Asian debt market surging to new heights
JAMES DUNN, CONTRIBUTOR, THE AUSTRALIAN FINANCIAL REVIEW | APRIL 2019
THE SURGING BOND SUPPLY HAS BEEN DRIVEN BY THE RISE IN ASIAN WEALTH, ESPECIALLY DEEP-POCKETED CHINESE INVESTORS
In the two decades since the “Asian crisis” of 1997, the growth of the Asian bond market has been staggering.
What was effectively the missing link in that crisis is now a multi-trillion dollar behemoth, with the $US13 trillion ($18.3 trillion) Chinese domestic bond market on course to overtake Japan as the world’s No. 2, and celebrating its newly-won inclusion in the Bloomberg Barclays Global Aggregate Index.
It is a similar story with the Asia ex-Japan US dollar corporate bond market, where issuance was just under $US50 billion in 2008, but peaked at $US312 billion in 2017. Issued in the “Reg S” market (under US securities law, a Regulation S offering is a bond issued in $US outside the USA), the surging bond supply has been driven by the rise in Asian wealth, especially deep-pocketed Chinese investors.
ANZ Bank predicts the size of the dollar debt market for Asia ex-Japan to reach a total value of $US1 trillion by 2020.
But as the wealth being generated in Asia – particularly China – outstrips the capacity of the local bond markets to absorb it, it means that the investor base needs to diversify.
And that is where Australian bond issuers have a role to play.
“What continues to drive this secular shift is real growth in GDP, growth in wealth across the Asian countries, and the resultant growth in liquidity,” says Jimmy Choi, head of capital markets, global, at ANZ.
“The first theme is that investors buy their own country's paper, so you see Chinese investors buying Chinese names.
“But as significant liquidity grows, it starts to need to diversify – and that’s where Australian issuers come in. They need to diversify their investor base and tap into new pools of liquidity across the region, while many of the Asian investors are seeking to diversify their holdings, and Australia is seen as a natural choice for access to developed markets.”
Owen Gallimore, head of ANZ Markets credit strategy and research, has seen this change from the start.
“What continues to drive this secular shift is real growth in GDP, growth in wealth across the Asian countries, and the resultant growth in liquidity.”
Jimmy Choi, head of capital markets - global, ANZ
“I’ve worked in the dollar Asian bond market for the past 15 years, and in the early days, it was quite frustrating, because you would go to see some of the big life insurers in north Asia, and virtually the entire bond portfolio was held in US credit markets. But they had on their doorstep these high-yielding good assets, state-run companies, low credit risk.
“But over the years, these mandates have become a lot more focused on Asia's bond market, so now when you visit the capitals in north Asia, Tokyo, Taipei, Seoul, they're heavily invested in Asia's own dollar bond markets,” he says. About 80 per cent of Asian credit is now bought by Asian investors.
“It's a trillion dollar bond market now, and it's self-sustaining,” Mr Gallimore says. We've got $US150 billion in redemptions this year, and this capital needs to be invested.”
Now, says Mr Gallimore, there is a “desperate need for diversification” among investors – particularly in China.
“The mandates for most of the Chinese banks and investors to start with, as you'd expect, was to buy Euro/US dollar financials, and then your local state-owned enterprises (SOEs).
“But given that assets under management (AUM) levels have reached $US5 billion to as high as $US20 billion, some of the Chinese institutions have got too much money in dollar bonds. Their portfolios are too concentrated, and I think we could see some rapid progress in that offshore diversification.”
While the broad base in terms of Asian liquidity will be in US dollars, there is still likely to be growth in Australian dollars, says Jocelyn Wong, director, debt syndicate Australia, at ANZ.
“We saw issuance in $A of about $US161 billion in 2018, which was down on $US180 billion in 2017. But I don't think in terms of total volume in 2018 is a lack of demand. It's probably just a lack of supply in general.
“We’ve seen a new entrance of Asian demand, particularly for Aussie dollar issues, and not only does that boost the market liquidity in general, it makes it a bit more vibrant, so you get a bit more diversity in terms of the type of deals that can come, and in terms of the ratings band of the issuance, and of the duration that we’re able to offer,” she says.
Alastair Watson, treasurer at AusNet Services, has seen this first-hand. “We've probably got a fairly long history through the Asian markets, given our parentage (AusNet’s largest shareholders are Singapore Power, with 31.1 per cent, and State Grid Corporation of China, with 19.9 per cent), but even with that, the Asian component of our Australian-dollar bond deals has grown very, very strongly over the past few years. Typically, we get 40 to 50 per cent of our book coming through Asia – that's mainly Singapore, Hong Kong, and Japan.”
In May last year, AusNet mounted a $200 million 25-year issue. “Only a few years ago, the only place you could get that kind of tenor was the USPP (private placement) or 144A (private placement requiring a credit rating), if you wanted to go out that far. It was fantastic to get that term in the Asian market. I think that the Asian money is starting to really underpin that longer tenor that a utility business like us is looking for,” says Mr Watson.
Mr Choi says that “everyone tends to talk about Asian liquidity as one big pool of money,” but there are many pockets of liquidity. “You’ve got Japan, you’ve got Korea, you’ve got Taiwan, you’ve got Singapore and you’ve got Hong Kong.
“And now China is obviously building. The beauty for the issuers is that the investor base wants to diversify. And they all have bespoke features to them – you can tap either all of them at once, or individually at one time,” he says.
This article was first published on April 5 2019 in the Australian Financial Review’s Special Report on Rise of Asian Liquidity
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