Even bond investors don’t like a bully
Dan Fuss, 81, has made a career profiting off debt crises. In the 1980s, he loaded up on distressed Latin American assets others wouldn’t touch. A decade later, to the consternation of peers, he bet on Malaysian and South Korean bonds. As Lehman Brothers was crashing in late 2000s, Fuss was nibbling on shaky U.S. corporate debt.
But even this battle-tested maverick won’t dip a toe into North Asia. The reason: geopolitical risks that seem to rise by the day. “I keep waiting for peace to break out - I mean between China and its neighbors,” Fuss told me in Tokyo this week. “I don’t think,” he added, “that somebody is going to start sending troops ashore - that would be foolish. But foolish things do happen.”
Fuss’s worries should worry Xi Jinping. The Chinese president has embarked on a charm offensive in recent weeks. Earlier his month, he hosted Barack Obama and Shinzo Abe in Beijing along with other Asia-Pacific region leaders. There, he made nice with his Japanese nemesis before heading to Canberra, where he told the Australian parliament that China was committed to building friendly Asian relations. Xi’s government is even part of negotiations for a three-way summit with Seoul and Tokyo, a step that would warm Washington’s heart.
Yet at the very same time, Beijing is in the headlines for reclaiming land, possibly to build a military airstrip, near a disputed island chain in the South China Sea. China claims roughly 90 percent of the sea, parts of which are contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Such unilateral construction projects are raising tensions in some of the globe’s busiest shipping lanes - and pose a growing risk factor for markets. Beijing’s hard line on pro-democracy protests in Hong Kong is further denting its soft power.
To make matters worse, China’s economic fundamentals are simultaneously weakening. The slow pace of efforts to rein in the shadow-banking system and curb the dominance of state-owned enterprises is raising doubts about China’s reform agenda, while slowing global growth is challenging its export-oriented economy. Investors who might have overlooked regional tensions during boom times are being pickier now.
Xi’s desire for more retail and institutional investment from abroad prompted him to greenlight the Shanghai-Hong Kong stock exchange link that opened last week. International capital is vital to enlivening China’s lethargic markets and giving Beijing the means to dispose of rising debt.
As I wrote last week, securitization activity in China is booming this year as regulators seek ways to remove potentially risky debt from bank and corporate balance sheets. Here’s where Fuss and his ilk come in. The involvement of Fuss’s $25 billion Loomis Sayles Bond Fund in Chinese capital markets would provide fresh money, deepen liquidity, provide greater price discovery and set the stage for a more diverse stable of investment products. But Fuss isn’t biting, and he’s not alone. Beijing’s territorial ambitions are drowning out the growth story. “I don’t have that kind of risk tolerance,” Fuss said. “I think there’s too much uncertainty.”
To turn sentiment around, Xi needs to establish a clear pattern of improving relationships in Asia. That means acceding to requests for a regional framework to settle territorial disputes. China should stop bullying the 10-member Association of Southeast Asian Nations, which barely has the courage to mention differing claims in its communiques. It should halt reclamation projects that irk neighbors. Finally, Xi should take the lead in bringing China, Japan and Korea closer together rather than waiting for Japan to offer concessions.
Asia’s potential is obvious enough. For Loomis Sayles, Fuss says, China alone could “come to be the single largest country exposure outside of the U.S.” in the next 10 years. He’s been particularly tempted by some recent high-yield corporate bond issues in Asia’s biggest economy. But he and others need to see genuine warming trends first. “If Abe and Xi became golfing buddies,” Fuss said, “I would really change my mind.”
The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.
by William Pesek