IFR Asia reviews 2013 in cartoons
A selection of some of the best cartoons published during 2013 in IFR Asia.
To see the digital version of this report, please click here.
IFR Asia reviews 2013 in cartoons
A selection of some of the best cartoons published during 2013 in IFR Asia.
To see the digital version of this report, please click here.
Political capital Regulators across Asia have set out to improve governance and transparency in their capital markets, but regional experts worry they could create a host of self-defeating distortions if long-standing structural contradictions are ignored. The biggest changes have been in China, where the Year of the Snake may go down as one of the regulator. The Chinese Government has either proposed or followed through on a raft of economic and financial reform measures in its capital markets. Authorities in India and the Philippines also have been working hard, particularly to hone their respective free-float rules. In all jurisdictions, regulators are struggling to strike a balance between ensuring ample flexibility to encourage investments and growth, while discouraging the kinds of inflows or speculative activity that can threaten the stability of a financial system. The question for investors in Asia is whether or not they are likely to get that balance right and if they can find opportunities during the regulatory flux. For China, a lively debate has ensued over what measures the government should undertake to wean the country off its investment-fuelled economic model, set it on a path towards consumption-driven growth and, finally, establish a regulatory regime to enable international investors to trust fully its often-opaque capital markets. “If the zone is walled off from the rest of China, then the attraction of investing in it for foreign companies should be fairly limited.” “China’s government is good at building roads and airports, and pouring concrete, but, in terms of winning people’s trust, it falls short. Trust in the legal system, openness – these are not things that the Chinese Government can easily legislate for,” said Mark Williams, chief Asia economist for Capital Economics, an independent macroeconomic research company. In 2013, securities market regulations in the PRC continued to evolve, as the China Securities Regulatory Commission persisted with the suspension of any new IPOs on either the Shanghai or Shenzhen stock exchanges, while it worked to restore confidence in the listing process. The suspension of listings in China drove some listings to the Stock Exchange of Hong Kong. The SEHK, meanwhile, introduced changes to listing rules that significantly increased the onus on IPO sponsors to ensure listings were compliant and credible. One measure has made sponsors criminally liable for the contents of their IPO prospectuses. The PRC bond market is also slowly opening, with 17 central banks now authorised to invest in Chinese debt, according to Stephen Green, head of research for Greater China at Standard Chartered Bank. “These rules are engendering resentment and, practically, people are avoiding dealing with US counterparties. Even the largest Asian banks are struggling, since they haven’t sorted out the implications of Dodd-Frank compliance. Compliance costs outweigh any revenue you can make.” While the number and volume of domestic Chinese bond sales are increasing, the PRC has yet to address the problem of having two major bond markets under the jurisdiction of separate regulators in the People’s Bank of China and the CSRC. The regulatory split could easily nullify the impact of any well-meaning reforms, exacerbating the tensions that animate an already-dysfunctional market. “Issuing lots of bonds does not a bond market make — since a bond market is about pricing risk,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management. “If there’s no connection between risk and return, you’re going to have misallocation of capital,” Chovanec said. “The government still defines risk, and decides what goes bad and what doesn’t. The market is not pricing in the real economic risks on investments.” Third Plenum reform In November, the Third Plenum of the Communist Party’s 18th Central Committee resulted in a long-awaited statement on government policy priorities for the next decade. After a v
