20 September 2019
Asian countries are facing risks from shadow banking and capital ouflow while Indian Prime Minister Narendra Modi may find it difficult to boost infrastructure expenses. Photo: Bloomberg
Asian countries are facing risks from shadow banking and capital ouflow while Indian Prime Minister Narendra Modi may find it difficult to boost infrastructure expenses. Photo: Bloomberg

Hidden risks for investors in Asia

Since Europe and Japan launched their quantitative easing schemes over the past few years, low-cost capital has been flooding the Asian markets, creating more risks for investors in the region.

1) Shadow banking in China and Thailand

Asian banks remain conservative in lending, providing more room for shadow banks to take an aggressive role.

For example, the Hong Kong Monetary Authority has repeatedly warned homebuyers to act according to their means and tightened mortgage rules. As a result, home purchasers turned to consumer credit companies.

And the loans from China’s shadow banking system also jumped to 4 percent of global non-banking loans in 2013 from 1 percent in 2007. Meanwhile, the US ratio has dropped to 33 percent from 41 percent after the financial crisis.

The case is even more alarming in Thailand. Shadow banking accounted for up to 28 percent of total household borrowing in late 2014. The nation’s shadow bank lending reached 2.94 trillion baht (US$87.7 billion), up 48 percent from 2011, compared with a 40 percent jump in bank loans in the same period.

Thailand’s household debt now represents 85 percent of its GDP, exceeding the warning level of 80 percent. As a result, private consumption and exports in Thailand dropped 2 percent and 8 percent respectively from the year ago.

The nation’s GDP growth eased to below 1 percent amid weak growth momentum. The central bank has constantly cut interest rates to stimulate economy, and its currency has weakened to a low against the US dollar since 2009.

2) Capital outflow from China and Japan

The recent weakness of Asian currencies has stemmed from spiking inflation-adjusted interest rate, which has plunged bond prices and triggered capital outflow. Investors have shown limited interest in government bond auctions in Japan and China in light of lower returns. Bonds are far less attractive than mainland A shares, although the bond price might rebound following the latest interest rate cut.

Many mainland insurance companies have parked their money in banks for a 5 percent interest rate. However, the steady return has dropped to 1 percent following recent interest rate cuts.

As a result, mainland institutional investors have to look elsewhere for higher returns. They also need to diversify their investment from a strong focus on mainland equities.

3) Uncertainty in Indian economy

Indians have outperformed Chinese in the financial world as they speak better English and are usually more outspoken. Many senior officials global banks like HSBC and Standard Chartered and asset management funds are Indian.

India’s equity market has been sluggish recently as foreign investors are wary of the pending tax issue. Indian Prime Minister Narendra Modi has outlined plans to shore up economic growth and improve infrastructure facilities.

However, big Indian infrastructure companies are grappling with a debt pile of over US$48 billion, the highest level in a decade. Local banks are reluctant to lend money to these firms.

The country’s overall debt level remains low, but the debt-laden infrastructure sector has limited access to bank lending.

Indian banks have been pushing infrastructure companies to offload assets and pay back debt, but the standoff might continue as the existing law fails to motivate creditors to push for liquidation.

This could become a major headwind for Modi’s reform package.

This article appeared in the Hong Kong Economic Journal on May 14.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.