Financiers, policymakers and development enthusiasts who attended the Asian Development Bank annual meeting in Manila last week expected the following all-too familiar risks to dominate the discussions: the eurozone crisis, Chinese hard landing risks, and structurally high commodity prices for the oil-importing region. After all, Asian markets during the past year have been locked into a risk on/risk off seesaw as investors navigate this hydra-headed storm.
In truth, of the list of threats facing the region, delegates only really concentrated on public enemy number one: the eurozone. On May 1, official Chinese manufacturing purchasing managers' index rose to 53.3 last month, its highest in more than a year, fuelling optimism among delegates that Chinese policymakers would engineer a soft economic landing. What’s more, oil prices have softened a tad in recent days in tandem with the explosion of political risks in the eurozone.
Against this backdrop, the mood in Manila was of cautious optimism that the region is taking the right measures to buffer itself from the storm, while macro-economic frameworks provide beefier defences compared to Asia’s crisis-prone past. But an intensification of the eurozone crisis will be a game-changer for the region’s economic and financial cycle, delegates concluded.
Here are a couple of partial takeaways from the meeting:
- The jury is out to what extent Asian lenders have the funding and technical capacity to offset vanishing credit supply if weaker European banks retreat from the region. Although recent European Central Bank liquidity measures have helped to shore up banks’ balance sheets, there is a “material risk” of reduced European banking appetite in Asia, given the 40% probability of a severe recession in the eurozone, according to an S&P seminar. By way of background: these fears were voiced loudly by the Institute of International Finance, which predicted in January that net commercial bank flows to emerging markets will fall to just $38 billion in 2012.
Still, on the flipside: underscoring the lending capacity of Chinese banks, in January China Development Bank, Export-Import Bank of China, and Industrial and Commercial Bank of China joined forces to provide a $1.2 billion loan to India’s Reliance Communications to repay maturing foreign currency convertible bonds.
What’s more, in April, CIMB Group,one of Malaysia’s largest banks, signed a memorandum of understanding with the Royal Bank of Scotland for the sale of its regional cash equities and corporate finance business, in a deal that would highlight the opportunities for south east Asian lenders to expand their franchises thanks to European banks’ balance-sheet constraints. Finally, the bond market has witnessed a big jump in issuance, highlighting the capacity of capital markets to offset restricted bank credit supply.
According to an international banking regulator, dollar lending in the region will be more expensive in the coming year but Japanese banks have “barely begun” to uncap their liquidity hose. Whether the projected reduction in French lending in the region will materially strengthen domestic financial intermediation is anyone’s guess. Still, it’s fair to say trade financing costs are probably set to rise – but the question is by how much.
- ASEAN+3 finance ministers in Manila hailed the decision to double resources held by the Chiang Mai Initiative Multilateralization, a 12-year-old monetary framework, to $240 billion, in a bid to increase Asia’s financial safety net. But these are a series of commitments, which have not yet flowed into a region-wide pool of reserves. Perhaps more significantly: measures were announced that would see a greater harmonization of rules with respect to cross-border bond issuancewhile China, Japan and South Korea announced their intention to invest in neighbouring government bond marketsto encourage local currency portfolio flows.
Boosting intra-regional financial flows has been an oft-cited Asian policy aim during the past decade but the lack of perceived safe assets in the west has added a sense of urgency to this push. There is one problem with this narrative, though: most large Asian nations still run current-account surpluses. Thus, in short, it will be difficult for Asian savings to be soaked up in the region given Asia's export-led growth dynamics but a more modest aim is surely achievable: greater cross-border local currency bond listings – from a low base – by Asian companies and sovereigns in the coming years. Perhaps the eurozone crisis will give this push much needed momentum.
In summary, to be fair, Asian policymakers are learning the right lessons from the crisis: the need for regional integration, financial market deepening, and diversification away from the structurally weak dollar and euro. Many a good word is spoken on these three themes at all multilateral development banks’ annual meetings. The challenge for Asia now: delivery.