By Noel Quinn
Despite Asia’s voracious appetite for capital as it transformed itself over the past 30 years, the plain vanilla bank loan has reigned supreme, stifling the growth of other capital-raising options such as the region’s equities and capital markets, and its alternative investments environment.
Asia is fast outgrowing the bank-loan model as its principal source of finance, and the change is secular rather than cyclical. In relative terms, the first phase of industrialisation that propelled the region into prosperity was cheap.
The next phase, where growth is powered by a combination of productivity gains and moving up the value chain, will be much harder to achieve and much more expensive. Even in the absence of other non-secular changes in the global financial environment, the bank-loan model would have been unable to support continuing growth on its own.
The structure of Asia’s capital supply is changing. We believe that the down-scaling of the US Federal Reserve’s quantitative-easing programme is having and will continue to have a profound effect on financing in the region, but not in the way that most people suppose.
The fears that the taper will spark a massive withdrawal of funds from emerging markets and subsequent capital drought are exaggerated. A recent World Bank paper estimates that just 12.8 per cent of gross inflows into emerging markets between 2009 and the beginning of 2013 were specifically linked to quantitative easing.
The paper forecasts that the unwinding of QE will cut capital inflows by just 0.6 per cent of emerging market gross domestic product by 2016.
Similarly, we see little evidence of a capital drought as western banks cut their loan books in Asia, first in response to the financial crisis and latterly in the expectation that Basel III banking regulations will require higher capital requirements. Although the phenomenon is real, the region’s own financial institutions seem to have more than enough cash to make up for any shortfall.
It also looks probable that even with the taper, western central banks will seek to keep interest rates low for the foreseeable future, encouraging investors to continue to look to emerging markets in their search for yield.
Although growth in emerging markets is unlikely to return to the heady levels it experienced before the crisis, we still expect developing economies globally to grow almost three times faster than developed economies this year.
But last June’s “taper tantrum” and the reduction in western bank loans have nonetheless focused the attention of Asian businesses on the potential vulnerability of their financing model; and banks – looking forward to Basel III – are looking to deliver capital to their clients in ways that do not put extra pressure on their balance sheets.
Change in demand profile
The demand profile for funding is also changing. Asian businesses are becoming increasingly sophisticated as they seek to optimise fiscal efficiency in the face of rising wages, growing competition, and falling demand in the wake of the financial crisis.
Adding to the demand-side pressure for change are deregulation in China and fears of a maturity mismatch, particularly on long-term infrastructure financing. We estimate that Asia needs to invest some US$11.5 trillion (Bt372 trillion) in infrastructure alone between 2010 and 2030 to accommodate another 650 million people moving to cities.
The result of all these converging influences is that the Asian funding environment is starting to become more flexible, more customer-friendly and more efficient.
At its most basic level, that means that we expect initial-public-offering activity to pick up substantially. We are already seeing noticeably more interest from certain sectors such as retailers, real-estate investment trusts and developers in raising funds in the equities market.
But we are also expecting more Asian companies to opt for structured bond issues, or term loans from non-bank sources including private equity, hedge funds and sovereigns.
The evidence of this shift is already clear: syndicated lending to Asia ex-Japan hit $462 billion last year, an increase of 51 per cent over 2012.
To date, the limitations to the expansion of these less conventional funding solutions have not been from a shortage of supply or a lack of demand, but from the limited number of international banks that have both the reach and the expertise to link the two.
Asia’s economies and societies have matured rapidly over the past five years, but the region needs to expand its funding options both in terms of instruments and geography. Both investors and companies are looking to new ways to adapt to a new reality, and their search is leading to a new wave of financial innovation.
The author, Noel Quinn, is HSBC’s Regional Head of Commercial Banking, Asia-Pacific.