A chance encounter with a Brexit negotiator

It has taken the Chinese authorities some time to settle on an English name for President Xi Jinping’s signature trade and development policy. What started in October 2013 as the Silk Road Economic Belt and 21st Century Maritime Silk Road and was labelled One Belt, One Road, or OBOR, at first is now officially the Belt and Road Initiative (BRI). What was never in doubt, however, is the sheer scale of the plan. The parallel development of an overland trade route from China to Europe via Central Asia and a maritime link to the Mediterranean via the Indian Ocean embraces over 65 countries, 69% of the world’s population and almost a third of the global economy. It brings with it the promise of huge outbound investment as China moves to cement its position as a global economic power. That kind of ambition does not come cheap. Estimates for the total cost of the scheme vary enormously. DBS reckons that the transport infrastructure investment alone will exceed US$200bn over a five-year period. This is more than double the current batch of transport infrastructure projects under development in the ASEAN region, the bank noted in a September 2017 briefing. In early 2017, the Chinese government said that BRI-related projects worth a combined US$1trn were already planned or under way, but that the full initiative had “an expected lifespan investment of US$4trn to US$8trn”. (The latter figure represents “the cost of building the infrastructure that developing countries in Asia will need in order to maintain the economic growth that will lift people out of poverty in the next decade,” to quote the official China Daily.)SILK WALLET There is plenty of policy wallet behind the initiative. Backing the objectives, the Chinese government established the US$40bn Silk Road Fund in 2014 with shareholders comprising China Development Bank, China Investment Corp, Export-Import Bank of China and the State Administration of Foreign Exchange. There is also the US$100bn Asian Infrastructure Investment Bank, which opened its doors for business in January 2016, and the Shanghai-based New Development Bank, which aims to invest US$100bn of resources for development projects in BRICS countries. Public money, however, could not finance the scheme on its own. “The upper end of the estimations would not be covered by the entire global foreign exchange reserves,” said Becky Liu, head of China macro strategy research at Standard Chartered. “It is clear that the participation of the private sector will be crucial in the success of the initiative.” Sooner or later, it will fall to the capital markets to mobilise private investment into funding the exercise. That expectation is creating a great deal of noise – if not excitement, about what kind of shape the fundraising will take. “It will be a combination of both loans and bonds and will depend on liquidity and pricing,” said Ashu Khullar, Citigroup’s head of capital markets origination for Asia. “So shorter tenors are likely to be loans and further out past five years via the bond market. We also expect to see a number of project financings related to the Belt and Road too.” It is a mouth-watering prospect for bankers in Asia, but realising the potential of the expected onslaught into the capital markets might take some time – particularly as regional financial markets need developing just as much as the trade routes. “There are opportunities for private sector involvement,” said Liu. “But there are also a number of challenges to overcome.” NEW FRONTIERS Although the initiative covers two-thirds of the world’s population, its scope is just a third of the global economy. This discrepancy points to some of the major problems that need to be addressed. Most of the BRI infrastructure projects will be newly built and built in the lesser-developed parts of the world; not the conditions to att

