Asia seeks 2024 redemption for IPOs | FinanceAsia

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After a relatively poor 2022, while some Asian stock markets performed well in 2023, such as India and Japan, others including China, Hong Kong, Singapore and Australia languished as geopolitical tensions, rising interest rates and poor performing domestic economies knocked investor confidence.

There was also a downturn in mergers and acquisitions (M&A) in Asia Pacific (Apac), with 155 deals completed in 2023 with volumes down 23% compared to 200 deals in 2022, according to WTW.

Broadly, investors were spooked by a combination of higher for longer interest rates from the US Federal Reserve, a lacklustre economic performance in China post-pandemic with the property sector dragging confidence, and wider geopolitical tensions.

Will Cai, partner and head of Asia capital markets practice and co-chair of China corporate practice at law firm Cooley, told FinanceAsia: “2023 was a very challenging year for all major capital markets in Asia, with Japan as the only exception. There were several contributing factors: the slower-than-expected post-Covid-19 economic recovery in China, the current regional and global geopolitical tensions, as well as the high interest rates.”

He added: “High interest rates have a significant negative impact on capital market deals. The logic is very simple: if treasury bonds can provide 5% annual return, risk free, investors will expect a much higher return on high-risk equity deals – which unfortunately is not what many companies can deliver in a tough market. We probably need to see a moderate reduction on interest rates before equity investors return to the market.”

Amid the gloom, other avenues in the equity space beyond IPOs, performed relatively well, with banks needing to respond to changing client needs.

Kenneth Chow, co-head of Asia equity capital markets, Citi, said: “These are challenging market conditions and as a bank you need to be nimble and flexible. However, there are always opportunities in Asia, such as convertible bonds and block trades.”

Japan and India rising

There were arguably two Asian ‘star’ performers in 2023: Japan and India.

Despite a weak yen, Japan saw a breakout from years of deflation, corporate governance reform and a solid domestic economy, while India saw strong GDP growth of around 7% and a continuation of reforms.

Udhay Furtado, co-head of Asia equity capital markets, Citi, told FA: “Japan and India have recently emerged as IPO hotspots, while Indonesia has also seen positive momentum. There is an increasing interest in the energy transition story, including the makers of electric vehicles and batteries.” 

Japan, with IPO proceeds up 82% compared with 2022, was the standout Asian market last year.

Peter Guenthardt, head of Asia Pacific investment banking at Bank of America, said: “There are many opportunities in Japan with the fee pool increasing 20% in 2023, while overall fees were down by the same figure across Apac. The fee pool was twice the size of China this year. Japan could remain the largest fee pool in Apac in 2024.”

Guenthardt added: “In Japan, there has been an increase of IPOs, block trades and convertible bonds, with that trend set to continue. There has also been a rise in activist investors – for which it is the second most active market in the world.”

He continued: “Japanese companies are also looking to expand abroad for M&A opportunities, with the US being the most popular market and where sectors such as technology are particularly attractive.”  

In India, the market saw a big improvement in the second half of the year. While many companies conducted IPOs outside of India, the local stock markets saw the number of issuers increase by over 50% to 239, according to data from the London Stock Exchange Group (LSEG). With the second half of the year doing particularly well, this bodes well for 2024, with some experts tipping the world’s fifth largest economy to lead the way in IPOs globally this year. 

Citi’s Furtado said in a media release: “We hope to see a turn in the IPO markets, as we have been seeing in India in late 2023 and we also expect to see [a] continued pick up in convertible bond activity (given refinancing efficiencies), alongside a robust follow-on/ block calendar.”

2024 Hong Kong bounceback?

One of the big questions for Asia in 2024 is can Hong Kong, one of the pre-eminent financing hubs, return to something resembling its former glory after years of protest and pandemic turmoil. Any turnaround in Hong Kong should also indicate improved confidence in Chinese equities given that the majority of companies listed on the Hong Kong Stock Exchange (HKEX) are Chinese.

PwC is predicting HK$100 billion ($12.8 billion) of deals in 2024 with around 80 deals in the pipeline, and KPMG is expecting Hong Kong to return to the top five of the IPO global rankings.

While the fundamentals are still strong in the Special Administrative Region (SAR), a recent reliance on Chinese companies, which have been buffeted by domestic headwinds and rising US interest rates, has damaged the market. In addition, the potential implications of the SAR’s new national security law have rattled global investor appetite.

However, in a sign of optimism, already in 2024, two Chinese bubble tea firms have applied for listings on the HKEX suggesting that market appetite could be rebounding in China – especially for companies supplying consumer staples.

Although stock markets in mainland China are providing stiff competition to Hong Kong, foreign investors and Chinese firms are still attracted to Hong Kong’s greater flexibility. In addition, geopolitical tensions mean that Chinese and Hong Kong firms are becoming more cautious about listing in the US.

Stephen Chan, Hong Kong-based partner at Dechert, told FA: “2023 was relatively challenging for the Hong Kong IPO market, with the number of deals and proceeds raised having declined year on year. We have seen a number of potential listing applicants choose to delay their listing timetable in view of the underperforming stock price of recent new listings.”

A sluggish stock market performance, low valuations for newly listed companies and the macroeconomic environment contributed to potential listing applicants opting for the wait-and-see approach, with the SAR facing strong headwinds.

Chan added: “The US interest rates hikes saw investors opt for products with high interest rates and fixed income.” This dampened the demand for IPOs, and in turn affected the valuation of potential IPOs and hence weakened the urge for potential listing applicants, explained Chan. 

He said: “Increased borrowing costs and lower consumer spending in general – due to the high interest rate cycle – have also affected the operational and financial performance of the potential listing applicants. Improvements to both investor sentiment towards the equity market and companies’ operating and financial performance would be essential before companies could reconsider fundraising through IPO.”

