Annual Conference 2014, Boao Forum for Asia
Session Summary
Session 25
April 11, 2014
Capital Markets: Old Problem, New Solution
Moderator:
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WANG Boming, Editor-in-Chief, Caijing
Panelists:
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Tom BYRNE, Senior Vice President & Head of Asia Pacific Sovereign Risk, Moody's
Investors Service
CHIU, Paul Cheng Hsiung, Chairman, Bank SinoPac
Fred HU Zuliu, Chairman, Primavera Capital Group
LI Jiange, Chairman, Shenyin & Wanguo Securities
Atsushi SAITO, Director & Representative Executive Officer, Group CEO of Japan
Exchange Group, Inc.
Junichi UJIIE, Senior Advisor, Former Chairman, Nomura Holdings Inc.
Key Points:
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Markets around Asia have been improving steadily, which is consistent with performance in
the U.S., where U.S. Federal Reserve Chairperson Janet Yellen's19 March announcement
that 5.6% unemployment is an acceptable target, has boosted stocks.
The linkage between the Hong Kong and Shanghai stock exchanges, announced at the BFA
Annual Conference's Opening Plenary by Premier Li Keqiang, will help grant the respective
participants wider access, increasing RMB product access to Hong Kong investors, and
access to international stocks to Chinese investors. The linkage also alleviates the
perception that Asia's financial centre is moving from Hong Kong to Shanghai.
Reforms stemming from Abenomics boosted the Japanese economy in 2013, though this
performance in 2014 has not been as positive. Implementation of further reforms, as
outlined by Prime Minister Shinzo Abe, are necessary to ensure the long-term positive
performance of the stock market.
Debt markets are underdeveloped across Asia, as compared with mature bond markets in
the U.S., where corporate and municipal bonds thrive. In Asia, this is the result of investor
preference for consumer/commercial loans, or the stock market, viewing bond markets with
mistrust.
Moderator, WANG Boming, Editor-in-Chief of Caijing, opened the session with a commentary
on the development of China's capital markets, noting that global capital markets after the
global financial crisis, have seen growth of the stock market. This is evident in Japan, the U.S,
and Europe, where the respective economies are picking up. Mr. Wang said the stock market is
performing well, with more liquidity, and people are thinking of withdrawing from emerging
markets and going back to U.S. equity markets, where pre-financial crisis levels have been
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reached. With that in mind, panelists were asked whether this performance is liquidity-driven or
a reflection of U.S. fundamentals.
Tom Byrne, Senior Vice President & Head of Asia Pacific Sovereign Risk at Moody's Investors
Service, commented that the U.S. is a liquidity-driven market and currently, the U.S. economy is
neither performing poorly, nor well. The debate is whether the U.S. will catch up and have a
normal recovery after the financial crisis. Moody's economist is bullish on U.S. prospects, citing
that the U.S. can achieve 3% plus growth. In emerging markets, when former U.S. Federal
Reserve Chairman Ben Bernanke announced tapering of the Quantitative Easing (QE)
programme in May 2013, the impact was not so much a withdrawal from emerging markets, but
more a cessation of new funds. Mr. Byrne pointed out that the most recent data showed that
there were net inflows into emerging markets, given that the U.S. Federal Reserve's exit from
QE will be done at slow pace.
Paul Cheng Hsiung CHIU, Chairman of Bank SinoPac, considered the market situation in
Taiwan, where the stock market has been performing well, having risen to more than 8000,
double its pre-financial crisis position. Following the announcement on 19 March by Janet
Yellen, the new Chairperson of the U.S. Federal Reserve, that 5.6% is an acceptable rate of
unemployment, Taiwan's stock market has been performing well.
Looking at the Japan stock market, Atsushi SAITO, Director & Representative Executive Officer
and Group CEO of Japan Exchange Group, Inc., observed that Japan recovered greatly last
year, by 50%, with trading value growing three times. In 2014, however, the market is down by
17% because Japan is still expecting the "third arrow" of Abenomics. The Abenomics policy
outlines the liberalization of labour contracts to change the historical "lifetime system" of
Japanese companies, an improvement of Japan's agricultural system, and corporate tax cuts. If
Japanese Prime Minister Shinzo Abe is serious, then these reforms will benefit the Japanese
markets. Mr. Saito acknowledged that the "three arrows" may not be enough to sustain growth
and there may be a need for a 4th or 5th arrow given the significant challenges of the sharp
population decline; a fast aging population; the migration of manufacturing facilities out of Japan
to China, India, the Philippines, or Indonesia; and the fact that no matter how much the yen
goes down, exports are not accelerating at all. He added that the nuclear energy programme
was suspended, which resulted in the need for Japan to buy oil and, given the drop in the value
of the Yen, buying oil has become very expensive. Japan is currently relying on dividend
income from abroad and the current account is sometimes negative. He asserted that the
Japanese system must change, with new types of reform.
Junichi UJIIE, Senior Advisor and Former Chairman of Nomura Holdings Inc. observed that the
Nikkei index is currently around 15,000, and, Abenomics, there is potential for it to reach 20,000
by next year. Abenomics has drastically changed people's minds, and the expectation now is
that deflation will not continue. Corporates have started to invest and, if this continues, the stock
market will reflect that.
Turning to China, the moderator raised the question as to why the stock market is still around
2,000 points when GDP growth rate is still high at 7.5%.