Sleeping giant awakes Abenomics looks to be pulling Japan out of its decades-long torpor, but its near-term impact across Asia remains decidedly mixed. While the surge in the Nikkei Index and the stream of Japanese acquisitions in South-East Asia will continue, China and South Korea could unleash their own measures to protect against a devalued yen. The long-term effects of Abenomics on both Japan and the wider Asian region will depend on Prime Minister Shinzo Abe’s ability to deliver on badly needed structural reforms. However, the year-old stimulus programme – a bold attempt to eradicate deflation via currency devaluation, labour policy reform, and spending on infrastructure – is already scoring points for its positive impact on inbound and outbound investments across the region. “Japan was considered a sleepy market until Abe’s arrival,” said Izumi Devalier, a Hong Kong-based economist with HSBC. “That has changed in the past year. Turnover of Japanese equities by foreigners reached a record ¥108trn (US$1.08trn) from April to June 2013.” “Investors have revised their Japan underweight positions. The excitement died down somewhat in Q3 2013, but the investing community is looking closely at Japan again,” Devalier said. The Nikkei has surged 46% year to date, although the rally has often given way to doubts that Japan will truly be able to break through decades of stagnation and deliver on the entire suite of structural reforms. The reforms are also prompting Japanese investors to move more capital beyond their borders. Japanese investors’ net outward portfolio investments into Asian equities in the first half of 2013 amounted to ¥305.6bn, up from ¥232.3bn in the preceding six months, according to HSBC’s Devalier. South-East Asia is a particularly popular destination for Japanese funds as investors seek returns abroad. “Trading amounts in both inward and outward [flows] increased, compared with January–September 2012,” said Harumi Taguchi, principal economist at research firm IHS. “By country, Japanese investors are net buyers in the Philippines, Malaysia, Vietnam and Singapore.” Thailand’s equity market also stands to gain from a sustained economic resurrection in Japan. “In Asia, Thailand has the closest trade ties with Japan and I would expect the SET [Stock Exchange of Thailand] would experience the greatest repricing for improved economic prospects in Japan when the third arrow of Abenomics kicks in,” said Tim Condon, chief economist, Asia, ING Bank. The outward investment goes far beyond short-term equity portfolios. Newly confident Japanese companies have gone on buying sprees in Asia this year as they pivot away from China, although acquisitions will become increasingly expensive for Japanese buyers if the yen depreciates too much. Two such examples are Sumitomo Mitsui Banking Corp’s agreement to acquire a 40% stake in Indonesia’s Bank Tabungan Pensiunan Nasional for roughly US$1.5bn and Mitsubishi UFJ’s US$5.6bn bid in July for a majority interest in Thailand’s Bank of Ayudhya.QE conundrum The so-called “three arrows” of Abenomics, namely monetary stimulus, fiscal stimulus of ¥10.3trn and growth-enhancing structural reforms, are fairly conventional, yet bold initiatives for a country that has slumped under 15 years of deflation and become a “zombie” economy. The first arrow, a vigorous programme of quantitative and qualitative easing, has arrested deflation, but concerns remain that the 1.9% inflation figure projected for 2015 may remain out of reach. Moreover, Japan’s ambitions are not immune to the influence of neighbours, such as Korea and China, who could blunt the impact of such strident QE if they choose to follow a similar agenda. “Should other central banks now choose to relaunch their own QE programmes, this could overshadow the BOJ [Bank of Japan] and dilute the market impact of their efforts,” said Stefan Hofer, emerging-market economist, Julius Bär. “However, this seems very unlikely under current circums
Divining intentions China’s foreign policy is premised on its desire to ensure uninterrupted economic growth, while promoting political stability and prolonging the rule of the Chinese Communist Party. For decades, the Chinese Government has deployed both soft and hard power to promote its influence and status overseas, while, at the same time, discouraging foreign interference in China’s affairs. Yet, China is trying to have its cake and eat it, too, in portraying itself, on the one hand, as a good neighbour and, on the other, making sure its neighbours know who is boss. China cannot have it both ways. The country’s approach to foreign affairs is linked with its national identity, characterised by its sense of “national humiliation” about the loss of territories it held under the Qing Dynasty. In the 19th Century, parts of Central and South-East Asia, Nepal, Bhutan, Mongolia and the Koreas were considered “tributary” states of China. Maps from the period portray a confident China with strong regional influence. More recent maps, such as one published in the popular, hyper-nationalist book China’s Road Under the Shadow of Globalization (China Social Science Press, 1999), portray the country as the victim of an international conspiracy to divide its formerly held territories into independent states. “China now ranks second only to the US in military spending (2.0% versus 4.4% of GDP, respectively) according to the World Bank.” China’s modern geopolitical psyche is very much linked to this sense of loss and humiliation. It is also characterised in the often-used Chinese saying “hide one’s brilliance and bide one’s time”. China sees its return to global prominence as inevitable, based on its modern history as a global leader in such areas as trade, finance, and industrial production. China’s global