What’s driving this voracious and diverse appetite for RegS issuance in Asia?
#1 First and foremost is the rise in middle class income across the region. For example, by 2025 125 million ASEAN households are expected to attain middle-class status.2
#2 The second force accelerating this hunger for US assets is investor and issuer flight from riskier Asian currencies, and a persistent view that the US dollar is still a safe haven in these uncertain times.
#3 And third is a broad shift in capital flows globally. In recent months, there has been increasing demand for US dollar credit from Asian pension funds and sovereign wealth funds – based anywhere from China, Japan and Singapore – due to a lack of opportunity in local currency markets.
2. TOO LEVERAGED TO CHINA?
While Asia’s RegS market has grown exponentially in recent years, the bulk of the market is composed of bonds issued by Chinese institutions such as banks and state-owned enterprises, and bought by Chinese investors, according to ANZ research.
China made up about 47 percent of the US$730 billion market as of June, and is 64 percent of Asia-ex Japan/Australia’s new issuance year-to-date.
The drivers of this trend are easy to understand. China’s struggle to control capital outflows and steady the RMB as regulators attempt to slowly liberalise the country’s capital account has encouraged many Chinese firms to raise funds offshore.
At the same time, more and more Chinese investors – from institutions to individuals – are eager for exposure to US dollar assets, and to fund the growth of foreign companies based in jurisdictions with strong regulatory regimes, such as Australia.
And yet, given China’s colossal size relative to most other Asian markets, in many ways the figures are misleading. In fact, the RegS market has seen a surge in issuances from lower rated countries – such as India and Indonesia – many of which are coming into the market.
Is the market too leveraged to China? Some analysts think so. For example, should Chinese policymakers suddenly loosen the reins on the anti-leverage campaign and encourage domestic issuance in RMB, China’s issuers and investors may turn their attention onshore.