past, non-dollar currencies will now make up 20%–30% of their funding.
"Issuers are currently looking at non-dollar currencies more actively than before," she said. "We've come a long way for local currencies to come to where they are now."
This is true for other major currencies, as Asian issuers look more to euros as well. Manoj Agarwal, head of debt capital markets for Asia Pacific at BNPP, said issuers are seeing more opportunities in euros as hard currencies benefit from their home investor base but also more attention from Asian investors.
"APAC issuers historically have benefited from the Asia bid. Now we are seeing the Asia bid in non-dollar hard currencies," said Agarwal.
Dollar's staying power
Some are pushing back against the negative connotations of the term dedollarisation, which implies that the world is dumping dollars. “It’s a genuine trend, but it’s a bad word because it’s open to misinterpretation,” said Henderson. Diversification or redistribution may be a more accurate description of what is happening in capital markets, he said.
As one investor said, the US dollar will always have the depth and breadth that is needed for international borrowers to raise funds, as was most recently seen in Japanese borrower NTT’s US$17.7bn-equivalent deal that included US$11.25bn from seven US dollar-denominated bonds.
Sameer Gupta, head of India and South-East Asia DCM at Deutsche Bank, does not believe markets are showing a secular trend away from dollar funding and issuance should pick up as the rate cut cycle in the US restarts.
“From an Asian bond market perspective, we are not seeing any trend towards dedollarisation at this stage," he said. "It’s more about issuers evaluating different markets and deciding on basis of cost competitiveness.”
Henderson said the G3 market is far from doomed, but “it’s just going to be one tool in the box”.