Uh oh. Asian domestic currency fixed-income trading appears to be collapsing, say Greenwich Associates.
The Stamford-based research firm’s most recent Asian Fixed Income research in fact points to some very alarming figures – a 47 per cent drop in domestic currency fixed-income trading in India, and a drop of one third in China and Australia/New Zealand.
Should we care? Well yes, they say.
The rise of the Asian domestic bond market in the years leading up to the current financial crisis marked a profound shift towards debt market stability, according to Greenwich:
“In the past, large Asian companies that earned most of their revenues in local currency had to obtain most of their long-term financing in dollars or European currencies – which history has proven is a dangerous position to be in. The emergence of thriving local-currency debt markets has been seen as an important new source of stability, but the severity of the current financial crisis leaves the near-term fate of these markets in real doubt.”
The preceding boom was certainly impressive. Greenwich estimates trading volumes in the domestic currency bond markets of China, Indonesia, Malaysia, India, Thailand and Australia/New Zealand increased more than 135 per cent from 2006 to 2007 .
Accordingly, local-currency products grew to make up over 50 per cent of overall fixed-income trading volume across Asia in 2006-2007, compared with 30 per cent the year before.
Despite the contraction in the domestic markets, Greenwich says overall Asian fixed-income trading volume (including derivatives) is up 35 per cent to $2,300bn, with trading volume in cash bonds up 15 per cent (specifically in bonds denominated in the currencies of G3 and G7 countries). This suggests a clear flight to quality.
Asian institutional trading volumes in G-3 denominated Asian bonds soared 90% to $214 billion in 2007–2008. Fueling that growth was a dramatic spike in activity in G-3 denominated investment-grade sovereign/corporate issues, in which trading volume increased nearly four-fold, and in G-3 high-yield bonds, in which trading volumes more than tripled.
What’s more, there appear to be some dire implications for the fortunes of the major broker-dealers who invested heavily in the market.
Who’s the dealer likely feeling the most pain? Greenwich says it’s HSBC, ranked top in the firm’s Asian Fixed Income Dealer rankings in 2007-2008 with a 12.1 per cent market share in overall trading.
And who ranked second? Well that would be Citigroup, with a market share of 9.6 per cent.
Greenwich, of course, emphasises that until now HSBC has been able to weather the associated storm (our emphasis):
“It is interesting to note that among all the major dealers competing in Asia, HSBC has built the biggest trading franchise in local-currency products,” says Tim Sangston. “But the banks’ strength in other areas and its market-leading scores for overall franchise quality over the course of the credit crisis have enabled it to weather the storm in Asia to this point.”
FT Alphaville wonders if things could be about to change, given recent analyst notes regarding the group’s capital position.
Related links:
Is the East heading into the red? – FT Alphaville
Why we STILL think HSBC needs $20-30bn of capital – FT Alphaville