Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman back in the studio for another podcast alongside my co-host Harold van der Linde.
Speaker: Good to have you back, Fred.
Speaker: As far as finance goes, it's all eyes on the banking sector this week with major news coming out of Switzerland following last week's shock in Silicon Valley.
Speaker: The question for you and myself is, could these problems ripple across Asia?
Speaker: Let's get the conversation started Under the Banyan Tree.
Speaker: Before we get to Asia-specific, let's start with a big picture view of what's going on in global finance.
Speaker: This week's headlines are all about UBS's takeover of its crisis-hit competitor Credit Suisse.
Speaker: That's a deal worth more than $3 billion, and UBS has taken on a big bank here.
Speaker: Of course, that comes just a week after the collapse of U.S.-based Silicon Valley Bank, which was shut down by U.S. regulators.
Speaker: Now, Harold, clearly lots going on, a lot of volatility in financial markets globally.
Speaker: How did it actually impact financial markets here in Asia, particularly the equity markets?
Speaker: No, we've seen a lot of volatility over the last week.
Speaker: I mean, two weeks ago, we were talking about the major risk maybe being US inflation and US interest rates going higher than expected.
Speaker: And suddenly, we get a bit of a curveball, right?
Speaker: All sorts of banking issues.
Speaker: So we've seen equities coming down, bouncing back strongly.
Speaker: Gold prices went up.
Speaker: They've actually come down a little bit.
Speaker: Interest rates across the region have moved around a lot.
Speaker: Bond yields globally have moved around a lot.
Speaker: So
Speaker: There's been a lot that's happened, but if you then look where we are now, we are down from where we were, say, a good 10 days ago before this started.
Speaker: So some risk has been priced in.
Speaker: Fred, what else has been going on in markets across the region?
Speaker: Well, certainly you've seen a lot of volatility in Asian financial markets as well, of course.
Speaker: But by and large, the impact is manageable.
Speaker: So if you look at FX, for example, there's been some depreciation of Asian currencies, emerging Asian currencies, for example.
Speaker: The yen is strengthened.
Speaker: That's very typical in this environment.
Speaker: Safe haven, right?
Speaker: Safe haven flows.
Speaker: Dollar, of course, strengthened.
Speaker: Then you saw a bit of a lift in interbank rates, but nothing too dramatic, actually.
Speaker: So Korea, for example, has always been watched very closely and saw a bit of a lift there of interbank funding costs.
Speaker: But really, in the large scheme of things, it's fairly contained.
Speaker: So the conclusion from financial markets seems to be this is largely a Western financial issue.
Speaker: It's not really directly impacting financial systems on banking systems across Asia.
Speaker: And that certainly is a positive factor.
Speaker: message there.
Speaker: But Harold, when you look at it from a bottom-up perspective, that is, how vulnerable might Asian banking systems be?
Speaker: What does your insights tell you about what's going on across the region from the bottom up?
Speaker: We cannot ignore the fact there's a lot of debt around the world and there might be pockets of debt that is not really visible for us at the moment.
Speaker: But if you look at the banking system, as you say, from a bottom-up perspective, capital ratios look good.
Speaker: For example, for banks, the key financial centers, Singapore and Hong Kong, but also in ASEAN are well capitalized.
Speaker: The Indian banks have really cleaned up their balance sheet over the last five, six years.
Speaker: They're in a much stronger position.
Speaker: The Chinese banks are not really impacted here because this is really global money flows that goes around.
Speaker: They only just deal in RMB.
Speaker: So the movements in bond yields that have really shaken some of these banks globally, that's not something that happens onshore in China.
Speaker: So the banking system across Asia look reasonably good.
Speaker: And also the companies that they deal with, the growth of those companies,
Speaker: is to a large extent, at least what I can see in the equity markets, a large extent driven by regional or domestic factors.
Speaker: It's a recovery in domestic consumption in China and India.
Speaker: It is rural consumption in India as well.
Speaker: We sectors such as consumer discretionary and healthcare that do well.
Speaker: So it's not really reliant on export sectors.
Speaker: And therefore, maybe the growth profile of their customers, the bank customers, should look reasonably good as well.
Speaker: Yes, so from a macro perspective, there are two distinctive factors really when it comes to Asian banking systems.
Speaker: One is that you have a lot of local liquidity, that is a lot of deposit rich institutions in Asia that have traditionally not funded themselves out of capital markets as much.
