The 18th National Congress of the Communist Party of China has been set for November 8. On that day Xi Jinping is widely expected to be anointed the next president and party leader. Bankers and analysts are now speculating about the policies China’s new leaders will announce.
As big and attention-grabbing as the Chinese economy is, it is still the problems in the West that decide how much money goes into Asia’s bond market. This is partly a result of capital controls — money flows a lot more easily from Frankfurt than it does from Beijing — but it is also because most big global investors remain based in Europe and the US, and their mood changes most easily when they look out of their windows.
This does not mean that Asia’s bond market cannot prosper unless the problems in the eurozone are fully dealt with. The huge growth in Asian G3 bond issuance this year shows that the opposite is true.
It is certainly easier to close an overnight deal in Hong Kong or Singapore when the news from Europe is good — but widespread fear about the eurozone helps drive investors to Asia in the weeks and months that follow.
European stress, Asian strength
Rupa Duttagupta and four other economists at the International Monetary Fund recently wrote an analysis of the spillover from economic crises to other regions, a piece that was included in the IMF’s World Economic Outlook report, released on Tuesday.
The most interesting result for Asian bankers? A virtual recommendation to buy Asian bonds, at least for those who remain bearish on Europe.
The economists studied the effect on capital markets from the euro crisis and the global financial crisis. They found, unsurprisingly, that stress in the euro area pushed up government bond yields in Europe and the Commonwealth of Independent States.
But euro stress also pushed up sovereign yields in Latin America and the Caribbean. These regions combined suffered a 8bp-10bp rise in government bond yields in the two days after a stress.
Government bond yields in developing Asia, by contrast, fell in the days after heightened fears of the euro market. This is partly a result of investors looking for somewhere safe to park their cash — even if that means moving down the credit curve — but it is also because investors want to be rewarded for taking market risk after a stress, and Asian bonds tend to offer good spreads.
(The IMF included the following countries in the ‘developing Asia’ category when it looked at government yields: China, India, Indonesia, Malaysia, Pakistan, the Philippines, Sri Lanka, Thailand and Vietnam.)
This tightening would not affect all Asian issuers, of course. Duttagupta and her team studied only the impact on sovereign yields, and while that has relevance for investment grade credits — especially those that are state-linked — there is little doubt that fears over Europe can hit the high yield bond market hard.
The IMF study showed that European woes can help Asian bond investors net an easy profit, but the economists also looked at the effect of stresses in China — and found little specific impact on sovereign yields. China can still, of course, affect the real economies of its Asian neighbours, but bankers do not have to worry too much about a spillover from stress in China to pan-Asian bond yields. At least, not just yet.
Analysts’ attempts to predict the chances of big stimulus measures in China amount to little more than guesswork at the moment. Xi Jinping received international press attention last month simply for appearing in public — he had been keeping quiet for a few weeks. So few people expect him to grab a microphone, jump on stage and shout about his plans before even taking his new job.
It would certainly be good news for bankers, investors and issuers if China added to these measures, giving everyone an excuse to be bullish for a few weeks until the next bad news hit the screens. But regardless of whether China’s new leader moves quickly to stimulate the economy, Asian bankers looking to launch bond deals — and when making their plans for the future — should keep their gaze fixed on the West.