Certain sectors have been performing better than others, including technology, media and telecom (TMT) and biotech and healthcare companies. These are likely to continue to lead the IPO market in terms of the deal count and deal size in Hong Kong, especially with January 1, 2024’s HKEX regulatory reform for the new Chapter 18C (known as the GEM reforms) for specialist technology companies, and an expanding market for biotech and healthcare under Chapter 18A which was launched in 2018.

Chan added: “The HKEX has taken the opportunity to introduce a number of modifications to improve the fundraising process including the new settlement platform, FINI, which will shorten the time gap between IPO pricing and trading and hence reduce the market risk and modernise and digitalise the entire IPO process.”

“The GEM listing reform aiming to enhance attractiveness for SMEs to seek listings. . . will also boost the number of deal counts for the Hong Kong IPO market and provide SMEs with development potential a viable pathway for pursuing listing in the main board in the future.”

A continuation of the return of visitors to around 65% of pre-pandemic levels to the SAR in 2023 should also help build momentum in the local economy. In addition, the SAR has been reaching out to the Middle East for investment and is increasing its trade cooperation with Asean countries.

Asia outlook

While China appears to still be struggling to turn its economy around, Asia will continue its overall growth trajectory as the middle class grows, technology evolves and connectivity improves. The relatively young populations of Asean countries such as Indonesia, Vietnam and Thailand will also continue to provide a boon for investors.

Cooley’s Cai said: “In terms of deal counts, there were still relatively more biotech deals in 2023. Part of the reason is that biotech companies must raise capital regardless of market conditions (and therefore, the price). We also see companies from the ‘new consumer’ sectors looking to IPO. We believe these two sectors likely can do well in 2024.”

He continued: “We hope 2024 will be better than 2023, but we may need to wait a bit longer for a booming market.”

There is certainly a long way to go before seeing the region’s previous robust IPO levels.

“2024 is going to be a volatile year with the upcoming elections in the likes of the US and India, but there is a strong pipeline of deals if risk appetite returns, which will partly depend on the pace of monetary loosening,” said Citi’s Furtado.

Alongside a host of elections, there are ongoing conflicts in the Middle East and Ukraine, meaning there is much uncertainty over global supply chains, oil prices and the inflation trajectory.

While investors will be hoping that inflation can be kept under control so the US Fed can start cutting rates sooner rather than later, solid economic fundamentals and growth in many large countries in the region should provide confidence in Asia’s equity markets moving forward.

This article first appeared in Volume One 2024 of the FinanceAsia print magazine which is available online here. 


¬ Haymarket Media Limited. All rights reserved.

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Banking on the next US financial crisis – Asia Times

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This is the first of a three-part series

Doomsaying, as Jonah complained to God, is a game that a doomsayer cannot win. This applies in spades to predicting a financial crisis. If proven wrong, the doomsayer is discredited. If proven right, he may be blamed for helping to precipitate the crisis by undermining public confidence.

Far be it from me, therefore, to predict a US financial crisis in the coming months. However, indicators that a US financial crisis might occur during this session of Congress, described by this first part of a three-part essay, warrant prompt attention, especially by the Republican Caucus of the House of Representatives, to two questions:

First, if a financial crisis does occur this year, will the still little-tested financial-sector-funded bail-ins authorized by Title II of the Dodd-Frank Act, enacted in 2010, prove adequate to obviate the Biden administration’s asking Congress again, as in October 2008, to appropriate funds to bail out the financial system? The second part of this three-part essay discusses why financial-sector-funded bail-ins might fail to obviate a bailout.

Second, if the Biden administration does ask Congress this year for funds to bail out the financial sector, then how might the House Republican Caucus best respond? For House Republicans to support another bailout of Wall Street, or even to fail to prevent one, would outrage tens of millions of populists who dominate Republican primary elections.

However, for House Republicans to nix a bailout needed to mitigate an incipient economic contraction could enable Democrats to shift onto the Republican Party the preponderance of public blame for that contraction.

The third part of this three-part series suggests that the House Republicans might best respond to a 2024 bailout request by conditioning their support for it on prior enactment of legislation eliminating obstacles to profitable private conversion of banks, which are limited-liability corporations, into proportional-liability financial firms that would be less prone to default and would not need government insurance of their depositors. 

To convert all banks into such financial firms – without any change in their employees, payrolls, physical plant, equipment, deposits, depositors or financial assets including outstanding loans – would render financial crises less frequent and less acute, and would lastingly obviate government bailouts of the financial system when such crises do occur. 

The obstacles impeding profitable private conversion of banks into proportional liability financial firms appear to be wholly governmental. The greatest of them is government insurance of bank deposits, which reduces the profitability of such conversions.

By conditioning House approval of one last financial-sector bailout on prior enactment of legislation mandating imminent elimination of the governmental obstacles to the profitable private conversion of banks into financial firms that are less default-prone, need no deposit insurance and will generate fewer and less severe financial crises that will not require government bail-outs when they do occur, the House Republican Caucus could avoid blame for refusing to mitigate an incipient economic contraction in a way that does not alienate the affections of working-class populists who loathe having to bail out rich and systematically corrupt financiers. 

In doing so, House Republicans would also seize a rare opportunity presented by a financial crisis to remove governmental obstacles to a simple, robust, and profitable private reform of the financial system that would make it lastingly more efficient and more stable.  Opportunities to do so much good at so little cost are so rare that if a 2024 financial crisis presents one, all Americans might end up remembering that crisis as a blessing in disguise.

The Quarterly Banking Profile (QBP) for the third quarter of 2023, released by the Federal Deposit Insurance Corporation (FDIC) on November 29, reported that US banks’ “unrealized losses on [non-equity] securities totaled US$683.9 billion in the third quarter, up $125.5 billion (22.5%) from the prior quarter, primarily due to an increase in mortgage rates that reduced the value of mortgage-backed securities” – the same sort of financial instruments’ overvaluation that proved unsustainable in 2007-08, precipitating the last US financial crisis. 

