Notes From The Front Line

This summer we onboarded our ninth major dealer, an institution whose business is based primarily in the APAC region. We’ve taken that opportunity to travel to the region to meet people and get to know the landscape over there. Having spent the last 2.5 years building Origin in Europe, if I had to describe Asia in one word, it would be electrifying.

As I write this, I can feel a buzz in the air: it’s hot, very humid and strolling down the street for ten minutes leaves you needing a new shirt! Not ideal conditions for business attire, but it’s certainly exhilarating. After 7 straight days of meetings and conferences in Hong Kong and Singapore – over 30 individual meetings in total – it’s fair to say that I’m looking forward to getting back to London and my own bed!

Franklin and I have met with a diverse mix of issuers – both corporates and financials – as well as dealers from Europe, America, Japan, Australia, Singapore and China. It’s been intense, rewarding and inspiring. We’ve enjoyed catching up with familiar faces and supporters such as our former advisor Søren Elbech, now working to set up the Treasury function within the new Asian Infrastructure Investment Bank (AIIB), and Flora Chao and Yuri Kuroki at IFC in Singapore.

Nowhere in the world is the pace of change more stark than in Asia. I predict we will all be spending more time in the region in the years to come, so I thought it worth sharing my learnings from recent meetings.

China is crucial to the health of the global economy in so many ways, but the opening up of its bond market is quite possibly the most exciting development for the fixed income markets over the next decade. For those of you who are not experts on the subject – and I know many of you are – the Chinese bond market is currently heavily regulated and closed to outside participants. The Chinese style of state capitalism relies on strong capital controls, restricting flows in both directions.

Despite that, funding needs are growing, and with the economy still growing at 6-7% annually, this isn’t surprising. The onshore bond market has grown to be the third largest in the world currently valued at $9 trillion, and it is set to double in the next 5 years, overtaking Japan at number two. Offshore financing by onshore Chinese borrowers has gone up 100% just in the last year – stunning statistics that underscore the pace of development here.

Appreciating the need for onshore Chinese firms to find other sources of funding beyond bank lending and the onshore market, China recently launched Bond Connect – cautiously laying the groundwork for the opening up of the market to the international financial community. Right now, it is only open for northbound flows (offshore investors investing in onshore companies), but there are hopes that it will open up southbound flows in 18-24 months. We had an eye-opening meeting with the Bond Connect team within Hong Kong Exchange, who told us that financial authorities are actively looking for platforms to help bring international investors to their system to trade in onshore Chinese credits. And once southbound flows start, they will be seeking ways to help Chinese investors access international credits. This latter development is incredibly exciting for issuers across Asia, Europe and the Americas, adding depth and diversity to the global fixed-income investor base.

Opportunities abound for issuers and investors who are willing to open their minds and their portfolios to new counterparties. By the same token, professionals with international DCM and syndicate experience are being snapped up by Chinese banks who are setting up debt capital markets businesses.

Challenges remain, though. There is still much work to be done around standardisation of reporting, transparency and ratings comparisons between China and the international market. Ratings in particular are viewed differently here, as Chinese corporates can be rated quite highly by local agencies simply for their size.

We’ve had some very productive conversations with prospective clients. As you might expect, participants in China’s bond market are keen to embrace technology. Some issuers are doing 200-400 transactions a year, with growing funding needs. In the long run, technology enables financial institutions to streamline and scale operations – but in the first instance, it helps people to cope with the massive workload.

Each of the Chinese banks we met with have multiple branches across the world including entities based in locations like Macau, Sydney, Dubai, and Luxembourg that also issue their own debt securities. For example, just yesterday ICBC Luxembourg just issued two tranches of inaugural green bonds, showing the swift maturation of Chinese issuers to new debt products. Like everyone else, big chinese banks are actively looking for investor diversification.

The first Euromoney Borrower’s conference in Asia was a success – I think it’s interesting and relevant for Euromoney to move to Asia and it was certainly a different experience to London! The event in Singapore was a great meeting of a wide variety of issuers, dealers, and public sector representatives from around the region.

Singapore is particularly ambitious, positioning itself as the international hub of the region, offering grants of up to 50% of the issuance costs (legal, arrangement, ratings etc) for Asian bond issuers and offering 100% of the external review costs for green bond issuers. It’s also making a play for the status of regional tech hub, with fintech programs sponsored by both local banks (DBS and Standard Chartered) as well as programs sponsored directly by the Monetary Authority Of Singapore.

Hong Kong has a different feel. A city with more history and deeper roots in both the financial and logistics industries. The geography is stunning. Within a few minutes walk uphill from Central Station, you hit a lush hiking trail taking you up to Victoria Peak, revealing spectacular skyline views. Thirty minutes on the ferry takes you to islands with beaches, seafood, and beautiful nature. Hong Kong offers a great mix of concrete jungle and real jungle.

Both cities are bound by a ruthless ambition to succeed within capital markets. While Singapore is looking to be the English speaking hub of the region, Hong Kong is becoming the gateway to China. The offshore entities of Chinese corporates and banks are all based there, and it is also the site for Bond Connect. Everyone within the capital markets business here is focusing on how to best position themselves for the inevitable opening up of the market. As are we.

Paul Graham wrote about Cities and Ambition, saying, “Great cities attract ambitious people. You can sense it when you walk around one. In a hundred subtle ways, the city sends you a message: you could do more; you should try harder.

These words seem practically apt in Asia.