The Asia-Pacific region is feeling the effects of the US Federal Reserve’s monetary policy, with business leaders concerned about the end of the central bank’s monetary stimulus. The Fed’s announcement in mid-2013 that it intended to taper its quantitative easing programme sparked volatility in emerging markets and now that the reduction has begun, by $10bn to $75bn a month, many in Asia are concerned that the region will experience a significant capital outflow. In fact, talk of the eurozone crisis and the impact of deleveraging by European banks in Asia are a distant memory, with the US now often cited as the biggest concern when it comes to the global economy.
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While there are signs that the developed world has turned a corner in its recovery from the global financial crisis, the World Bank in January 2014 warned in a report of the risks of tapering to emerging markets. Speculation about the tapering seemed to have caused more turmoil than the actual event, but in a worst-case scenario, where there is a rocky adjustment to the US’s tapering, the World Bank estimates that capital flows to developing countries could decline by between 50% and 80% for several months.
Kaushik Basu, chief economist and senior vice-president at the World Bank, says: “Global economic indicators show improvement. But one does not have to be especially astute to see there are dangers that lurk beneath the surface.” He estimates annual growth in developing countries will rise to more than 5% in 2014, with China doing better at 7.7% and India at 6.2%.
Healthy growth
An outlook published by the Organisation for Economic Co-operation and Development in October 2013 projects that growth in emerging Asia will moderate gradually, but will stay resilient over the 2014 to 2018 period, with average growth of 6.9%. While a healthy figure, it is still below the 8.6% registered before the global financial crisis in the 2000 to 2007 period.
In a survey of chief financial officers (CFOs) and senior finance executives in Asia published by Bank of America Merrill Lynch (BAML) in mid-2013, the majority were bullish on their earnings potential. The most optimistic were those in developing south-east Asia, where 81% of respondents expected revenues to increase and 72% expected their profits for 2013 to grow compared with the year before. Meanwhile, the survey found that CFOs in Japan and South Korea were the most pessimistic in Asia, even though their outlook was more hopeful than it had been a year earlier.
More than one-third of all respondents in BAML’s survey said commodity prices were their greatest concern, while in Indonesia in particular this proportion leapt to 60%. A total of 50% of CFOs in South Korea and 42% in China said the risk of a change in commodity prices was their main concern. In Taiwan, only 8% were primarily worried about commodity prices and cited counterparty risk and currency volatility as their greatest concerns. Currency volatility was also a concern for CFOs in Thailand, Japan, India, Malaysia and Australia, while interest rates were more of an issue for CFOs in Hong Kong.
A Deloitte survey of CFOs in south-east Asia published in December 2013 cited issues for CFOs that are familiar to the banking industry: regulation and compliance. The survey found that risk management had become a greater focus for the majority of CFOs. Nearly three-quarters of CFOs surveyed said they were more involved in risk management, compared with the year before, which had become more important because of the global regulatory environment, as well more regulations at a domestic and industry level.
Tapering concerns
Kenny Keung, CFO of Hong Kong-based Lan Kwai Fong Group, as with many of his peers in the region, cites the US's tapering as his main concern with the global economy. He says the Fed’s tightening of monetary policy “will probably raise the interest rate and increase the global cost of capital”. He continues: “The strong US dollar and tightening of liquidity due to potential [quantitative easing] tapering will lead to capital outflow from emerging markets, which will weaken the domestic currency in emerging markets and increase the upward pressure on interest rates.”
The Lan Kwai Fong Group, which has its origins in the property development of Hong Kong’s district of the same name, now has developments elsewhere in Asia, including China and Thailand. On the impact of quantitative easing for the company, Mr Keung says: “Our development project in Thailand can benefit from the strong US dollar but the potential upward pressure on interest rates will discourage our borrowing activities and increase our financial cost.”
One of the countries that suffered in mid-2013 when the Fed announced its intention to taper was Indonesia. The south-east Asian country is included in the ‘fragile five’ – along with Brazil, Turkey, India and South Africa – whose currencies are deemed to be the most vulnerable to the US tapering.
Troy Parwata, group CFO of Indonesian firm Mitra Pinasthika Mustika (MPM), identifies tapering as his greatest concern regarding the global economy, along with other issues such as a difficulty in liquidity and the slowdown of economic growth in Indonesia. “The issue is more about higher interest rates and tightened liquidity from the banks. Repayment ability is not an issue,” he says.
MPM is a major distributor of Japanese vehicles in Indonesia and has subsidiaries that include business areas such as rental and leasing services, auto loans and insurance. As a distributor of Japanese brands such as Honda, the company cannot ignore the recent developments in the Japanese economy since the introduction of ‘Abenomics’, as the economic vision of the country’s prime minister Shinzo Abe is popularly known. The aggressive monetary easing by the Bank of Japan has targeted deflation and lifted Japan’s economy out of the doldrums, putting it back on the radar and gaining the attention of international observers.