That QBP stated that only $76.5 billion of those $683.9 billion in unrealized losses were held by community banks.  It also showed that US banks’ unrealized losses on non-equity securities, which were never greater than $75 billion for any quarter from the start of 2008 through the end of 2021, grew to nearly $300 billion in the first quarter of 2022, have exceeded $450 billion in every subsequent quarter and exceeded $650 billion in the third quarters of both 2022 and 2023.

On February 29, the FDIC announced that its QBP for the fourth quarter of 2023, will be released on March 7. For reasons not stated, it will be released a week later after the quarter’s end than the three prior QBPs, which were released on November 29, August 29 and May 29, 2023.

The unrealized losses quantified in the FDIC’s QBPs are merely those of US banks, deposits in which the FDIC may be obligated to insure against bank default. Data on the unrealized losses of the whole US financial system, including non-bank financial firms, seems not to be collected or published by any government agency. 

A former economics professor who has decades of bank risk-assessment experience working at the Bank for International Settlements, the US Federal Reserve, the IMF, the FDIC and the Basel Committee on Bank Supervision, recently suggested that the above-cited FDIC data may greatly understate the unrealized losses of the US “banking system in aggregate,” which he estimated to have amounted to about $1.5 trillion at the end of September 2023.

The extent to which the high-interest rates on US government debt that are now distressing the US financial system can still be blamed on money supply contraction seems questionable. Data for the broad US money supply, M2, released by the Federal Reserve on February 27, indicate that M2 increased from $20.565 trillion on October 30, 2023, to $20.949 trillion on January 8, 2024, before falling to $20.751 trillion on January 29 and rising to $20.877 trillion on February 5, 2024, the most recent M2 data publicly available.   

In the 99 days from October 30 to February 5, M2 grew by 1.52%, at a rate equivalent to more than 7.9% per year. Diverse indices suggesting that US aggregate price inflation has not decelerated in recent months seem unsurprising in light of the recent M2 data.

Moreover, the Federal Reserve fully controls only overnight interest rates. Even if it stops fighting inflation between now and this autumn’s elections, medium- and long-term default-risk-free interest rates may remain high if high future price inflation is widely expected. The central government’s burgeoning fiscal deficit may render such expectations increasingly difficult to dispel.

The US banking system is afflicted not only by default risk-free interest rates higher than those paid by banks’ long-term debt assets but also by the growing risk of collateral depreciation or default on debt held by banks.

The greatest source of collateral depreciation or default risk to US banks appears to be commercial real estate (CRE) mortgages, especially office building mortgages. On February 12, the Mortgage Bankers’ Association reported that $929 billion in US outstanding commercial real estate mortgages, including $441 billion held by banks, will come due this year – a 28% increase from the $728 billion that matured in 2023.  

A large proportion of these CRE mortgages maturing in 2024 are mortgages on office buildings that may have a market value substantially less than their book value due to unprecedentedly high office vacancy rates resulting from increased electronic working-from-home by white-collar workers during and since the Covid lockdowns of 2020-2021. 

During 2023, the US office vacancy rate rose to an all-time high and hit 18% in January 2024, according to one industry report, and 19.7% according to another.  Diverse reports suggest that a large proportion of outstanding US office mortgages have been bundled into transferable commercial mortgage-backed securities (CMBS) comparable to the residential mortgage-backed securities, Wall Street’s systematic and arguably fraudulent overvaluation of which helped sustain the decades-long US housing bubble that burst in and after 2006. 

The same commercial-mortgage industry analysis firm that estimates that the US office vacancy rate was 19.7% in January 2024 also estimates that the delinquency rate (by loan balance) of office mortgages securitized into CMBSs tripled during the past year, from 1.9% in January 2023 to 6.3% in January 2024.

Although US office listing prices reportedly fell only 1.8%, on average during 2023, Capital Economics reportedly estimated in December 2023 that average US office prices paid fell 11% in 2023 and will fall another 10% in 2024. Morgan Stanley reportedly has projected that US office prices may fall as much as 30% from pre-Covid levels.

Some partly empty office buildings that have been able to service decade-old maturing mortgages with interest rates of around 3% a year may prove unable to renew their mortgages at the higher rates now required. Many outstanding office mortgages reportedly are “zero-principal” or “interest-only” debt that leave the creditor owning 100% of the equity in an office building when the mortgage matures. 

When such an office mortgage matures and cannot be renewed, the mortgage creditors realize a loss – which only creative accounting can delay booking – equivalent to 100% of the decline in the market value of the office building.

On February 20, the Financial Times reported that US banks’ delinquent commercial real estate loans had grown to about $24.3 billion, equivalent to about 70% of their reserves, from $11.2 billion, equivalent to about 45% of their reserves, a year earlier.  The same article reported that the value of delinquent commercial real estate loans held by the six largest US banks has nearly tripled, to $9.3 billion, during the past year.

Of those six banks, only one, JPMorgan Chase, now has reserves greater than the value of its delinquent commercial real estate loans; two of the six banks, Citigroup and Goldman Sachs, have reserves worth less than half the value of their delinquent commercial real estate loans, the FT report said.

Growing default-risk threats to the US banking system are also posed by rising delinquencies on relatively short-term consumer debt, notably credit card debt and automobile loans.   

The “charge off rate” on consumer loans from US commercial banks –the proportion of nominal par value lost to default, net of collateral recovery – rose every quarter throughout 2022 and 2023 to 2.65% in the fourth quarter of 2023 – a level higher than has been observed since 2008-2011. 

The portion of US consumers’ credit card debt and auto loans that is delinquent by at least 90 days rose throughout 2022 and 2023, to over 6% and nearly 3%, levels not observed since 2007-2011.

US credit card delinquency increased by an even larger proportion in terms of value, for the value of US credit card debt rose steadily from a Covid-lockdown low of 770,000 billion in the first quarter of 2021 to an all-time high of $1.13 trillion in the fourth quarter of 2023.   Similarly, US auto loan delinquencies are a growing proportion of a growing volume of US auto loans, driven in part by rising auto prices.

