It used to be the syndicate manager's most blatant lie: "The bonds were placed mainly with accounts in Asia ex-Japan." That, everyone knew, meant that the lead manager still owned most of the bonds.
How times have changed. Nowadays, institutions in Asia do very often buy up a large chunk of new issues. Goldman Sachs, for example, estimates that about one-third of the global bonds and jumbo Eurobonds in deals it lead-managed last year were placed in non-Japan Asia (and about another 15% in Japan). "A couple of years ago, Asian investors were important," says Kipp Nelson, a managing director at Goldman Sachs in Hong Kong. "But now these investors often drive deals."
The reason for the rise of Asian investors is easy to explain. It is mostly due to rapid build-up of reserves by the region's central banks (see chart). The foreign exchange reserves of the 11 biggest central banks in Asia have grown from $324.92 billion in 1992 to $678.05 billion at the end of last year.
The growth in China's reserves has been particularly spectacular: they have multiplied by more than four times in as many years to over $100 billion. Such is China's demand for fixed-income instruments in which to invest these reserves that, according to Raymond Lo, a director at Salomon Brothers in Hong Kong, its central bank "almost automatically buys any new Eurobond which fits its investment criteria". The results of this can also be seen in the US treasury market, where China is now the fifth largest foreign holder of treasury securities (after Japan, the UK, Germany and the Netherlands Antilles). China's holdings of treasuries have more than doubled to $43.2 billion in just two years (see chart). You could argue that after July, adding Hong Kong's $26.3 billion to the figure, greater China will be the third largest foreign investor in US government paper.
But central banks are not the only investors in Asia with growing amounts of money to spend. A range of new investors with an appetite for more speculative securities is also broadening the type of bonds which investment banks can place in Asia. Rich individuals and small banks increasingly buy high-yield bonds, including local currency paper from emerging markets. The Hong Kong and Singapore branches of international banks are now more inclined to buy bonds, whereas in the past they stuck to participating in syndicated loans. And, most encouragingly, there is a new breed of western-style institutional investor from mutual funds to pension schemes putting growing amounts of money into the world's bond markets.
Lehman Brothers, for example, last month launched a $750 million floating-rate note for Ford Motor Credit targeted at Asian investors. On a fixed-rate issue for Ford in 1996, also targeted at Asian buyers, only 30% of paper was placed in the region. This time, according to Lehman, more than 40% of distribution was in Asia. "Five years ago, you wouldn't have done a deal like this," says Allen Cutler, a senior vice president in debt capital markets at Lehman in Hong Kong, "there just wasn't the money around in Asia."
Central banks are by some margin the region's biggest bond buyers. And, excitingly for investment bankers, they are becoming a little less conservative about what they will invest in. Traditionally, Asian central banks could buy only AA or AAA rated sovereign or supranational paper. They rarely bought bonds with maturities of more than five years and stuck to the three or four most international currencies. Most could buy issues only above a certain size typically $300 million and were restricted to a certain percentage of each issue. Few would touch derivatives.
As interest rates worldwide have fallen, central banks like other investors have been forced to loosen their investment criteria in order to maintain their returns. "Central banks want more yield," says Lehman's Cutler, "so they've had to go down the credit spectrum a little." Some of the Asian central banks will now selectively buy single-A paper, and are extending duration.
China is possibly the most adventurous central bank in the region. With $30 billion in new funds to invest each year, it has little choice. China also faces the problem that it has considerably more reserves than it needs for trade purposes or to tune monetary policy. (It has run up its reserves in a so far successful attempt to prevent the renminbi appreciating too fast.) It also has foreign debts almost exactly equal to its reserves. "Because it is reserved well beyond its liquidity needs, it needs to manage the funds properly and outperform the cost of its liabilities," says a banker in Hong Kong who covers central banks. China can borrow in the international markets at 80 or 90 basis points over US treasuries. "Therefore," says the banker, "it can't invest just in five-year treasury bonds."
Admits Lu Nanping, a director at the State Administration of Foreign Exchange (SAFE), the agency which invests the reserves on behalf of the central bank: "We are under huge pressure to manage such large sums well. We have been working hard to borrow skills from the international markets."
Bankers who deal with SAFE say that it hasn't relaxed its credit guidelines (it still buys only sovereign and bank AAA names), but it has become more adventurous with duration. It now regularly buys 10-year bonds, and has been known to invest in 30-year US treasuries. SAFE has also begun to use advanced hedging tools, such as options. It will even write an option when it wants to reduce its exposure to a currency without selling the underlying securities. "They're a little bit more aggressive than the other central banks we deal with," says Salomon's Lo.
Better safe than sorry
Bankers also report that SAFE (which was known as the SAEC State Administration of Exchange Controls until last October) is noticeably more sophisticated than a couple of years ago despite still having only three or four professionals handling its long-dated portfolio. "They used to parcel a lot of the management out to the Bank of China," says one western investment banker. "But now they do most in-house. They're getting much more professional in terms of fund management." Its order-size means SAFE gets the best possible service from bond salesmen. "They're very well informed," says Lo at Salomon, "because so many people talk to them."