The September 2013 quarterly review by the Bank of International Settlements highlighted soaring cross-border lending to emerging markets, suggesting the economic growth story for these countries is on track, albeit at a gentler pace. However, the flows may be as much about Japan, Abenomics and the retreat of European banks as it is about growth prospects in China, Brazil and elsewhere.
The quarter saw cross-border lending to emerging markets total $267 billion, an increase of 8.4% quarter-on-quarter. This is a record, according to BIS, led by interbank lending (as opposed to loans from non-bank entities); banks in Asian offshore centres accounted for $93 billion of that.
About 85% of the total increase compared to Q1 went to China, Brazil and Russia, but Asia Pacific accounts for 45% of all cross-border claims on emerging markets, up from 34% five years ago. Much of that borrowing comes from banks, in particular Chinese institutions. BIS says Chinese borrowers accounted for $160 billion of new credit, most of that to Chinese banks. BIS adds that claims on China tend to have shorter maturities than elsewhere in Asia.
This is not a case, however, of everybody lending more to Brics. The biggest rise in lending comes from Japan. Although Japanese funding will be welcome – particularly following this summer’s financial market volatility as global investors retreated from emerging markets – it also qualifies the increase in credit.
Japanese lending has stepped up as cross-border claims booked in Japan are declining. The lending is also funded mainly by domestic sources - ie, interbank loans or deposits within Japan. BIS figures show accumulated yen-denominated loans in the 12 months to March 2013 reached $114 billion.
Indeed, Japanese lenders are now the biggest by nation in the world, a position they haven’t held since the heady days of the 1980s. The nature of the lending is different. In the late 1980s, most lending by Japanese banks was conducted in offshore offices in order to avoid regulatory restrictions at home, and was heavily concentrated in industrial and commercial loans to Asian as well as US borrowers. Today they are financing their loans from domestic sources, meaning the deposit base. BIS reckons that, in Q1, about $2 trillion of such funding was funnelled into cross-border lending.
This activity reflects the fact that depositors as well as lenders in Japan are looking for yield that betters what they can get at home. Secondly, according to Western banking executives, a lot of this lending is on terms that global banks would not accept. The Japanese have a lower threshold for returns, and bundles of cash that cannot be put to productive use domestically.
Thirdly, this situation is likely to endure. Although German lenders are the biggest cross-border lenders in the world, in general European banks have retreated from Asia since the euro crisis began in 2009. Although many of these banks may feel capable of returning to Asia, they face uncertainty over how regulators will treat leverage and compensation, two factors that impact the flexibility of a creditor’s balance sheet.
So what the BIS figures suggest is that Japanese depositors, desperate for yield and overloaded with cash, are enabling Japanese banks to provide short-term loans to Chinese banks and other borrowers at decreasing rates of interest. This is at a time when China’s economy is tipped to slow. One can only imagine what kind of credit analysis is going into these flows; regardless, it suits the current needs of both Japanese lenders and Chinese borrowers – and suggests others will struggle to sustain a profitable business lending to emerging Asia.