Asian bonds at a crossroads

Institutional Investor, February 2009

Asia’s bond markets enter 2009 at a crossroads. Last year many of them demonstrated that they were credible alternatives to credit-clogged G3-currency markets, at least for local borrowers. But  what happens next? The coming 12 months will demonstrate whether Asian markets have shown sufficient depth and maturity to hold their ground as a key funding source or will once again be only an afterthought to the major global currencies.

“Local currency markets are a lot more important than people give them credit for,” says Sean Henderson, head of debt syndicate for Asia Pacific at HSBC. Dealogic, the data provider, says bonds in the 10 main Asia ex-Japan currencies combined amounted to the equivalent of US$231.8 billion in 2008, compared to US$28.3 billion for Asian issuers in dollars, yen and euros combined. “Both in terms of scale and the trajectory of the markets, local currency became a lot more important in 2008,” Henderson says. In particular, Asia proved itself a rare location in which borrowers could raise bank capital: Maybank, UOB, DBS and OCBC all raised tier one capital locally in 2008, and several Philippine lenders raised tier two funding.

Different markets responded to the opportunity – if one can call a global credit crunch an opportunity – in different ways. The standout, by a considerable distance, was China. The 10 largest local-currency bonds out of Asia last year were all in Chinese renminbi, and the smallest of those 10 was worth Y19.5 billion (US$2.85 billion). Consider China Ministry of Railways: in September, as Lehman Brothers plunged towards bankruptcy, it raised Y20 billion; a month later, as world stock markets hit some of the worst volatility for nearly a century, it raised another Y20 billion; and in November, amidst all that global uncertainty, it trumped them both by raising another Y30 billion in the largest bond of the year. China National Petroleum Corp, China Merchants Bank, China Development Bank and the sovereign itself have all raised billions of dollars worth of local money in 2008.

“China’s bond markets are starting to play a more meaningful role in the overall economy and we expect to see this welcome development continue,” says Mark Leahy, head of global risk syndicate for Asia at Deutsche Bank. “The regulatory framework around the bond market, and in particular the corporate bond market, continues to be strengthened and will allow more participants to play a more active role. This is the area we believe will have the most rapid growth in the coming years.”

But China is something of a special case. “It is the most cloistered of the domestic bond markets,” says Fergus Edwards at UBS in Hong Kong. “Local investors have a relatively limited number of markets to consider, and at present those with cash are less likely to invest in equities or in property than they were a year ago. That makes the bond market a very attractive third option.” Also, Edwards says, the Chinese are a relatively protected investor base, unaffected by declines in global markets, forex wobbles or the oil price. “Chinese companies continue to grow strongly, driven by continued, if weaker, domestic demand. The renminbi market allows them to domestically fund the investment that generates this growth.” Edwards, who was on the October Ministry of Railways deal, says the ructions in world markets at the time were “not a problem. Chinese accounts focused on the strength of their home market rather than the weakness of others.”

Elsewhere in Asia, though, few places were quite that resilient. Most markets showed healthy issuance until the October crash, and then locked up just like everywhere else. Malaysia, for example, hosted deals in ringgit worth $500 million or more from Cekap Mentari, Syarikat Prasrana, Cagamas (twice) and Khazanah, but there’s been nothing of any size since September. Barring an encouraging $554million-equivalent deal for Woori Finance in December, the same is broadly true of the Korean won. Philippine pesos and Indonesian rupiah have been active in low quantities (though Indonesia effectively shut down in August), but traditional stalwarts, especially the Hong Kong dollar, have been all but dormant: there hasn’t been a deal worth US$100 million in Hong Kong dollars for almost a year now.