Financiers and policymakers attending the Asian Development Bank annual meeting in Manila last month were expecting discussions on some all-too-familiar and worrying topics.
They might reasonably have expected the agenda to include substantive discussions on the eurozone crisis, risks of a Chinese hard landing, and structurally high commodity prices among other macro risks playing havoc with market sentiment. After all, over the past year, Asian markets have been locked on a risk-on/risk-off seesaw as investors navigate this storm.
In the end, though, of the list of threats facing the region, delegates concentrated only on public enemy number one: the eurozone.
The crisis in Europe has come into sharp focus in Asia only in recent weeks. Previously several market participants had failed to gauge the depth of the crisis and the threats it poses to the Asia-Pacific region.
One banker says: "We are really coming to terms with the seriousness of the situation, particularly with respect to Greece. Out here it can be tempting to think we are insulated to a certain extent. But the truth is that if Europe fell into a depression, it would be almost impossible for us to avoid following suit."
The 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.
Cautious optimism
Against this backdrop, the mood in Manila was one of cautious optimism that the region is taking the right measures to buffer itself from the storm, while macroeconomic frameworks provide stronger defences than existed in Asia’s crisis-prone past.
But an intensification of the eurozone crisis will undoubtedly be a game-changer for the region’s economic and financial cycle, delegates concluded.
The jury is out as to the extent to which 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 a Standard & Poor’s seminar.
Such fears have been previously 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 this year.
The flipside
On the flipside, and 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. The loan was to repay maturing foreign-currency convertible bonds.
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| Only one thing dominated the ADB meeting: the eurozone |
And in April, CIMB Group,one of Malaysia’s largest banks, signed a memorandum of understanding with 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 Southeast 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 or not 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 – only 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 to implement a greater harmonization of rules on cross-border bond issuancewhile China, Japan and South Korea announced their intention to invest in neighbouring government bond marketsto encourage local currency portfolio flows.
Urgent push
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 new sense of urgency to this push. There is one problem with this narrative, though: most large Asian nations still run current-account surpluses. So it will be difficult for Asian savings to be soaked up in the region given Asia’s export-led growth dynamics. However, a more modest aim is surely achievable: growth, from a low base, of cross-border local-currency bond listings by Asian companies and sovereigns. Perhaps the eurozone crisis will give this push much-needed momentum.
Asian policymakers seem to be 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 is delivery.