with Clifford Lee, DBS Bank
The World’s Best Investment Banks 2015
Global Finance: Asia’s bond market is relatively small, compared with the size of the regional economy. How are things changing today?
Clifford Lee: We are seeing impressive year-on-year growth, and local-currency bond markets in Asia are deepening in both size and sophistication. The good news is, there is space for more growth because we have started from a low base. However, the percentage of bonds relative to overall debt funding remains small. So far, the Asian dollar bond market, as well as the Singapore dollar and the offshore renminbi bond markets, are the most sophisticated in the region, because the currency markets are the most open. Elsewhere in Asia, FX controls remain in place. Asian bond markets are likely to continue expanding at a measured pace, unless such FX controls are relaxed.
GF: How crucial a development is the internationalization of the renminbi?
Lee: The offshore renminbi bond market has its limitations, but it only opened up to offshore participation in the middle of 2010. Since then there has been mounting interest from global investors. But its future growth will be limited if the Asian bond market continues to remain undersupplied. Asia must reduce its reliance on bank loans to fund growth. Much depends on how China’s efforts to build an offshore renminbi bond market pan out. Other markets in the region are watching closely to see how they can make themselves relevant. Going forward, FX controls could start to loosen up. Alternatively, other Asian markets could be encouraged to use the renminbi as a trade settlement currency, further spurring the growth of the offshore renminbi bond market.
GF: What is the outlook for Asian capital markets in the context of ongoing turmoil in the EU and an eventual interest-rate rise in the US?
Lee: From a fundamentals standpoint, I remain bullish on Asia’s bond market. We are starting from a low base, and a few megatrends bode well for its future growth: continued economic growth across Asia; increasing infrastructure funding needs; and Basel III regulations, which place capital restrictions on banks. But any sneeze out of the US dollar bond market, any cough out of the euro bond market, can disrupt the market in Asia.
GF: Within the region, what countries do you think will be leading the charge?
Lee: China will continue to supply the bulk of the debt fueling the Asian dollar bond market. South Korea is another strong supplier of debt. Indonesia was held back for a while due to political leadership changes, but it is in a good place now, so I hope they will step up. India will continue to see more offshore issuance. Smaller markets like Malaysia, the Philippines and Thailand have been coy in tapping the dollar bond market, but I hope they will come around soon.
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