That these credit card and auto loan delinquencies may continue to grow is suggested by an underappreciated datum in recent editions of the Employment Situation Report released monthly by the US Bureau of Labor Statistics (BLS): during 2023, all the growth in US employment was in part-time jobs, while full-time employment shrank. 

This trend continued and accelerated in January 2024, during which, per the BLS, “The average workweek for all employees on private nonfarm payrolls decreased by 0.2 hours to 34.1 hours in January and is down by 0.5 hour over the year.” 

This is consistent with recent massive layoffs of full-time employees and with the widely-noted transition of the US to a “gig economy” in which employment increasingly is temporary, part-time and with fewer benefits than employers are obligated to give to full-time employees.  

Delinquencies and defaults on residential mortgages remained very low but that is scant comfort for the financial institutions that own those mortgages, which typically originated years or decades ago, when interest rates were far lower than they are now and which pay rates lower than banks must pay depositors today. 

For those institutions, which now commonly might lose less by repossessing the mortgaged homes than by selling those mortgages, non-default is no blessing. 

US consumers are increasingly defaulting on short-term high-interest credit cards and auto loans that are profitable to banks while dutifully servicing long-term low-interest mortgages that are unprofitable to banks. In addition, a growing number of US corporations are at a growing perceived risk of defaulting on debt securities that they have issued, some of which may be held by US banks.

Furthermore, on January 24, 2024, the Federal Reserve announced that on March 11 it would end its Bank Term Funding Program (BTFP), which it began a year earlier, the day after Silicon Valley Bank failed. 

The BTFP was set up to lessen temporarily the insolvency risk of US banks by enabling them to borrow funds from the Fed for up to one year against the collateral of debt securities “valued at par” – valuations that can be far higher than market value due to recent interest rate rises. US banks have borrowed more than $160 billion of outstanding loans subsidized by the BTFP.

They appear obligated to repay, by June 12, 2024, the $102 billion that they borrowed under the BTFP between March 11 and June 12, 2023.

“Ichabod” is a former US diplomat.

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OSK Ventures International charts US.5m income amidst a challenging 2023 for private equity

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  • delivered y-o-y revenue growth of 32 %, US PAT of US$ 5.04mil&nbsp,
  • One company exited with five new deals into its investment portfolio.

Some of the promising portfolio companies that OSKVI has invested in.

In a filing to Bursa Malaysia last week, OSK Ventures International Bhd, a private equity company, disclosed its fourth quarter ( 4Q2023 ) and full-year results for the financial year ended 31 December 2023. The company recorded income of US$ 6.5 million ( RM30.8 million ), a 32 % increase over US$ 4.93 million ( RM23.4 million ) in FY2023, with a profit after tax of RM23.9 million.

[RM1 = US$ 0 211]

The Group claimed that despite hard business conditions in both the public and private sectors, it delivered a strong financial performance that was characterized by regular development across its venture capital segments.

The endurance of our investment strategy and the persistence of our investment companies are a testament to our progress performance. We continue to expand our goods offerings, taking advantage of this interest and understanding of other assets like opportunity equity and venture debt, as prompted by the growing interest in modern companies in the personal markets, said Amelia Ong, OSKVI CEO.

The Group properly exited one investment firm for FY2023, welcoming five new transactions into its secret purchase collection in the business tech, fintech, and e-commerce sectors. It is developing a new account and has 37 businesses in its portfolio.

OSK Ventures International charts US$6.5m income amidst a challenging 2023 for private equityAmelia ( pic ) stated in a statement to Digital News Asia that Project Tapir and OSKVI had just announced a strategic partnership. By combining, OSKVI aims to help the smooth integration of Singapore fintechs into the Indonesian business landscape, creating a powerful expansion chance for both parties involved.

By promoting their respective hobbies in neighboring nations,” This program will benefit the desires of both the Singaporean and Malaysian governments,” said Amelia. She added that Malaysia is highlighted as an attractive location for international investments while Singapore fintechs are supported in expanding overseas.

Following shareholder approval at the approaching Annual General Meeting, OSKVI proposed a final single-tier income of 2 sen per discuss for FY2023.

The Group’s shareholders ‘ funds as of December 31st, 2023, had a total of RM258.6 million in total assets and a total market capitalization of RM106.1 million ( based on OSKVI’s most recently quoted share price at the end of the FY2023 ).

OSK Ventures International charts US$6.5m income amidst a challenging 2023 for private equity

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Commentary: Using taxpayer money to bring in Taylor Swift concerts? It’s basic Swiftonomics

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While high-profile events generate immediate attention and revenue, their lasting impact on economic development may be limited. Over-emphasis on MICE (Meetings, Incentives, Conventions and Exhibitions) events for economic growth may overshadow more strategic and sustainable long-term initiatives and pose risks in the face of changing market dynamics and external factors.

Hence, navigating these risks requires a delicate balance between fostering growth and ensuring social equity as well as responsible governance.

SALIENT EXAMPLE OF STAYING COMPETITIVE

Singapore must undoubtedly distinguish itself from its competitors. Countries feeling left out of the Eras Tour, like Thailand and Indonesia, have already said they will do more to attract world-class acts and leverage Swiftonomics to their advantage.

In tourism, it is important to recognise that Singapore’s status as a stop-over rather than a stay-over destination requires innovative strategies.

Beyond events that are exceptions that prove the rule, the industry will likely benefit more from collaboration. Singapore must offer compelling experiences domestically (across segments including hospitality, food, leisure, outdoor and indoor wellness activities, cruise holidays and heritage experiences) but also foster regional partnerships for cross-border tourism to enhance appeal and broaden its reach.

And therein lies a larger important lesson: Taylor Swift has made salient just how important it is for Singapore to find ways to stay competitive, beyond the tourism or MICE sectors. Singapore had the element of surprise with the Eras Tour, but it may not be sufficient for the next star act or business it wants to attract.