Speaker: And so the liquidity, the funding profile tends to be more stable in some of the emerging markets in Asia.
Speaker: So that's a structural kind of anchor, if you will.
Speaker: But the other thing which is interesting in this particular cycle is that in the U.S. you had a very large inflation problem and a big rise in interest rates.
Speaker: Whereas in most of the Asian economies, the rise in interest rates relative to the history of interest rate volatility has been far less than in the U.S.
Speaker: And so banks are not necessarily exposed to the same degree of interest rate risk that we see now play itself out in the US and maybe to some extent in Europe.
Speaker: And so the lower inflation that we had over the last year really helps us kind of anchor banking systems here in Asia as well.
Speaker: And I think that's an interesting kind of difference, nuance between what we see in the US in particular, but also in Europe.
Speaker: But Asia is no stranger when it comes to banking stress at all.
Speaker: You and I have seen a fair share of those with regularity every 10 years.
Speaker: 97, big crisis back then.
Speaker: What do you remember from that?
Speaker: And does this feel remotely close to that?
Speaker: No, I think it's not even a comparison to be extremely frank.
Speaker: In 1997, you and I were both in the region.
Speaker: I think you were in Thailand.
Speaker: I was in Indonesia at the time.
Speaker: The situation was completely different.
Speaker: Just as an aside story, I remember interest rates going up so much at the time that one of my colleagues' monthly interest payments on a mortgage were equal to the whole mortgage itself.
Speaker: So you had people, but also companies going bankrupt, so there was a massive problem.
Speaker: The banks collapsed, a lot of liquidity was pumped in.
Speaker: But I think the advantage, at least the current advantage that we have is that at that point in time it was really painful, but regulators came in and said, OK, we have to clean this up.
Speaker: So they cleaned up the banking system.
Speaker: So, for example, the Indonesian banking system
Speaker: mentioned earlier is very well capitalized because all the bad loans were taken out 20 years ago and since then these banks they've seen what damage can be done so they've been rather conservative very selective to to whom they extend loans to what about you Fred anything that you can remember from those days
Speaker: Well, yeah, that was certainly very impactful for the region in terms of, you know, nobody saw this coming and it was disruptive, not just economically, but politically.
Speaker: But I think we have to be very careful in drawing parallels here.
Speaker: And that's because at that point, the vulnerabilities were external.
Speaker: It was external debt.
Speaker: Countries had taken out too much hard currency debt, and that led to a whole host of issues.
Speaker: Now, today, because of the regulatory response, because of the Asian financial crisis, we've much more stringent rules around external debt.
Speaker: We have much higher foreign exchange reserves.
Speaker: the regulatory environment is such that this type of vulnerability really doesn't exist to the same extent in Asia.
Speaker: And that now is essentially a steadying factor.
Speaker: So yes, the Federal Reserve is raising interest rates, but it doesn't impact local funding by financial institutions as much.
Speaker: It doesn't need to lead to effects mismatches on the balance sheet of corporations, for example.
Speaker: And I think we have that tightening of the regulatory environment
Speaker: to thank for and that's maybe one of the good things that came out of the crisis ultimately and gives us the resilience that we have today.
Speaker: At the moment, that's right, yes.
Speaker: You're listening to Under the Banyan Tree from HSBC Global Research.
Speaker: We're going to look at the risks facing Asia's financial system in a moment.
Speaker: Now, we've talked a lot about the past and we kind of concluded that at the moment Asia looks very resilient, not the no parallels to what we see elsewhere in the world.
Speaker: But that doesn't mean there are no risks here, Harold, right?
Speaker: No.
Speaker: And what keeps you up when you think about risks that the region might face?
Speaker: Well, I think ultimately debt in itself is not really a problem.
Speaker: The issue is if the debt is not productive.
Speaker: See, if you and I take on a loan and we do something with it, start up a business that grows pretty well, we can repay that loan.
Speaker: So the fact that you have more debt is not really a problem.
Speaker: It's as an economy that it's not always been productively used.
Speaker: If that is the core of the problem,
Speaker: There are pockets in Asia where this might come to roost at some particular point in time.
Speaker: So we have to be cognizant of that.
Speaker: China has a lot of local government debt that is high.
Speaker: It's not always been productively used either.
Speaker: What's unclear if that's the case, that's something that needs to be sought out at some particular point in time.
Speaker: Also, there might be financing of real estate across the region and maybe other sectors.
Speaker: I'm thinking about maybe healthcare, tourism that looks productive at the moment, but might not be productive in the future.
