Insight
Asian investors seek wider markets
MARK EGGLETON, CONTRIBUTING EDITOR, THE AUSTRALIAN FINANCIAL REVIEW | APRIL 2019
One of the major reasons Asian investors are turning their eye to Australian corporate bond issuers is a need to diversify into broader assets across wider markets.
A close examination of the March release of the Asian Development Bank’s Asia Bond Monitor reveals the vast majority of the top 30 local corporate currency bond issuers in China are state-owned enterprises (SOEs).
Moreover, a large proportion of the local currency bonds in US dollar terms are held by state-owned enterprises in South Korea and Singapore as well.
All of these markets, as well as Hong Kong, are proving to be fertile grounds for Australian issuers as Asian investors look to diversify away from SOEs and do not have the confidence in their homegrown non-SOEs, especially in China.
A key reason in this lack of confidence is that corporate bond defaults rose to record highs last year in China alone, with non-SOEs accounting for over 85 per cent of these.
Fitch rating agency suggest this year will also see a rise in SOE defaults as local Chinese governments are less likely to bail them out. This came close to happening back in late February when a local government financing vehicle Qinghang Provincial Investment Group missed an interest payment of $US11 million to investors.
It was the first time an SOE had missed a payment in more than 20 years but the local government finally did come good on the payment.
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“All of these markets... are proving to be fertile grounds for Australian issuers as Asian investors look to diversify away from SOEs"
Mark Eggleton, Contributing Editor, The Australian Financial Review
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Bearing all this in mind, one Chinese non-SOE that should be successful in tapping bond markets is Tencent, which has recently announced the launch of a $US5 billion bond which would be the largest issuance this year in Asia, excluding Japan.
According to media reports, proceeds from the sale will be used for refinancing and general corporate purposes. Other sources suggest the Chinese social media and gaming behemoth is looking to diversify its business into areas such as cloud computing after reporting lacklustre results over the last 12 months.
Tencent is also taking advantage of an increasing demand in fixed income assets and the opportunity to lock in low-level interest rates over a longer term, considering global interest rates look set to head down sooner rather than later.
This is especially prevalent in Europe where the rather strange sounding negative-yielding corporate bond is making a resurgence. Put simply, it means investors get to pay companies for the privilege of lending to them.
It does not really make sense but there is now $US10 trillion worth of bonds showing negative yields globally, according to Bloomberg.
What it can be loosely attributed to is a decade of quantitative easing, which according to industry observers has changed the way capital and investments are judged.
Mark Eggleton, Contributing Editor, The Australian Financial Review
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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