An optimistic case for Asian finance

A recent survey of participants to the Asian Financial Forum 2016 showed that, for the next five years, just 45.7% were optimistic in their outlook for the Asian economy, with the possible hard-landing of the Chinese economy, the world’s second largest, singled out as the biggest global economic risk this year.

Asked which factor was most likely to impact the future development of Asia, 44.8% said the slower growth trajectory of the Chinese economy, followed by regional co-operative projects, such as China’s Belt and Road Initiative, and the Trans-Pacific Partnership, in addition to both exchange rate volatility in Asian currencies and further financial market reforms in Asia.

But despite this downbeat assessment, not everyone is so pessimistic. A panel of international experts speaking at last week’s Marine Money Ship Finance Forum in London were less discouraged, predicting a brighter future for Asia as a prime source of funding for international players in the years ahead.

Managing director at Northcape Capital, Peter D Krudsen, said that he was particularly “optimistic” about China’s financing prospects. “They are learning; they are more aware,” he said, “and so they are picking clients more carefully, such as commercial banks in Europe.”

Clyde & Co partner Stuart McAlpin agreed, adding that recent statistics suggested promising developments in China. “Recent tables by Marine Money Forum are quite striking; Chinese institutions have shot up to occupy maybe the top 5%-10%,” he said. “Changing faces is important when it comes to surviving in the shipping industry.”

Christopher Conway, managing director at Export Agency Finance, said that Asian finance currently fills a very important gap in the market; one that continues to widen. “The terms in Asia are very attractive,” he said. “Should ship owners extend their search further, they’d find that Chinese deals are especially appealing.”

That said, while Chinese money is still there, the country’s financiers are being more careful about how they spend it. “Of course they are concerned that they finance something and then the project goes belly up and they are left alone with the asset,” said corporate counsel at Bernhard Schulte Group, Max Asschenfeldt.

Soft landing

Despite hitting a 25-year low of 6.9%, China’s figure for GDP growth is almost in line with expectations, easing concerns of a hard landing. In fact, China’s economy grew 6.8% in the last quarter of 2015, resulting in a general sigh of relief that the second largest economy in the world was continuing to grow in sectors and may actually be rebalancing. While real estate construction and exports have been weak, consumption, light industry and services are continuing to expand.

Other concerns over the economies of East and South Asia specifically include tighter global financial conditions due to US monetary policy, as well as rising import costs from weaker regional currencies. In addition, the region will also have to adjust to a much slower demand in China, as that economy slowly shifts to a more consumption-driven growth model.

According to recent reports from FocusEconomics, however, the economy for East and South Asia will continue to show resilient growth this year, with the analyst expecting growth of 6.1% in 2016. FocusEconomics expects India to be the region’s fastest growing economy in the year ahead, with 7.6% expansion, followed by Bangladesh, with an expected 6.6% increase. Hong Kong and Taiwan are predicted to be the slowest economies of the region in 2016, although still with an increase of 2.1% and 2.0% respectively.

Corresponding with President Xi Jinping’s statement that growth should be no less than 6.5% in China’s 13^th five-year plan – spanning 2016 to 2020 – FocusEconomics expects its economy to rise by 6.5% this year, adding that growth is predicted to pick up slightly going forward thanks to firm domestic demand.

Macro impact

President at KOTAM, KMARIN Group, Khoon Kee Woon, considered the macroeconomic impact on Chinese financial institutions’ ability to remain relevant in the face of a developing capital market, noting that Chinese stock market growth has been a great deal less of late, which has caused concern. These macroeconomic changes could lead to lengthened execution time and reduced access to funds, he said.

Asked whether Chinese lenders aim to be biggest in shipping, Mr Woon said that while it’s not a goal, it is “inherent of their size”.

“So far, Chinese investments have always been driven by higher-ups, so you see lots of investments in infrastructure,” added Mr Asschenfeldt. “What is happening now is they are getting rid of these restrictions and have started investing in projects that just make sense from an economic point of view, which is a real game changer. I agree that it’s not their goal to become the biggest, but the fact is they have a huge amount of money and they’re starting to pick out projects in a different way than that have in the past.”

Concerns were also raised by the panel about how projects are being funded by the Chinese. Sharp increases in pricing have led some transactions to be cut loose, which has an impact on owners. Any ambitions to be the largest lenders in shipping need to be weighed against the longer term funding needs of owners, the panel said.

Further, with the emerging new debt capital market from Asia, the panellists questioned why funding companies are so interested in shipping, and what shipping can do to retain that interest going forward.