After the latest run of hot IPOs, there is no doubt that technology is now the Asian equity investor’s sector of choice. The listings of ZhongAn Online P&C Insurance and China Literature in late 2017 caught the imagination in Hong Kong, with hundreds of thousands of retail investors piling in with orders. Investors in the region are crying out for more opportunities to invest in fast-growing businesses, even welcoming companies that have yet to turn profitable. The surging interest makes it clear why Asian stock exchanges are so keen to attract more technology companies to list on their bourses, rather than the US. The reforms needed, however, are proving far more controversial. Hong Kong and Singapore’s exchange operators have each tabled proposals to allow listings from companies with dual-class shareholding structures – a popular feature in the technology world. Singapore Exchange tabled proposals to accommodate weighted voting rights, subject to certain provisions, in February, and clarified in July that it would allow secondary listings from companies with a dual-class share structure that are primarily listed in any of 22 developed markets – as defined by index providers FTSE and MSCI. In June, Hong Kong Exchanges and Clearing revived plans to allow dual-class shares in a concept paper on the creation of a new third board. The exchange plans to publish its response to the consultation by the end of the year. Both exchanges are expected to push ahead, but there are questions that need to be answered. Will the proposals attract more listings? What safeguards are required to protect minority investors? Will it trigger a race to the bottom in corporate governance standards? And, with Hong Kong-listed Tencent crossing a market cap of US$500bn in November, are reforms even necessary at all?NO THIRD BOARD HKEx’s proposals outlined the creation of a new third board for new economy companies, split into two segments. These are the New Board Pro, targeted at early stage companies that do not meet the current listing criteria, and the New Board Premium, which is for more established companies that are ineligible to list in Hong Kong because of their corporate governance structures. Both would allow companies to sell shares with weighted voting rights. HKEx also said it would accommodate secondary listings from firms with unequal voting rights. The Hong Kong government has since hinted that it would drop plans for a third board to allow companies with dual-class structures to list on the main board through the creation of a special chapter. “The first principle adopted is that perhaps we do not need to create a new board for these purposes, but instead, in the listing rule set up a new chapter,” said Financial Secretary Paul Chan in November. The latest comments have been welcomed by most market participants. “My initial feeling is that it’s a sensible route forward,” said Keith Pogson, senior partner for financial services at consultancy firm EY. Bankers pointed out that the purpose of the proposals was mainly to attract secondary listings from some of the large Chinese tech firms like Alibaba. Listing on the main board would be a more attractive option for them than a start-up board with limited liquidity. Still, there is a concern that by scrapping the third board, Hong Kong will need to do more to attract start-up firms. James Fok, HKEx’s head of group strategy, declined to comment on the specific proposals since the conclusions to the concept paper have not been published, although he said that HKEx should do more to attract fast-growing startups. “It’s certainly the case now that if you look at the price to earnings multiples of the [technology] companies listed here, Hong Kong is as competitive as any other jurisdiction, which has helped attract technology firms,” he said. “But I do acknowledge that we should do more to accommodate certain types of companies, particularly those at the pre-revenue stage. We haven’t so far

The virtual currency world will remember 2017 as the year in which this niche and somewhat shadowy industry exploded into the public consciousness. The seemingly day-by-day rise in the price of bitcoin and the explosion of the number of smaller rivals, known as alt-coins, created a spate of headlines. Virtual currency also barged its way into the corporate finance world through the much-maligned initial coin offering (ICO). The concept of the ICO is one that is so far not being taken seriously in traditional corporate finance circles. The plethora of scams and bizarre celebrity issuances have as yet only served to create a toxic reputation for ICOs. But once the hype dies down, there is a serious question to be answered for the investment banking industry. Are bankers in danger of being cut out of the fundraising process? A typical ICO involves the sale of virtual currency, which provides capital to the seller and allows buyers to access the company’s platform or product. The virtual currency tokens are usually facilitated by blockchain – or distributed ledger – technology and tradable after the primary issuance. Information is given to prospective buyers through a document known as a white paper. Companies like Australia’s Power Ledger, which raised A$34m (US$26m) in the second half of 2017 from the country’s first ICO, seem particularly suited to the model. The deal gave token buyers, such as utility companies, retailers and households the ability to trade renewable energy on the company’s blockchain-based platform. “The whole concept of the ICO is well-aligned with peer-to-peer energy trading,” said Power Ledger managing director David Martin. “The token is used in energy trading and useful for the business model … we had other alternatives, but the ICO stood out head and shoulders as the right way to go.”CRYPTOGRAPHIC MODEL The thinking behind Power Ledger’s decision can provide both comfort and worry for those in the corporate finance business. On the one hand, the company’s ability to raise its own funds without relying on outside help is hardly encouraging for intermediaries. On the other hand, the model’s appeal seems to be limited to companies where blockchain is integral to their business model. “I think that the ICOs that you have seen do well are the ones where there’s a cryptographic model central to the business,” says Martin. As of November 27, a total of 228 ICOs had raised over US$3.6bn in 2017, according to industry website Coinschedule. This figure represents a phenomenal rise from the mere US$100m raised in 2016. As the publicity around ICOs grew, several heavyweights of the banking world weighed into the debate, with JP Morgan CEO Jamie Dimon calling bitcoin a “fraud” and warning that it will eventually “blow up”. The price of one bitcoin has shot up to over US$9,000, up from around US$4,000 in mid-August. Goldman Sachs analysts pointed out back in August that ICOs had in fact outpaced angel and seed funding for the internet sector in the preceding months, sounding alarm bells for an industry that thrives on early-stage investments in the tech giants of tomorrow. But despite the disruption lower down the chain, panic does not appear to be setting in just yet at the big investment banks, which typically service larger companies. “There’s been an explosion of capital raising, but it’s too small at the moment to be taken seriously,” said one ECM banker based in Hong Kong. “I think for smaller companies in this new economy of fintech and insurtech, it could become something, a real trend, but it’s still seen as a bit dodgy. My perception is there seems to be a lot of resistance from the established players. Everyone agrees that blockchain is coming, but ICOs are a bit marginal. “What we need to see is a proper tech company raise capital in that form. I think that will change things.”REGULATORY MISHMASH The key to whether ICOs make it into the mainstream will depend on the development of more coherent regulatio