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LI Jiange, Chairman of Shenyin & Wanguo Securities, and former vice-chairman of the CSRC
responded that it is possible to have a high rate of economic growth with a poor stock market.
When the stock exchange reached 6,000 between 2005-2008, the growth was too fast and
abnormal. As a result of the volatility during 2006 and 2007, many people had lost confidence
in the stock market and it has remained sluggish for many years. With interest rate liberalization
in two years, people are guessing that the interest rate will rise, given that it has been kept low
for government reasons. Monetary policy in China is influenced by the U.S., where the 5-year
interest rate was 5% and the loan interest rate 7-8%. For small-to-medium (SME) companies,
the interest rate is higher than 15% and the risk-free return of the general public within banks is
already very high, so they are not willing to put their money in capital markets due to interest
rate risk.
Mr. Wang sought the panel's views on the substantial changes that might be expected from the
newly announced linkage between the Shanghai and Hong Kong stock exchanges. Mr. Li said
that when he met with Charles Xiaojia LI Charles Xiaojia, the CEO of HKEX, the latter cautioned
that the benefits should be judged on the basis of the market's response to the news, and it was
more relevant to observe the benefits, such as Hong Kong's role as the bridge between the
west and China for the past 30 years, where China has learned a lot from HKEX. China is
modeling its exchange around the Hong Kong regulatory framework and further cooperation
between the two stock markets will expand the investment channels of Hong Kong investors,.
Given that Hong Kong is an offshore RMB centre, the linkage will enable the flow of RMB.
Likewise, Chinese investors will have access to international companies. Another benefit is the
consolidation of Hong Kong and Shanghai as complementary international financial centres,
given the introduction of the free-trade zone in Shanghai, which also alleviates the view that
financial activities are shifting away from HK. The linkage enables Hong Kong to be a stronger
offshore centre and enables Mainland China to benefit from further reforms, echoing Premier Li
Keqiang's comments on a new round of high-level opening of the financial sector to promote
such reform.
Looking at the lack of bond markets in China or wider Asia, including Taiwan and Hong Kong,
whereas the U.S. bond market is well-developed, Mr. Byrne commented that the sharp rise of
debt in China is corporate debt, not household debt, while budgetary government debt is also
low to moderate. Public sector debt in China is very high, whereas in the U.S., local
governments use municipal debt as a financing vehicle. He cited that the U.S. has
approximately US$ 4 trillion in bonds, which have three features: 1) they are transparent; 2)
debt issuers are accountable for the debt issued; and 3) they are relatively safe because they
are low-default and low-risk in the rated universe. In China, the local governments have a lot of
debt, but the structure of the debt is important and local governments should avoid shadow
banking. For this to work, there has to be market discipline, implicit guarantees must be
removed, and bankruptcies must be allowed to occur to reduce moral hazard, so the pricing of
credit risk can develop further.
Mr. Chiu commented that the financing of major economies depends on banks. Capital markets
in Mainland China are not developed, he continued, citing an article that stated that 80% of
stock value comes from internal means, with IPOs only accounting for 20% of value. This was
in contrast to the period from 1995 to 2000, when 80% of stock value was derived from IPOs,
meaning that internal corporate development was limited and money was needed from external
sources. In these circumstances, companies should use debt, he noted.
Mr. Ujiie added that, in Japan, the government bond market was almost too large. Japan has
two problems. Firstly, the corporate bond market is too commercial bank-centric and there is a
conflict of interest between bond and loan market, so the corporate bond market did not grow as
it should have. The rating of local government bonds is very good, which implies that people
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believe there is an implicit government guarantee. The long-term problem of the capital markets,
is that a diversified share ownership is necessary in order for the market to be efficient in
allocating capital. In China's equity markets, shares of state-owned enterprises (SOEs) have to
be reduced. At the end of 2013, 65% of listed Chinese companies were still majority-owned by
the State. SOEs lack efficiency. Taking Japan as an example, the gradual privatization of state
enterprises has enabled the diversified stock market to emerge. This has led to good corporate
governance. The long-term success of the Chinese capital markets is related to diversification
of the stock market.
Mr. Saito commented that, during deflation, the problem was not with the debt market in Japan,
but with inflation, bonds values have declined, and local bond holders have suffered, so
investors, who are mostly Japanese, moved to buy real estate or stocks to combat the effects of
inflation. To address the fundamental problem of having the highest debt ratio in the world,
Japan is going to increase consumption tax from 8% to 10%. European corporate tax is 2225%, while in Japan, it is 35%. Today, most countries charge tax on the consumption side, not
on the producer side, but Japan and the U.S. charge manufacturers, which needs to change.
No other markets are trading corporate bonds except the U.S., so there is no mark-to-market.
He asserted that Asia must construct a good, tradable market and that it must have a bond
exchange like the U.S. OTC market. Asia needs an efficient debt market.
Mr. Li added that debt and bonds have become very notorious in China. Formerly called
"enterprise bonds", they were approved by the state commission of planning and, under a
planned economy, borrowers believed they never had to pay it back. For Chinese companies, it
has been easier to get bank loans, so it has not been necessary to go to the bond market. In
the U.S., the bond market was first; in Germany, share issues only began with Deutsche
Telecom, but before that, Germany only had a bond market. In Hong Kong, investors deposit
and, if they are aggressive investors, they buy stocks. Bonds are in the middle of the spectrum,
so Hong Kong investors are less interested, therefore the Hong Kong bond market is not strong.
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