There is still too much of a disconnect between Asia's underdeveloped debt capital markets and its fast-growing and increasingly weighty economies, according to some of the region's leading asset owners and banks.
Although Asian aggregate output is now broadly on a par with that of the US and Europe combined and accounts for a lion's share of global growth, local capital markets have not kept pace, Liew Tzu Mi, the chief investment officer for fixed income at Singapore sovereign wealth fund GIC, said at an AsianInvestor event this month.
“We all know that the capital markets in Asia have lagged the economy significantly, both in terms of size as well as the composition of what represents the market today versus what the underlying economy is,” Liew said.
Part of the reason is because regional governments have been slow to liberalise markets, delegates heard at the event held in Singapore in partnership with State Street Global Advisors.
“Let’s just be honest in this room and among the panel – Asian governments play a big part in how they are going to shape the Asian bond market,” David Chua, head of investment strategy at Prudential Assurance Company Singapore, said.
Speaking on the same panel, Clifford Lee, managing director and global head of fixed income, treasury and markets at DBS Bank, said governments are still trying to make a decision on how quickly and in what form they want to open up their capital markets to investors,
Some regional governments have been pressing ahead, bit by bit, to improve access, with mixed results. Among them, notably, is China with its various qualified foreign institutional investor schemes (QFII and RQFII), the China Interbank Bond Market (CIBM) Direct Access scheme and, more recently, the Bond Connect programme linking its huge domestic bond market to Hong Kong.
For all that, Asian bond markets are still punching below their combined weight, Ng Kheng Siang, Asia-Pacific head of fixed income at State Street Global Advisors, told the audience.
A key hurdle is the relative lack of market liquidity – something the deterioration of bond market liquidity generally after the global financial crisis has exacerbated, GIC’s Liew said.
“That is making investments difficult, not just from selling, forget about selling, but even buying – even if you want to buy when you see a dislocation I don’t think you can get many bonds if you want to do anything,” Liew said.
The lack of sellers is partly a consequence of the market's relative immaturity, as the development of high-yield credit typically trails the sovereigns when markets open up, DBS Bank’s Lee said.
Another factor is that very few Asian governments rely on offshore investors buying local currency bonds to grow their economies.
“Because of that, much of the bonds are ... held by the respective domestic investors, and many of them are take and hold. I’m generalising but that is really a big part of the problem,” Lee said.
When borrowers in Asia, especially in Southeast Asia, do need credit, the bond market is oftentimes not the first place they look for funding.
Many companies are not interested in going to the bond market to raise funding simply because they can borrow very easily from the banks, said Kiyoshi Nishimura, chief executive of the Credit Guarantee and Investment Facility (CGIF), also on the panel.
“The real constraint for the development of bond markets in Asean countries, or even Asia in general, is [that] banks are really too strong,” Nishimura said.
Banks across Asia still have ample balance sheets, so the economic growth in the region still hasn’t reached a point where it has grown beyond what banks can support, DBS Bank’s Lee said.
To that end, his bank is trying to heed the lessons learned from the Asian Financial Crisis in 1997, when most corporate debt came from banks, to persuade more borrowers to turn to bond markets.
“When there is a panic, if you are funded by 20 to 30 banks, as opposed to a few hundred bond investors, if a few of the banks start to pull, the rest will follow and you’ll crumble. Hence the fundamental need, the textbook need, of a broader capital market space,” Lee said.
A change in borrower attitudes is coming, he added, but it likely won't happen overnight: “They’re going to milk the banks, milk the commercial banks, but we believe that the growth of Asia will outpace the balance sheet strength of the banks in due course.”