Samer Elhajjar is Senior Lecturer from the Department of Marketing, National University of Singapore Business School. The opinions expressed are those of the writer and do not represent the views and opinions of NUS.Continue Reading

Why the BOJ won’t rain on the Nikkei’s parade – Asia Times

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TOKYO — With the Nikkei 225 surging to 34-year highs, the conventional wisdom is that the Bank of Japan (BOJ) now has greater confidence — and political cover — to raise interest rates and end decades of quantitative easing (QE).

But what if the opposite is true? Might the Nikkei boom luring tidal waves of capital toward Tokyo actually dissuade the BOJ from normalizing monetary policy? A walk down memory lane suggests BOJ Governor Kazuo Ueda might be too worried about spoiling the Nikkei’s party to tighten.

Consider the BOJ’s track record of hitting the monetary brakes during stock rallies of the past. Case in point: the central bank’s December 1989 rate hike, which signaled the end of the Nikkei’s most infamous bull run.

No one really knew at that moment, least of all then-BOJ governor Yasushi Mieno, who pulled the fateful trigger on Christmas day. That half-percentage point increase in short-term rates to 4.25% seemed like a rational response to upward inflation pressures at the time.

Even then-finance minister Ryutaro Hashimoto said the increase would help maintain price stability. But years later, when Hashimoto served as prime minister from 1996 to 1998, it was clear that the BOJ’s tightening move marked the top tick of Japan’s “bubble economy” era. And the start of a deflationary nightmare from which Japan is only now starting to recover.

Today, economists know that on December 25, 1989, Mieno’s team pulled out the financial equivalent of a precarious Jenga piece, destabilizing everything above and below. Fair or not, Mieno’s BOJ was roundly criticized for collapsing the stock market and setting Japan’s lost decades in motion.

Granted, the titanically large rallies in real estate and stocks might have been better tamed with macroprudential policy tweaks by the Ministry of Finance and regulators than blunt-force BOJ rate hikes. At the time, though, Tokyo’s politics were going through a unique period of volatility.

In 1989 alone, Japan had three different prime ministers: Noboru Takeshita, Sosuke Uno and Toshiki Kaifu. Distracted elected officials left asset bubble management duties to the BOJ.

Once Mieno retired in 1994, it fell to successor Yasuo Matsushita to deal with the economic fallout. That included mountains of bad loans on bank balance sheets. By the time Matsushita passed the torch to Governor Masaru Hayami in 1998, Japan had already fallen into deflation.

In 1999, Hayami became the first major central bank leader to slash rates to zero. In 2000 and 2001, the Hayami BOJ pioneered quantitative easing, or QE. In 2003, it was Toshihiko Fukui’s turn to manage Japan’s QE experiment.

Fukui decided Japan was ready to rip out the monetary intravenous tubes and ended QE. Then in 2006 and 2007, the Fukui-led BOJ managed to hike official rates twice.

The backlash was fast and furious. Politicians and corporate chieftains groused early and often about Fukui yanking away the proverbial punchbowl.

Yet when the economy slid into recession soon afterward and the Nikkei stumbled, the Tokyo establishment blamed the BOJ for messing up – again.

When Fukui’s replacement arrived in 2008, Masaaki Shirakawa quickly restored QE and returned rates to zero. In 2013, Governor Haruhiko Kuroda arrived to turbocharge QE in hyper-aggressive ways. Kuroda’s BOJ cornered the government bond market and nearly nationalized the stock market, becoming the biggest investor by far.

Bank of Japan Governor Haruhiko Kuroda. Photo: AFP / Kazuhiro Nogi
Bank of Japan governor Haruhiko Kuroda walked away without ending QE. Photo: Asia Times Files / AFP / Kazuhiro Nogi

That sent the yen down 30%, boosting exports and generating record corporate profits. In 2013 alone, the Nikkei surged 57%. In the years since then, ultra-loose BOJ policies, coupled with government efforts to strengthen corporate governance, sent the Nikkei to its current highs. The benchmark is up 45% over the last 12 months.

Yet the market’s current bull run, which began last year, appeared to make the BOJ timid about stepping away from QE.

In December 2022, Kuroda tiptoed up to the line by letting 10-year yields rise as high as 0.5%. Global markets quaked, sending the yen and Japanese yields skyrocketing. Kuroda’s team spent the week after December 20, 2022, racing to make large and unscheduled bond purchases to cap yields. After that, Kuroda didn’t attempt to “taper” again.

Enter Ueda, who grabbed the BOJ’s controls last March. Ueda also tested the waters here and there, letting 10-year rates rise to 1% and beyond. Once again, markets took it badly and the BOJ scrambled to reassure bond traders that no big policy changes were afoot.

Since then, Ueda has avoided any hints that QE might be dismantled, that negative yield policies might be abandoned or that an official rate hike might be in the cards. This, of course, is not how global markets saw the Ueda era going.

As 2024 began, the overwhelming conventional wisdom was that Ueda’s team would be hiking rates by next month. But the fact Japan entered 2024 in recession has made the timing of BOJ tightening a moving target.

Analyst Ipek Ozkardeskaya at FXSteet.com speaks for many when she says “the Bank of Japan is in no rush to hike rates this April.”

Etsuro Honda, former special advisor to Japan’s Cabinet, tells Reuters that “while uncertainty is high, I oppose ending negative rates. It’s too early.” Honda adds that “negative rates are used for inter-bank operations, which apply risk premiums when it comes to corporations where no one’s asking for borrowing with negative rates.”

Earlier this month, BOJ Deputy Governor Shinichi Uchida tamped down expectations for near-term tightening moves. Speaking in the western city of Nara on February 8, Uchida said: “If sustainable and stable achievement of our 2% inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we’ll explore whether it should be revised.”

Complicating the many “if’s” confronting the BOJ is uncertainty about whether inflation is slowing or accelerating. Japan’s consumer prices slowed less than expected in January, with “core” inflation rising at a 2% rate year on year. On the price trend front, “recent data have been extremely disappointing,” says Stefan Angrick, an economist at Moody’s Analytics.

