Markets could get ‘violent’ if dollar, U.S. rates surge
Borrowing costs still priced off U.S. rates, HSBC’s Zhang says
Asia’s economies may be increasingly bound to China, but the risks to the region’s markets may be more linked to the U.S. as Chinese policy makers make progress in arresting a record run-up in the country’s debt.
A deeper danger than China for emerging Asian markets is a rapid increase in U.S. interest rates and a surge in the dollar, according to Zhang Zhiming, head of China research at HSBC Holdings Plc. The dollar remains the global financial system’s dominant currency, and record sales of offshore bonds by Asian borrowers have only strengthened its importance for Asia, the argument goes.
“Asian countries are tied to the Chinese economy, but from a currency standpoint and a funding-cost standpoint, they are more tied to the dollar — just look at the continued surge in dollar issuance,” Zhang said in an interview in Hong Kong Wednesday. “Even in the past few years the bond has strengthened.”
While it’s true that more and more of Asia’s dollar bond market — expected to reach $1 trillion within the next couple of years — is held by investors from within the region, U.S. dynamics continue to be key for borrowing costs.
“You still price ‘T plus’ not ‘CNY plus,’” Zhang said, referring to pricing based on premiums over U.S. Treasuries rather than yuan funding costs. “And at the end of the day, you need more money to pay if the dollar rises.”
While the recent surge in U.S. yields has taken Asian dollar bond rates up along with them, a weakening dollar has so far helped insulate emerging markets from funding pressures. If that changes, Asian economies that have become more leveraged could face a stress test.
“Leverage matters if things get shaken up, and leverage has risen in Asia,” Zhang said. “If rates and the dollar accelerate, then things can move fast. It could be violent.”
Non-financial private-sector credit in emerging Asian economies outside China has increased to well over 100 percent of gross domestic product since the global financial crisis, and China’s leverage has also climbed while that in developed markets has shrunk, according to a JPMorgan Chase & Co. analysis of Bank for international Settlements data.
Though most Asian countries count China as their top trading partner, the role of the dollar vastly outweighs that of the yuan — something that’s not necessarily an anomaly, according to Zhang. Centuries ago, China had the world’s biggest economy, and was active in trade, though its currency was largely limited to domestic use, he noted.