June 13, 2017 2:00 pm JST
Comment

Vultures circle over Asia as corporate debt piles up

Wishful pessimism over China's 'Japanization,' Asia catching another flu

MAKOTO KAJIWARA, Nikkei commentator

A South Korean worker holding a placard reading, "I'M Fired," stages a street protest against the International Monetary Fund (IMF) in dowtown Seoul in 1997. © AP

TOKYO -- Pessimism about China's economy prevailed among financial industry folks from various parts of Asia who recently gathered in Hong Kong. A focal point of their discussion was whether China will follow a once-thriving Japan that now refers to its recent past as the "lost decades."

At this kind of discussion, Chinese corporate debt had to be considered. It equaled 166% of the country's gross domestic product as of September 2016, up from less than 100% in 2008.

"Zombie companies" should also be considered. China's corporate landscape is lined with steelmakers, chemical producers and coal miners that are sinking in excess capacity and starving for earnings.

One after another, those present in Hong Kong questioned whether these ailing companies can repay their liabilities now that the country's economy no longer enjoys double-digit growth.

Corporate debt is only one factor that testifies to China's "Japanization." Real estate prices in urban areas have kept soaring, and the population has begun to erode.

It is probably fair to say that those who gathered in Hong Kong concluded China's debt, property and population woes are identical to those Japan began facing after its 1980s bubble economy.

It is also probably safe to refer to some of the participants as "vultures" -- investors who hope to swoop in after a corporate bankruptcy and buy low, bring the color back to the white elephant, then sell high. Others on hand were bankers who help work out restructuring plans and legal experts who coordinate views among creditors.

Although China's economic activity is solid, the gathering's participants tended toward "wishful pessimism."

I do not take lightly the views voiced there. Indeed, deliberations on the deteriorating creditworthiness of businesses are taking place across Asia.

In March, India's "twin balance sheet" problem -- companies' excess liabilities and banks' bad loans -- drew much attention at a meeting of economic experts in New Delhi.

India's interest coverage ratio -- a measure of how easily a company can make interest payments -- stood at 3.7 in 2016. This puts India at the bottom of the world's emerging economy totem pole, according to the International Monetary Fund.

Banks see the same problem but in terms of nonperforming loans. In India, the ratio of bad loans to total outstanding lending stood at 7.6% in 2016, up from 4% in 2013, according to the World Bank.

Next month, Singapore will host investment fund executives from around the world. Organizers are drumming up interest in their conference by posing a question: In this world of bad loans, high-yield bonds and bonds issued by bankrupt companies, how much of this debt is attractive?

I do not think Asia gave rise to the kind of debates that excite vultures by chance. In fact, the financial industry seems to think another Asian financial crisis could occur.

Incidentally, July marks the 20th anniversary of the so-called baht crisis. In 1997, Thai authorities ran out of foreign currency reserves in trying to defend the baht. The so-called "Asian flu" then spread.

Many people look at past financial crises and see a pattern, one that seems to follow U.S. interest rate hikes. The 1994 Mexican peso crisis, the 1997 Asian financial crisis, the bursting of the dot-com bubble in 2000 and other crises occurred after U.S. authorities raised interest rates.

When credit is tightened, investors lose some generosity. Those "U.S. authorities" mentioned earlier sit on the Federal Open Market Committee. Next week this policy-setting board will meet and decide whether to raise its federal funds rate, the rate at which commercial banks charge one another for overnight loans.

If the committee goes ahead with an increase, it would be the fourth since 2015, when the Fed essentially ended a zero interest rate policy.

Many observers say another hike will not trigger a crisis. Asia has implemented certain measures since 1997. Southeast Asia's 10-member political bloc has morphed into an economic bloc that is more capable of handling an external payments crisis. And the region's foreign currency reserves during the two decades through 2016 quadrupled.

Yet ... China. At the time of the 1997 crisis, China was a small potato, at least economically speaking. It also played a minor role on the international stage.

Today, the situation could not be more different. Citigroup of the U.S. last month quantified how much impact China would have on other economies should its own stall. Taiwan, Singapore and the Philippines would suffer the most. If the Fed hikes rates next week, and investors lose their generosity toward China, other Asian countries will have to ask themselves if they can keep from being pinned by the formidable U.S.-China tag team.

There is also concern that any financial and economic turmoil could further stoke the anti-globalization movement.

In fact, the Asian financial crisis can be said to be the origin of the current round of anti-globalization.

Thailand, remember, was the first to fall, in July 1997. By that fall, the flu had spread to other Southeast Asian countries as well as to Hong Kong and South Korea. Since Asia was buying 30% of America's exports, U.S. stock prices plummeted, resulting in a temporary halt to trading.

The crisis exposed the dark side of globalization. Protesters rose up against the International Monetary Fund. Instead of calling for zero interest rates and the kind of other easy money policies that Japan, the U.S. and Europe are employing now, the IMF bailed out the affected countries by demanding punitively high interest rates. People suffered as the high rates further choked economies, and globalization got a bad name.

South Koreans called their country's predicament an "IMF crisis."

But it should be noted that anti-globalization does not answer any of today's social problems.

After the Asian flu, even South Korea farmed out the rehabilitation of some of its collapsed companies to Wilbur Ross, the current U.S. secretary of commerce who back then was a well-known vulture investor. South Korea eventually adopted a floating exchange rate system, the won depreciated and exports soared.

Economic drags can be mitigated if a country opens its doors to the world and attracts long-term funds from abroad. Investing in equipment and infrastructures as well as spending to reduce an economy's reliance on companies that rack up debt also serve as buffers.

To this end, governments and companies alike need to craft visions of future growth and sell them to the world.

In this regard, Asia has little time to spare.

Get Insights on Asia In Your Inbox

To read the full story, Subscribe or Log in

Get your first month for $0.99

Redeemable only through the Subscribe button below

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

Resubscribe now to continue reading.
BEST OFFER:
Only US$ 9.99 per month for a full-year subscription

To read the full story, Subscribe or Log in

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.