Speaker: Or the expected cash flow they're going to get from that is not as big as what they currently would anticipate.
Speaker: So if you have another downturn at some particular point in time, it might come back to rooster.
Speaker: So I think if there are risks, that's the way maybe to think about it.
Speaker: Is that fair to say, Fred?
Speaker: Yeah, I think so.
Speaker: And I think you make two valid points here.
Speaker: One is that the risks are closer to home.
Speaker: They're not external to the extent that the Asian financial crisis was partly an externally driven crisis because of external vulnerabilities.
Speaker: Now the risks are more domestic, more at home in Asia.
Speaker: So what happens elsewhere in the world doesn't affect us as much.
Speaker: The second point I think you hint at as well is that the vulnerabilities aren't as acute.
Speaker: That is, we know they're there.
Speaker: We know there's aging, for example, in some economies.
Speaker: There is increasing leverage among local governments, for example, among households.
Speaker: But we know of these issues, but they're in the background.
Speaker: And they're not acute partly because we don't have the inflation system.
Speaker: We don't have the interest rate risk that we face in other economies in the world.
Speaker: And so that means policymakers need to think about this and investors over a two to three, five year horizon.
Speaker: But it's not something that really affects us as much this year or at least for the foreseeable future.
Speaker: And of course, much depends on where the policy direction goes in the meantime.
Speaker: Yeah, and maybe the lesson what we've learned over the last 10 days or so is that knowing that these problems there allows you to prepare, but the world can suddenly change and suddenly these problems can come to the surface and come back to bite you, right?
Speaker: So it's very important that policymakers stay vigilant.
Speaker: Stay vigilant, absolutely.
Speaker: Harold, busy couple of weeks for anybody who works in finance.
Speaker: Yes, indeed.
Speaker: But I feel like we keep saying that all the time.
Speaker: So how do you keep yourself sane in this world?
Speaker: I was struck when you mentioned being in the Asian financial crisis.
Speaker: You were in Indonesia.
Speaker: I remember that actually before the crisis, I was in Thailand at that time.
Speaker: You walked around Bangkok and you saw these high rises at night, which are all dark.
Speaker: There were no tenants.
Speaker: They were half built.
Speaker: And so it was almost a gold city a little bit.
Speaker: That must have been a hint to anybody who was in Bangkok, say, in 96, kind of seeing that overbuilding.
Speaker: But I don't know.
Speaker: Do you have something similar in Jakarta?
Speaker: Yeah, no, absolutely similar.
Speaker: And actually, looking back on that, there's a nice story that suddenly pops up here, is that I went with a client to see a few companies.
Speaker: And we walked into a building, and he said, you know,
Speaker: It's always a bad sign if the lobby of a company looks as good as a five-star hotel.
Speaker: And this is maybe that productive use of capital, right?
Speaker: They've taken on debt, but instead of building a factory, they've also put a lot into marble lobby entrances.
Speaker: And yeah, soon thereafter, we found that a lot of these buildings that they were constructing at the time, yeah, they were completely empty.
Speaker: They were dark at night and the crisis, of course, didn't help.
Speaker: And
Speaker: Actually, you know, I looked at this more systematically, actually, at sort of the psychology of bubbles.
Speaker: Yeah.
Speaker: You mentioned into detail, right?
Speaker: You mentioned, you know, the lobbies that are decorated like five-star hotels.
Speaker: My PhD thesis was based around models to predict financial bubbles.
Speaker: And I found...
Speaker: that a reliable predictor of a financial bubble and hence a crisis subsequently is if per capita champagne consumption goes up above trend by a certain number of standard deviations that would usually entail that a financial crisis follows with about an 18-month lag or so.
Speaker: Now, that indicator has never made it into mainstream finance, but it's still worth thinking about.
Speaker: But it does seem to me today that we've not been too exuberant in our champagne consumption in Asia, so I feel fairly comfortable about delivering financial stability.
Speaker: But if champagne sales are going to go up, we've got to be worried.
Speaker: Then we have to watch.
Speaker: Maybe I should get my bottles now then.
Speaker: And on that note, we're out of time here under the banyan tree.
Speaker: Thank you very much for joining us.
Speaker: Yes, do listen in to our sister podcast, The Macro Brief, for the thoughts of our European banking analysts on the situation in Switzerland and beyond.
Speaker: As for us, we'll be back next week putting Asian markets and economics in context.
Speaker: See you then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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