Japan’s inflation is a mixed bag. Image: Facebook

As Hiroshi Yoshikawa, professor emeritus at the University of Tokyo, tells Bloomberg of Ueda’s plight: “I wish him the best of luck. Financial markets and the government are making the BOJ’s exit into a special event and fixating on if the bank is going to act and when. As the governor in charge of the policy, he may have little choice but to be cautious.”

Many are still betting on the BOJ acting. “This means that inflation remains above the Bank of Japan target, validating market expectations for a rate hike in the first half of the year,” says Francesco Pesole, economist at ING Bank.

This view, however, ignores how the ghosts of 1989 are colliding with the economic uncertainties of 2024 — and, to some extent, the ghosts of the mid-2000s, too. Not only did Japan’s crash in the early 1990s and the resulting bad loan crisis cause deflation — it also pushed the financial system to the brink.

In November 1997, Yamaichi Securities collapsed. The failure of a then-100-year-old Japan Inc icon shook markets everywhere, coming amidst the Asian financial crisis slamming Indonesia, South Korea and Thailand. Japan, punters worried, wasn’t too big to fail, but was too big to save. Thankfully, officials in Tokyo kept the episode from becoming a systemic shock globally.

But that near miss might also be factoring into Ueda’s calculus as he mulls withdrawing liquidity. The year since the demise of Silicon Valley Bank in California has put a spotlight on Japan’s vast network of profit-starved regional banks.

Across this aging nation of 126 million people are 100-plus regional institutions serving less economically vibrant regions. These banks have long been reluctant to consolidate or fully embrace the digitalization trends disrupting the globe.

As the population ages and the corporate exodus to Tokyo accelerates, there’s less demand for loans from rural lenders. And the trauma from 20 years of deflation left mid-size lenders more conservative than ever.

Rather than use BOJ liquidity to increase lending, many regional banks spent the last decade buying government and corporate bonds, leaving balance sheets vulnerable to higher long-term rates.

This pivot will sound familiar to students of last year’s SVB collapse in California. Ueda’s BOJ worries that rate hikes could push some fragile rural lenders toward insolvency as longer-term yields surge, SVB-style. 

For these reasons and others, Ueda hasn’t been the maverick some thought the Massachusetts Institute of Technology-trained economist might be. A big one could be the BOJ not wanting to be blamed again for wrecking a bull market in stocks.

As Kei Okamura, portfolio manager of Japanese equities at Neuberger Berman, notes, “we are still at the very beginnings for foreign fund inflows.”

Jean Boivin, a managing director at BlackRock, says “Japan’s equity rally has room to run” and that the market “can best their all-time highs.”

JPMorgan strategist Rie Nishihara adds that the Nikkei boom “will spur corporates to increase growth investment and improve capital efficiency and make institutional and individual investors take more interest.”

If the BOJ is perceived to be the spoiler once again, the risk is that the political empire in Tokyo might strike back.

Japanese Prime Minister Fumio Kishida isn’t very popular these days. Photo: Wikimedia Commons

The extent to which the ruling Liberal Democratic Party’s leadership is unpopular with voters can be seen in the 17% approval rating with which Prime Minister Fumio Kishida entered 2024. The LDP and its actions would surely push back hard on any hints Ueda might shock global markets.

There’s an argument that the feel-good factor from the Nikkei rally could improve Kishida’s support numbers and impart a “wealth effect” that makes businesses and households feel better about the economy.

But the Nikkei’s surge could also be the tail wagging the dog at BOJ headquarters. Remember how wrong the conventional wisdom was about the BOJ last year? It could be even more wrong about what’s afoot in 2024.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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Hong Kong property players hope authorities lift cooling measures in upcoming Budget

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CALLS TO SCRAP PROPERTY CURBS

The demand from mainland clients has also slowed along with China’s economy. There have been increasing calls for the Hong Kong government to lift all property curbs, a move which one analyst said will help.

“If you try to convince them (the authorities) to remove all the cooling measures, the transactions could catch on more quickly. And when there’s reinforcement of the market like this, the interest rate comes down later. It will help the market,” said Mr Martin Wong, director of research and consultancy of Greater China at Knight Frank.

Mr Wong estimated that the earliest rebound will be in 2025 if interest rates remain high, but noted that there are other hurdles. 

“There’s a large number of unsold units in the market by developers and if the developers have to (sell) their inventories, they need to cut prices. So that will set a new benchmark for the market to go down for the prices,” he said. 

However, this could spell wider implications for the property market, given the high level of negative equity loans. Negative equity occurs when the value of an asset owned is less than the outstanding balance on a loan. 

Hong Kong Monetary Authority figures show that the value of negative equity loans surged to a 20-year high of US$16.7 billion (S$22.5 billion) at the end of last year.

“If we are foreseeing 2024 for the home prices to continue to go down, the negative equity cases will continue to go up this year. I think in terms of implication, our banks will be exposed to a higher risk than before. Although it’s not up to an alarming level, the risks will continue to go up,”  he said. 

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THAI reports B28.1bn net profit

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PUBLISHED : 24 Feb 2024 at 04:01

THAI reports B28.1bn net profit

Thai Airways International (THAI) reported a jump in revenue and logged a net profit of 28.1 billion baht last year due to a recovery in the aviation and tourism sectors and a significant increase in passenger travel demand.

Piyasvasti Amranand, chairman of THAI’s committee overseeing the airline’s rehabilitation, said the total revenue, excluding one-time transactions, amounted to 161 billion baht last year, mainly due to a 79.3% jump in passenger revenue. The airline’s cash flow exceeded 67 billion baht, so it had the liquidity to continue its business operations and service debts stipulated in its rehabilitation plan, said Mr Piyasvasti.

“THAI’s total debt is 120 billion baht, with the first repayment of 10 billion baht to be made this year. We must repay it in 12 instalments. Considering THAI’s financial performance, the airline can service its debts,” he said.