A curious inversion of the “shoeshine boy” scenario now applies to global asset prices. That apocryphal story involved Joseph Kennedy – the rich father of the future president of the United States – realising it was time to exit the stock market just prior to the 1929 crash when the young lad shining his shoes in New York blurted out recommendations on which counters to buy. Nowadays it’s easy to envisage the same scenario, in relation to the idea that everything from stocks to bonds to ETFs to cryptocurrencies is absurdly overvalued. But the modern day shoeshine boy doesn’t tell you what to buy: he tells you to get the hell out. It’s common knowledge that asset prices are at stratospheric levels on a variety of measures. One could look at the Shiller P/E ratio, which suggests that US stocks are as overvalued as they were just prior to the crash of 1929 or during the dotcom bubble. Cryptocurrency bitcoin smashed through US$15,000 a coin in early December with such savage speed that not owning that mysterious unit of exchange has become the ultimate hindsight trade de nos jours. Meanwhile in Asia, credit spreads have returned to levels not seen since just prior to the global financial crisis of a decade ago. The iTraxx Asia ex-Japan Investment-Grade Index, which measures five-year CDS, has contracted by 90bp over the past two years, even in the context of a 50bp increase in five-year US Treasury yields, to just below 75bp as this report went to press. Against this backdrop, there is talk of global financial crisis part two. A large coterie of professional market players are of the “not if but when” mindset, and the game is to guess what might precipitate the correction. War with North Korea is the favourite contender among doomsday merchants, with a debt crisis in hyper-leveraged China also a frequently cited catalyst. An overly aggressi.ve unwind of Japan’s super-easy monetary policy also gets a mention. But how would Asian credit fare should a rerun of the GFC – heaven help us all – play out? One could only assume that the issuance party which has seen annual volume in Asian G3 primary markets surge from around US$25bn a decade ago to around US$350bn this year, will be brought to a halt. If primary deal size is a measure of “irrational exuberance” – to borrow former Fed chairman Alan Greenspan’s infamous parlance – then 2017 took the cake. Blockbusters such as Postal Savings Bank of China’s mammoth US$7.25bn trade or Alibaba Group’s US$7bn have become objects of insouciance in the midst of massive oversubscription and rock-steady secondary trading. It would be fair to assume that anything that resembled a “GFC part 2” would bring this Asian issuance bonanza to a halt. But it is becoming fashionable among both the buyside and sellside in Asia to suggest that the region’s credit markets are likely to weather any generalised financial turbulence better than most other blocs, and particularly if the correction has an orderly semblance on the way down.TEFLON-COATED One example to justify this view was the sanguine reaction to default by China real estate developer Kaisa Group Holdings in 2015. In previous years, so the thinking goes, such an event would have slammed the issuance window firmly shut, perhaps for months. Asia’s primary bond markets now seem Teflon-coated. If an eyelid was batted when Kaisa renegotiated US$2.5bn of debt, it was only for the primary market’s equivalent of a nanosecond. It was business as usual almost immediately. It’s reasonable to read this as a measure of just how mature Asian primary markets have become. The days when an Asian G3 new issue had to be anchored by the US institutional bid are long gone, and the proportion of trades taking the 144A route has fallen markedly. The swelling coffers of the life insurance and pension fund industries, and the growth in assets under management at the private banks have made Asian investors so liquid that the region can handle primary issuance in size on its ow

The year in cartoons Highlights of the year in black and white To see the digital version of this report, please click here

The year in numbers Review of the year 2017 To see the digital version of this report, please click here

To see the digital version of this report, please click here

To see the digital version of this report, please click here

To see the digital version of this report, please click here