strategy today, and its path to global prominence, is to embrace multi-polarity, while supporting the principle of state sovereignty and self-determination. So, while it engages major powers and increasingly uses foreign aid to enhance its influence, it also uses its veto power in multilateral development banks and on the UN Security Council to get what it wants. It generally serves Chinese interests to exist in a world with no single dominant power, and Beijing has perfected the art of sitting on the sidelines and waiting for an end-game to emerge, then swooping in and claiming the spoils. A good example of this was the Iraq War, where China did not participate in combat, but aggressively pursued oil contracts, ultimately winning a large percentage of them. However, the principle of embracing multi-polarity does not apply in Asia, where China clearly sees itself as the dominant power. Beijing views the US “pivot” to Asia as a containment strategy and an effort to disrupt China’s emerging sphere of influence in the region. Neither Beijing nor Washington has been clear about where their “core” interests lie on this subject. Beijing raised the ante in late November when it declared an air defence zone over disputed islands in the South China Sea. Japan and China claim sovereignty for the islands, which Japan calls Senkaku and China calls Diaoyu. The US remains neutral on the islands’ sovereignty, but it recognizes Tokyo’s administrative control and has stood by its treaty obligations to Japan in its view of the air zone. Still, it remains unknown how the US would react if a conflict with China actually erupted, raising the risk that both sides could cross an unknown red line. Similarly, Beijing views the gradual remilitarisation of Japan with great suspicion. While, on the one hand, China sees the Japan/US military alliance as a “check” on the notion of Japan’s gradual remilitarisation, through the alliance the US is enhancing Japan’s ability to defend itself. The US has, over the years, provided Japan with early-warning radar, anti-ballistic missile systems, surveillance and anti-submarine airplanes, long-range drones, squadrons of vert
Welcome back, China Investment banks in Asia-Pacific have come full circle. Firms that shifted resources to South-East Asia after volumes and fees from Greater China ebbed in the last two years have the world’s second-biggest economy squarely in their sights again. “The theme for 2014 is going to be China, because we’ve already started to see it this year, as the country starts to reassert itself in the capital markets and in terms of innovation,” said John Wright, CEO, Global Sage. A boost in deal flow out of the PRC is one sign that demand for Chinese talent is on the rise, as it is for securities. PRC equity issuers are starting to return to the Hong Kong and US markets after a significant drought. In September, China Huishan Dairy priced a US$1.3bn IPO at the top of its expected range, paving the way for several companies, including local banks, to issue new equity. A month later, online classified site 58.com and travel site Qunar priced successful IPOs in New York, where investors had, for the past year at least, shunned anything related to China. Chinese companies, meanwhile, also have raised more money in the international bond markets than in any other year – and investors seem hungry for more. These big Chinese debt and equity fundraisings have led bank executives to recalibrate their businesses towards the PRC in a different way than before. Yet, few banks will hire aggressively to handle China-related business, which left them overexposed in the past, according to headhunters. Instead, they will redirect resources into China, including SEA-focused bankers. Still, it will not be as easy as redeploying staff from one office to another. A lot of future PRC business will come from private entities, rather than the major state-owned enterprises many bankers know best. This new crop of issuers requires some sector expertise that many banks do not have. “China is changing from an SOE market to one focused on private companies,” said Christian Brun, a co-founder of recruitment firm Wellesley Partners. “Banks have had to shift their strategies to deal with these different clients on the mainland. One thing that has happened as a result is international banks’ China coverage teams have had to become organised around sectors and not products.” One area that may require more attention is foreign exchange, as China moves to increase the renminbi’s role in global markets, including letting markets eventually set the currency’s price. “There has been a shift of some resources away from South-East Asia to North Asia,” said Global Sage’s Wright. “You also have to add to that trend the growth of the renminbi as an international currency.”More in Singapore While investment banks account for a newly active Chinese market, they will probably maintain their recently expanded presence in SEA, a region that, for many, defined 2013. As volume in PRC-related capital markets