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With the energy of frustrated followers of Nostradamus finally finding vindication, market-watchers pounced on China’s opening-bell volatility as confirmation that the end, finally, was nigh. Talk of a new Asian financial crisis churned the pundits’ butter into a rank concoction. Ever the master of the well-timed party favour, Kim Jong-un threw a North Korean hydrogen bomb into the mix. Elsewhere, David Bowie died, angst abounded and yet somehow the sun still rose the next day. And the day after that.
That the sun can still shine despite the naysayers reflects the continuing disconnection between life on Asia’s streets and its representation through international media that this column seeks to address. It is the inevitable by-product of the need to distil multiple events into simple narratives. Like compressing music files, some of the detail is inevitably lost.
With this in mind, let us consider the street-level response to the four horsemen of a supposed Asian apocalypse.
Boldly, the white rider of conquest demands: will hedge funds prevail in forcing the Hong Kong dollar to de-peg from the US?
There is little-to-no expectation among people in Hong Kong that the HK Monetary Authority will face its own Black Wednesday any time soon (if ever). With the SAR positioning itself as the ‘super-connector’ to mainland China and marked as the starting point on China’s ‘One Belt, One Road’ initiative, Hong Kong’s stability is a fundamental requirement for key pieces of Chinese political and economic policy.
The three pillars that enable Hong Kong to occupy this space are: property rights, rule of law and stability of the peg. Back in 1992, the UK’s withdrawal from the European exchange rate mechanism produced a loss of face, but it was far from the mortal wound that Hong Kong would suffer from a forced decoupling. Beyond political will, estimates of the liquid economic firepower available to the HKMA and relevant Chinese regulators provide a materially deeper buffer than that which was available to the Bank of England.
Angrily, the red rider of war snorts: is war in the Korean peninsula imminent?
News reports on the latest crisis in the Korean peninsula often feel like exposition scenes in disaster movies, setting up a nightmare scenario for Sly/Bruce/Arnie to ride to the rescue. Appropriately, South Korea’s response to the latest atomic threat was to send in the pop culture cavalry by blaring propaganda, in the form of bling-tastic K-pop music, across the demilitarized zone, using amplification systems seemingly repurposed from a fevered heavy metal fantasy.
South Koreans’ near total indifference to sabre rattling in the North is not simply a case of information fatigue. Instead, it is wearied acceptance of a political stalemate. Rather than military brinkmanship, it is the fear of reunification costs and near-impossible-to-control refugee flows (sound familiar?) that anchor the peace. In a former life, your humble narrator found himself in the market with a new issue during North Korea’s first nuclear test in 2006. After a few harried conference calls, the bond was priced at the tight end of the range.
Weakly, the black rider of famine croaks: is this the beginning of a new Asian financial crisis?
Quite simply, no. Unlike 1997, a sharp move in exchange rates will not trigger a cataclysmic inability to service dollar-denominated debt. A by-product of the intervening years of economic growth has been the development of local currency-denominated capital markets supported by local banks and the beginnings of long-term real money (eg domestic insurers, international insurers writing local policies, and public and private pension plans). Demographics and capital market reform will only see these pockets deepen.
Further, names that are high yield internationally may be industry leaders locally, making them the beneficiaries of a flight to quality during troubled times. This difference in perception is why international lenders, even ones with local currency funding capabilities, remain outgunned in local currency lending markets.
Chinese property developers provide a ready example – with Chinese fears abounding, these one-time belles of the ball are unlikely to find much demand among G3 buyers today. Domestic lenders have taken their place with ample and attractively priced liquidity in the club loan market. So when workouts inevitably follow slowing economies, it will be domestic creditors, rather than the multilaterals, at the table.
Last but not least, the pale rider of death asks: is the Chinese economy on its last legs?
We have reached the cliffhanger ending as the credits begin to roll. Tune in next month to find out whether the Chinese economy will escape, Han Solo-like, from its frozen block of carbonite.