China exposure
China continues to be the major economic force in the region and those with close trading relationships are keeping a close eye on its economy and watching for signs of a cash crunch.
For James Samuels, CFO of Fusheng Industrial, the machinery division of Taiwan’s Fusheng Group, the company’s biggest exposure is in China, followed by the EU and the US. “Our biggest concern is the very average growth in all three key markets with little evidence of a clear uptick in any one market,” he says. “Although we borrow onshore in Taiwan at very low rates, we tend to keep a very low level of net debt so our borrowing needs are generally very low. Rates will go up, but it is hard to see when and how fast. All of our long-term debt is hedged.”
As China’s trade with the rest of Asia increases, so too will the demand for trade settlement in China’s currency. Figures from the Society for Worldwide Interbank Financial Telecommunication’s (Swift’s) Renminbi Tracker show that in October 2013, an increasing proportion of trade finance was done in renminbi. The renminbi had a 8.66% share of trade finance, which had grown from 1.89% in January 2012. The renminbi had overtaken the euro to become the second-most used currency in trade finance after the US dollar, which retained the lion’s share of trade finance activity with 81.08%. The Renminbi Tracker also reported that the top five countries using the renminbi for trade in October 2013 were China, Hong Kong, Singapore, Germany and Australia.
In terms of the renminbi being a payments currency, the currency ranked 12th in the world, according to Swift data. And, in January 2014, Standard Chartered’s Renminbi Globalisation Index, which measures renminbi deposits, dim sum bonds and certificates of deposit, trade settlement and foreign exchange in the offshore centres of Hong Kong, London, Singapore and Taiwan – reached 1301. This figure was up 6.1% from the previous month and reflected year-on-year growth of 78.9%. The bank surveyed corporates and found that Chinese corporates generally have lower offshore renminbi usage rates compared with Hong Kong firms and multinational corporations.
Renminbi benefits
For Mr Keung at Hong Kong-based Lan Kwai Fong Group, the internationalisation of the renminbi has a key role to play. “The internationalisation of the renminbi is a must in the foreseeable future,” he says. “The denomination currency of our capital investments and borrowing are in renminbi. Once renminbi is internationalised, it implies a release of foreign exchange control and a liberalisation of the financial industry. We definitely will benefit from a greater supply of financial institutions offering both deposits and borrowing in renminbi. Moreover, the internationalisation of the renminbi will lead to more financial products in renminbi in hedging both interest rates and exchange rates. These will decrease the risk in exchange rate and enhance the cost of borrowing.”
Mr Samuels also has an interest in the developments in the use of the offshore renminbi. Taiwan became connected to the offshore renminbi market in February 2013 when a clearing bank was established in Taipei and renminbi payments began, which satisfied the appetite for China’s trade with Taiwan to be settled in its own currency. One local banker explained that Taiwanese companies and banks stand to benefit from the internationalisation of the renminbi as it reduces the foreign exchange risk of having to convert payments into US dollars, and it also means that paying a Chinese trading partner in their own currency means that they can negotiate better terms.
The renminbi also helps companies in their supply chain in Greater China. Taiwanese companies taking orders from North America or Europe, for example, may manufacture their goods at a subsidiary in China and then export the goods out of Hong Kong; settling in renminbi makes the transaction simpler and more efficient.
Fusheng Industrial’s Mr Samuels says: “Renminbi is a major currency for us as it internationalises our transaction costs and exposures go down. This is a big positive for us. However the real question for us is how the internationalisation will impact controls on outward remittances.”
Banking relationships
Mr Samuels says he is “generally happy” with Fusheng’s banking relationships. “They understand us and our needs and have been very supportive where required. Our banking needs are generally fairly simple, so most products we need are available at a competitive price. Our biggest issue is not with our banks, but with restrictive Taiwanese regulations,” he says. He adds that he does not expect the number of banking relationships to change in the next five years. “Our banking needs are well met by the relationships we have currently. Some of these relationships go back 40 years,” he says.
Mr Keung at Lan Kwai Fong Group says he is confident that the banks his company uses are large enough to withstand any volatility in the financial markets and says that the financial products and services they offer are comparable. However, there are some negative effects of the current banking environment on corporates. “Due to the financial crisis, all banks pay more attention to compliance rather than banking experience. This creates inconvenience to the client and a damping of the client relationship,” he says.
Despite this, however, Mr Keung expects that Lan Kwai Fong Group will keep roughly the same number of banking relationships. “The internationalisation of the renminbi will open us to more financial institutions for more financial products. Due to the keen competition, the number of banking relationships may also be increased. In term of services, my biggest complaint is the turnover of personnel, which will lead to inconsistency of services,” he says.
Meanwhile, Mr Parwata at MPM in Indonesia expects that the company will increase the number of its banking relationships by three to four banks in the next five years to spread the company’s risk and also have access to more funding.