started to decline severely in 2012, global investment banks moved more Asian talent to SEA and hired new bankers with key relationships in that region. “There was a lot of attention on Singapore, where investment banks put more resources,” Wright said.”International firms have opened offices to access new business from the region, looking at Malaysia and Indonesia via Singapore (for example).” In 2013, this trend extended to private-equity firms and boutique firms. Blackstone announced a new office in Singapore this October. KKR opened an office in Singapore in late 2012. CVC Capital Partners and TPG Capital also had been considering more hires in their SEA offices, sources said. Competition for the region’s M&A business also has become a lot more intense. Boutique advisers are interested in getting in on some of the volumes that the bigger M&A shops, such as Morgan Stanley and Goldman Sachs, currently enjoy. Evercore Partners is a case in point. It hired Keith Magnus as senior managing director for its new Singapore office in July. Magnus joined from UBS, where
Low rates and unflagging investor appetite for most of the year pushed bond sales in Asia to an all-time record high. Sales of Asian debt in G3 currencies had already beaten last year’s US$133.8bn tally as of mid-November, with the total in IFR’s 12-month review period at an unprecedented US$146.5bn. The banner year for Asia, excluding Japan and Australasia, is an unintended consequence of the US Federal Reserve’s monetary policies, which kept bond prices high and yields low throughout much of the world and sent investors scrambling to find yield in emerging markets. That has been a dream come true for bankers and syndicate managers at debt capital market desks across the region. Still, the bewildering array of securities issued in the sovereign, investment-grade and high-yield sectors has created a sense of vertigo in a region that, until the last two years, was used to far more modest activity. The primary bond market for Asian G3 securities was about 40% smaller before 2012, making it much easier to notice landmark deals. The market now resembles an overcrowded room of individuals jostling for attention. Last bond blowout? Will it last? In May, the markets got a taste of how sensitive investors are to the Fed’s plans to scale back its monthly US$85bn purchases of US government and mortgage debt. Primary bond issuance came to halt and cash drained from emerging markets after Fed Chairman Ben Bernanke said the central bank would begin tapering the stimulus on further signs of improvement in the US economy. Surprisingly, however, the “taper tantrum,” as it came to be called, did not last. Investors focused on economic fundamentals within emerging Asia and central banks in the region took action. Indonesia, for instance, raised rates 150bp before September. The markets regained their footing come mid-September, when cash began flowing back into the region. “You could say that the May ‘taper tantrum’ was something of a defining moment for EM credit, more, perhaps, in terms of the recovery in sentiment that followed it, particularly in Asian credit,” said Jake Gearhart, head of debt syndicate at Deutsche Bank in Singapore. “We’ve cleared some major crises in 2013 and, in a sense, we’re running out of crises. As far as Asian credit is concerned, it seems to me that it’s not just about ‘tourist money’, but it is firmly established as an asset class with long-term staying power,” Gearhart said. The markets could go haywire again when the Fed actually does begin to scale back its bond purchases, but bankers seem to believe the US central bank’s forward guidance for short-term rates to remain near zero throughout 2014 will be enough to keep markets calm. The elephant in the room is, perhaps, the behaviour of US Treasury yields. The 10-year Treasury yield rose to about 2.75% as the year drew to a close, up from 1.76% at the start of January. Earlier this year, any Treasury selloffs reversed when news of softer US economic data surfaced, keeping rates low. The consensus now, however, seems to be that US growth is sufficiently strong to usher in a period of secularly rising long-term yields, a scenario that could put the brakes on new issuance in Asia.Starting with bang The banner year began in January with a stunning US$24.2bn in debt sales from 53 deals, according to data from Thomson Reuters. Offering levels came back to earth in February, but about US$18bn was sold each month, on average from March until Bernanke’s comments in late May. China oil major CNOOC managed to find a pure sweet spot for issuance in early May, when it priced a US$4bn, four-tranche, SEC-registered Global, the biggest conventional G3 bond out of Asia in a decade. The bond, the biggest in the G3 market from any Chinese issuer, and the third-largest on record in Asia, was 4x oversubscribed with a whopping US$23.8bn in orders, the most this year. Soon after that blockbuster, debt sales slowed in June in the wake of the Fed’s comments, with only US$429m sold across