The IMF/World Bank annual meetings this year provided an ideal backdrop for a discussion on the internationalisation of Asia’s capital markets.
With China and India – Asia’s two largest emerging economies – opening their currencies and reforming their capital markets, the 2017 meetings offered a timely opportunity to discuss the region’s progress, and the challenges that remain.
China this year allowed foreign investors to invest in onshore renminbi bonds without opening a bank account on the mainland, introducing a groundbreaking Bond Connect platform in early July.
That followed a direct access programme giving certain institutional investors a way into the interbank bond market in 2016 and the gradual opening of the Panda bond format, allowing overseas issuers to raise funds onshore.
But China has also restricted currency outflows and squeezed onshore bond yields higher to rein in credit growth, giving global investors pause for thought. It has also been slow to formalise Panda bond rules, and questions around the direction of the currency remain unanswered.
India allowed companies to sell rupee bonds overseas in 2015 and has been refining the rules ever since. Housing finance company HDFC made the breakthrough for the corporate sector in 2016, opening up a promising alternative investor base for Indian borrowers and giving global investors unrestricted, quota-free exposure to rupee securities. The offshore liquidity pool, however, remains limited, and the latest rule changes have added more complications for potential issuers, imposing coupon caps and minimum tenors that were originally designed to prevent weaker companies from taking on foreign exchange liabilities.
Barely a stone’s throw from President Trump’s White House in Washington DC, the latest IFR Roundtable also took place amid a mounting debate over the resilience of global emerging markets to rising US dollar interest rates.
Emerging markets tend to underperform when the US dollar strengthens, and Asia felt the full force of shifting global capital flows in the 2013 “taper tantrum”, when the suggestion of an end to US quantitative easing rocked confidence in India and Indonesia, among others.
Asian borrowers have sold a record amount of US dollar debt in 2017, with issuance already exceeding US$250bn, excluding Japan and Australasia. As countries open their capital markets to the world, are they attracting valuable long-term capital, or are they leaving themselves more exposed to volatile capital flows?
An engaged audience at the IMF headquarters tested the panellists on this and other topics, ranging from infrastructure finance to the use of blockchain technology.
At a time when the US administration is reducing its emphasis on multilateral institutions to focus on stimulating domestic growth, the debate around recent developments in China and India takes on even greater significance.
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