Mr Piyasvasti also said the airline is expected to file for the resumption of trading of THAI shares on the Stock Exchange of Thailand within the next year, noting that earnings before interest, tax, depreciation, and amortisation after deducting aircraft lease payments are higher than the projection in the rehabilitation plan.

The SET suspended the trading of THAI shares in May 2021 due to the risk of de-listing because of negative equity and signs of non-compliance. The company has until 2025 to resolve the issues.

THAI recently confirmed it had placed an order with Boeing for at least 45 aircraft, which would be added to the fleet between 2027 and 2033.

“The fleet will not be paid by the taxpayers’ money. THAI didn’t receive a single baht from the government during the Covid-19 pandemic,” he said.

Chai Eamsiri, THAI’s chief executive officer, said the aircraft acquisition programme is a pure business decision to support the airline’s business while noting that the company has yet to decide if it opts to pay with cash.

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China bond outperformance tells a bigger story – Asia Times

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China’s stock investors could be excused for feeling like President Xi Jinping is disinterested in their plight as market valuation losses mount.

Bond punters seem ascendant, though, as Beijing officialdom makes clear it has their backs in the way few international funds saw coming.

The hyper-targeted nature of policy rescue efforts by the People’s Bank of China (PBOC) and other arms of the state explain why yuan-denominated corporate bonds were among the globe’s best-performing asset classes last year.

The dollar bonds of local government financing vehicles (LGFV) were also big winners in 2023. Unlikely, too, given all the hand-wringing about the US$9 trillion LGFV debt mountain.

The borrowing binge has credit rating companies worried that municipal debt will be China’s next crisis, one that could dwarf today’s huge property troubles.

The reason bonds are winning: Xi’s team understands that a vibrant sovereign bond market is needed to defuse the property crisis and head off a local government debt meltdown. The same goes for achieving Xi’s bigger goal of replacing the dollar as the linchpin of trade and finance.

That’s not to say Xi’s team has given up on putting a floor under China’s stock markets or gross domestic product (GDP). In 2023, inflation-adjusted GDP beat Beijing’s target to grow at 5.2%. But nominal GDP slipped to 4.6% from 4.8% a year earlier as deflationary pressures mount.

To economist Zhang Zhiwei at Pinpoint Asset Management, nominal GDP trailing real output “suggests China is likely growing below its potential growth. More supportive fiscal and monetary policies would help China to restore its growth potential.”

Economist Duncan Wrigley at Pantheon Macroeconomics says news that domestic loan growth only expanded by 10.4% year-on-year in January, the slowest pace since 2003, suggests more stimulus is coming.

The downshift indicates “still-relatively sluggish credit demand, despite net new social financing and net new loans beating market expectations.”

But the longer-term goal of increasing China’s financial footprint is the bigger priority. Beijing has made significant inroads into making the yuan a major reserve currency.

The endeavor shifted into higher gear in 2016 when China secured a place in the International Monetary Fund’s “special drawing-rights” program. It was then that Xi won the yuan entry into the globe’s most exclusive currency club along with the dollar, euro, yen and the pound.

In 2023, the yuan topped the yen as the currency with the fourth-largest share in international payments, according to financial messaging service Swift. It overtook the dollar as China’s most used cross-border monetary unit, marking a first.

The yuan is supplanting the dollar in certain spaces. Photo: Facebook Screengrab

Also last year, Chinese government bonds performed better than US Treasuries in terms of total returns. Adding in the outperformance by corporate bonds, 2023 was a milestone year for China’s emergence as a debt-market superpower.

Yet the dollar continues to dominate despite the US national debt topping $34 trillion and as extreme political polarization in Washington has Moody’s Investors Service threatening to yank away America’s last AAA credit rating.

Xi’s reform team is looking to borrow from Washington’s model for luring waves of capital into local assets. Doing so is vital to financing China’s development and sustaining the giant infrastructure projects driving economic growth.

At the moment, foreign investors hold about 30% of the $26 trillion of US public debt outstanding. In China, it’s 10% at most. Xi, in other words, hopes to get foreign governments and the globe’s top asset managers to fund his economy the same way they long have the US’s.

That means building more vibrant and transparent capital markets. Though the magnitude of China’s total debt liabilities isn’t in the same orbit of the US, China’s public IOUs also exceed GDP. In China’s case, the IMF estimates the burden to be about 116% of GDP when you add in local governments’ off-balance-sheet borrowings.

For China, municipal governments are vital to meeting Beijing’s ambitious annual growth targets. Yet following years of runaway investment in infrastructure, fallout from Covid-era downturns, fewer windfalls from land sales and soaring pandemic-related costs, local government debt is now a top financial risk.

Economists agree that Xi and Premier Li Qiang should lean into increasing global demand for Chinese debt. The end of Federal Reserve tightening signals that interest rate differentials between the US and China have peaked. At the same time, China’s deflation trend means investors buying today could be looking at big returns as bond prices rise.

Already, Beijing has increased and widened the channels to welcome foreign investors, including benchmarks like FTSE Russell.

What’s needed now is a top-to-bottom revamp of market mechanisms from efficient pricing to hedging tools to allowing for capital to enter and leave markets easily. Beijing must make its national balance sheet more transparent and move its fiscal management practices more in line with global norms.

Xi also must resist the urge to weaken the yuan for short-term gain. As economic headwinds intensify, nothing would boost Chinese GDP faster than a weaker exchange rate to boost exports. That might turn off global investors who think in dollar terms.

Hence the Chinese central bank’s reluctance to ease policy. Earlier this month, the PBOC cut the amount of cash banks must keep in reserve by 0.5 percentage points. That pumped 1 trillion yuan ($140 billion) in long-term liquidity into markets.

It was enough to tame bond market dynamics but not stabilize Shanghai stocks. Equity investors have been waiting for Xi’s team to launch a giant new stock stabilization fund – so far, to no avail.

Part of the rationale seems to be that China can do the bare minimum to stabilize stocks and keep GDP as close to 5% as possible. The restrained nature of policy moves, though, appears positive for bond markets and negative for stocks.

