Crisis, distress and restructuring hogged the headlines as 2018 came to a close. The uncertainty pervades as a surfeit of macro headwinds cloud visibility. Sounds familiar? These same words and a sombre outlook were also in the foreground 20 years ago when The Asset launched its first issue in the middle of the Asian financial crisis.
30 Apr 2019 | Daniel Yu
Despite the grave worries expressed at the time, however, the past two decades have turned out to be the most exhilarating period in Asia. Just like the cover of the first issue of The Asset, a phoenix emerged from the ashes of the meltdown. Slowly at first, economies in the region started rebuilding. Buttresses were put in place to fortify domestic markets. Before long, activity returned, and Asia resumed being the fastest-growing region in the world.
To be sure, it was a different era. Foreign names dominated. In financial services, Chase was competing with JPMorgan and Merrill Lynch was decades away from being in the embrace of Bank of America. Having a collection of names seemed a way to lend prestige to the rarefied world of investment banking from Morgan Stanley Dean Witter to Salomon Smith Barney to Warburg Dillon Read. And yes, even Lehman Brothers scored a coup when it arranged the US$97 million initial public offering (IPO) for China.com, the poster child of the dotcom days attracting an order book of US$3 billion from 150 accounts.
Issuers in Asia were busy cleaning house and sharpening their financial acumen. Cash management was starting to gain traction. Technology in treasury was not far behind nor were cyber-security fears. In The Asset’s first two years, familiar refrains still resonate today: “current modes of user identification for computer security such as passwords, PIN numbers and even signature recognition are vulnerable to fraud, theft, loss, abuse or duplication”, we wrote in the April 2000 issue. “But there is one foolproof method making great advances that will defeat even the most determined hacker.” Given the subsequent hacks occurring over the next many years, a foolproof method it was not, which may continue to undercut the promise of technology.
Shanghai's main shopping district along Nanjing Road.
An important pillar of reform that fostered the region’s impressive turnaround was the development of the capital markets. From less than US$500 billion in size at the end of December 1999, East Asia’s local currency bond market reached US$13.1 trillion as of the end of 2018, according to data compiled by the Asian Development Bank. Slowly at first, these fledgling markets began to attract investor interest. Appetite for Asian credits was such that by June 2001, The Asset for the first time began to use the term, “Asian bid”, acknowledging how these investors are driving value and volume in Asia’s bond markets.
The narrative of the past two decades is incomplete without recognizing China’s rise that was made possible with its entry to the World Trade Organization at the end of 2001. Few doubt today the significance of the largest emerging market economy to be plugged into the global trading system. The concept of Asia, ex-China was already apparent and was chronicled in the pages of The Asset even during the early days. Today, of course, China’s emergence is front-and-centre in its trade dispute with the United States. The country is now the world’s second-largest economy, the world’s second-largest securitization market and home to the world’s largest IPO when Alibaba raised US$25 billion in September 2014.
As The Asset marks its 20th anniversary, it is once more looking ahead with anticipation. The region’s transformation in the coming two decades is likely to be just as breathtaking. Change will be most pronounced in a number of areas underpinned by the region’s continued overall steady economic expansion.
Lehman Brothers headquarters in New York.
Commitment to infrastructure by governments from Indonesia to India, the Philippines and Thailand is beginning to unlock opportunities. With more and faster links, second and third-tier cities in these countries, much like what we saw in China in the 1990s to 2000s, will spark the spread of commerce and accelerate wealth creation beyond today’s overpopulated urban centres.
As the world’s biggest and fastest-growing merchandise trading area accounting for 51% of the total increase in world exports in 2017 and 60% of the growth in world imports, Asia is also seeing the advent of the golden age of travel.
The number is set to double to over 540 million travellers by 2030. Today, one in three global travellers is from the Asia-Pacific. Eighty percent of the trips taken is intra-Asia. As the region’s largest outbound travel market, Chinese tourists are and will be driving the volume to countries such as Thailand, Japan, South Korea, Vietnam Singapore, Malaysia and Taiwan, not to mention Hong Kong and Macau. Imagine a size equal to the entire population of the United Kingdom, Germany, Austria and Ireland combined on the move. Because of the infrastructure build-out today and in the coming years, attractions that were inaccessible until recently will open up.
The region’s growing affluence likewise is spawning an unprecedented expansion in institutional assets. Savers are becoming investors. The Asian financial crisis in 1997 has imbued a conservative streak among Asia’s central banks. From China, with the largest foreign exchange reserves at US$3 trillion, to Southeast Asia’s more modest but still sizeable relative FX reserves, the focus is on maintaining a more than adequate buffer, which has been drilled into the psyche of monetary authorities in the region.
From sovereign wealth funds to pension funds, insurance and asset management companies, Asia is leading the way in terms of size and pace of increase. The growth rate of insurance premiums in Asia, for example, is more than three times the world average. China’s share of global premiums increased from less than 1% in 2000 to 9.7% by 2017. Asia is the world’s fastest-growing asset management market with the region now accounting for nearly a fifth of the global total.
The region’s transformation will have technology as the backdrop. Already ubiquitous in China, the adoption in the region will be among the fastest globally. As our guest writers share in this issue of The Asset, countries in the Asia-Pacific are likely to accelerate their consumption of goods and services via electronic and mobile devices. E-commerce, big data, cloud, blockchain, artificial intelligence and demographics are coming together in a heady cocktail of possibilities enhancing user experience that is intuitive and seamless. It is also making possible financial inclusion, translating words into action.
Another emerging trend is the rise of finance linked to sustainability. During the past few years, Asia has become a centre for the issuance of green bonds with China leading the way. In Indonesia, innovative models of financing are helping to fight deforestation and improve the working conditions of farmers. In India, the financial supply chain is empowering women’s cooperatives and providing livelihood to rural communities. In Korea, the capital market is now able to finance housing for low- to moderate-income individuals.
Meanwhile, loans linked to a range of ESG metrics are changing the way companies in Asia enjoy lower cost of financing. That the capital markets have become the venue of innovation in sustainable finance reflects the increased awareness among corporates of the importance of not just meeting their funding objectives but also the broader environmental and social needs of the community.
By 2020, Asia will account for 40% of global trade flows.
As history so often reminds us, nothing ever happens in a straight line. Even as Asia experiences short-term challenges, the medium and long-term outlook remains as vibrant as ever. With the benefit of hindsight, including members of an editorial board that have been around for the past two decades, The Asset will go on chronicling how Asia evolves, sharing insights rooted in its history in the capital markets. With its practice of bringing the back story to the front, The Asset is committed to finance that is relevant to the real economy, sharing tales of turnaround, breakthroughs and innovation as it did when it published the first issue in March 1999.
Daniel Yu is editor-in-chief of The Asset.