Pension funds and insurance firms often lament the lack of a deeper and longer-duration government bond market in Asia.
One major reason for this shallowness is that Asian governments don't want it to happen, argues Bunt Ghosh, Asia vice-chairman of fixed income and global head of emerging market risk at Credit Suisse's asset management arm.
The development of domestic bond markets in Asia has lagged the rest of the world and that of equity and foreign exchange markets in the region, says Hong Kong-based Ghosh.
Fixed income markets in Latin America, for example, are far more developed than in Asia, he notes. For one thing, LatAm countries tend to have relatively well established pension systems, plus on the whole, Asian governments don't need to borrow.
“The trouble is that most Asian governments don't actually want a substantial sovereign bond market,” he concludes. “There's no evidence, despite all the talk, that they are making a lot of progress in developing a local-currency bond market.”
They take the view, says Ghosh, that if they don't need to borrow, what's the merit of borrowing at a 5% or 6% coupon?
“Another reason for their reluctance is the idea that they would create a market that they in some senses can't fully control,” he says. “These are liabilities that are hostage to international and regional investors, and I don't think that sits comfortably with a lot of governments in the region.”
Even where governments do need more funding, as in India and the Philippines, they do not always take the steps necessary to enable such financing, Ghosh argues. India's bond market is all but closed to foreigners. It is opening very gradually, he says, but the amount of investment allowed is so small as to be irrelevant.
The investment limit for foreign institutional investors (FIIs) in Indian government debt and corporate bonds is reportedly likely to be increased by $5 billion. That will mean the FII investment limit in government bonds will rise from $10 billion to $15 billion, and in corporate debt from $15 billion to $20 billion.
While Ghosh confirms that a deep and developed Asian local-currency government bond market is likely to develop, he says it could take a long time. Without a mature market there's a limit to how much a local-currency corporate bond market will emerge, he adds.
In any case, banks and corporates in Asia are relatively cash-rich, so why would they issue bonds, which often have tight covenants to negotiate? It's easier for them to go to banks to agree loan covenants and manage the process that way, he argues.
“Everyone looks at the US bond market and says 'the rest of the world should be like that',” says Ghosh. “But the reason it has such a big corporate bond market is because it didn't have such a big banking sector 15-20 years ago.”
US banks were a very small component of the stock index in the past, he notes. Because of inter-state banking restrictions, lenders were all regional, there were very few national banks – hence banks tended not to be big enough to intermediate big issues.
By contrast, in Europe, banks have been the largest cap stocks for a long time, says Ghosh.
Meanwhile, when asked about Credit Suisse's business strategy for the coming months and years, he tells AsianInvestor that the group is likely to make further alliances with fund management firms in emerging markets.
“Given the stage most emerging market countries are at, having domestic fund managers is very valuable for local information,” says Ghosh. “So we’re looking to take stakes or partner with local firms that are best of breed.”
By way of example he cites Credit Suisse's agreement in February of an exclusive global distribution relationship with HDFC Asset Management, an Indian firm with $20 billion in assets under management. The bank is the exclusive distributor of the asset manager’s products outside India, and HDFC AM is the Swiss firm’s exclusive partner in the long-only AM space in India.
Credit Suisse also has a strong franchise in Brazil through asset-management and private-banking joint venture Credit Suisse Hedging-Griffo and is growing its presence in Asia.
Other firms seem to have adopted a similar approach in Asia in terms of buying into local fund houses. For example, Nikko Asset Management has acquired DBS Asset Management in Singapore and Australia's Tyndall Investments, both in deals agreed last year.