“This pattern of new lows in bond yields and resumption of declines in equities highlights to us that the market is concerned that stimulus is not sufficient to address the current deflationary environment,” notes strategist Jonathan Garner at Morgan Stanley. “Our economists continue to argue that a major fiscal package targeting the consumer is needed.”

At the same time, it’s possible “policymakers may start shifting their focus from foreign exchange stability toward more monetary easing” as the need for a stable yuan “has become less necessary,” says Jingyang Chen, strategist at HSBC Holdings.

The overriding focus, though, must be fixing the cracks in China’s financial system. Trouble is, the “ongoing news flow” points to a property crisis that’s “still hot and not easy to resolve,” says analyst Kieran Calder at Union Bancaire Privee.

The bottom line, he adds, is that investor confidence “cannot return” until the property sector is finally fixed. Indeed, the longer the default troubles at China Evergrande Group and Country Garden make global headlines, the more challenging it will be for Asia’s biggest economy to attract enough capital.

At the moment, Xi and Li also are stepping up efforts to head off a local government debt reckoning. Moves include pulling some of the leverage built up by prefectures around the nation onto Beijing’s own balance sheet.

It’s a delicate process. Xi’s Ministry of Finance must maintain confidence among investors that they won’t sustain massive losses. This perception is vital to attracting healthy demand for new debt issues to finance cleaning up older ones.

Here, it’s vital to get right the mix of banks upping lending in the short run and address local government imbalances in the long run.

Beijing is indeed making some progress. As analysts at UBS argue in a note, “continued local government financing vehicle debt swaps using the previous issuance of special refinancing local government bonds in 2023 may have reduced some existing bank loans, corporate bonds and shadow credit.”

In the long run, the ends could justify the means of China prioritizing bond over stock markets. Yet in other ways, the challenges involved in buttressing confidence among global investors is growing.

This week, Xi’s regulators tightened curbs on China’s rapidly growing quant trading industry. Both the Shanghai and Shenzhen exchanges are increasing monitoring of such dealing, particularly in the leveraged products space, after freezing the account of a major fund for three days.

Such regulatory uncertainty has been a constant worry for global investors since Xi’s tech crackdowns beginning in 2020. Those moves, and myriad others since then, tarnished Xi’s 2013 pledge to let market forces play a “decisive” role in Beijing decision-making.

For all Xi’s promises, China today is fending off worries it’s a buyer-beware market.

In March, Xi entrusted the reform process to Premier Li, who has since promised to accelerate moves to diversify growth engines. One key priority is creating deeper and trusted capital markets so that households invest in stocks and bonds in addition to property.

Chinese President Xi Jinping and Premier Li Qiang in a file photo. Image: NTV / Screengrab

Such retooling is needed to change the narrative that Chinese markets. Too many foreign investors still fear that Chinese markets are underpinned by a developing economy with limited liquidity and hedging tools, a giant and opaque state sector, and an immature credit-rating system that obscures risk and enables the chronic misallocation of capital.

In recent years, foreign investors wondered whether China might be facing a Lehman Brothers-like reckoning. Or a crash akin to the 1997-98 Asian financial crisis. For some, the property-overhang dynamic plaguing China’s 2024 echoes Southeast Asia’s predicament 26 years ago.

As top-heavy economies from Bangkok to Jakarta to Seoul hit a wall, investors fled and crashed currencies in their wake. That made dollar-denominated debt impossible to manage as default rates exploded across the region.

China’s property crisis has caused unpredictable challenges for local governments as tax revenues dry up. To Logan Wright, director of China markets research at Rhodium Group, “a collapse in local government investment would be comparable to the economic impact of the crisis in the property market.”

He notes that the “most important variable impacting” the world’s second-biggest economy “will be the success or failure of local government debt restructuring.”

You can’t restructure much, though, if China’s debt capital markets aren’t up to the task. The good news is that Xi’s team is focused on raising China’s bond market game and at least some global investors appear to be getting the memo.

Follow William Pesek on X at @WilliamPesek

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China’s latest video gaming curbs had their merits. Why did authorities pull the plug, and what’s next?

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The removal did not go unnoticed by local news platforms and Chinese netizens.

“The elders’ method of controlling the stock market,” one comment read, after a gaming blog reported on the removal of the proposed rules. 

“Let’s not celebrate too soon, who knows there will be a day when another weird regulation is proposed,” another commenter in Beijing wrote. 

One analyst says China’s shift towards pro-growth initiatives likely influenced the retraction of the draft rules. 

“The government’s recent emphasis on maintaining positive market sentiment suggests that such restrictive measures were counterproductive to their broader economic objectives,” Mr Ivan Su, a senior equity analyst at research firm Morningstar, told CNA.

China is facing economic headwinds including a property crisis, record-high youth unemployment and persistent deflation.

Against this backdrop, a hit to the lucrative Chinese gaming market – the world’s biggest – could prove hard to stomach. Domestic revenue last year surpassed 300 billion yuan (US$41.6 billion) for the first time, according to industry association CGIGC.

Meanwhile, the number of gamers in China grew 0.61 per cent to a record 668 million, close to double the entire population of the US.

When asked why the authorities followed through on a private tuition clampdown in 2021 – which also decimated the market value of listed tuition firms – while hitting the brakes on tighter gaming regulations, Mr Su pointed out the difference in scope.

He said the draft gaming rules target people of all ages. Meanwhile, the private tuition ban mainly aimed to ease the academic workload of students under the age of 16.

“This broader impact requires more consideration and could lead to more complex implications across different demographics, necessitating a more cautious approach,” he added.

REINING IN VIDEO GAME SPENDING

China is not the first country attempting to rein in spending on video games.

Various countries have taken or are taking action against loot boxes, which are virtual goodie bags that gamers can pay for to get random rewards. The monetisation technique has been likened to a form of gambling.

In Europe, Belgium imposed an outright ban on loot boxes in 2018, a world first. The Netherlands is mulling a similar move, while Spain has been pushing for a loot box ban for minors.

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