Gillian Tett needn’t worry about Davos Man

Economic and political antagonisms, anti-bank politics and controls on the movement of capital, all leading to distortions in credit, shortages of capital and slower global growth. This is the warning from Gillian Tett of the Financial Times, who is burrowing into the anxieties of Davos-goers and other financial elites.

It is the sort of view that one might expect from people in Europe and North America, but I can assure you, Davos Man’s day is not done. Globalisation, specifically of capital, is here to stay. But it is going to look different, because Asian societies are going to be increasingly influential in writing those rules.

Tett bases her analysis on a McKinsey report looking at how financial flows are becoming more localised and how states are increasing their involvement in markets. She wonders how much of this is due to the Lehman Brothers collapse and the eurozone crisis, and is therefore a bump on the road, versus how much of this is an ongoing structural development.

Last week, we organised a conference in Hong Kong on Asian debt markets. Issuers, bankers and investors have benefited from a huge expansion of our bond markets, particularly in local currencies.

Some of this growth is exceptional, triggered by banks’ curtailment of lending activity. It also reflects a growing desire among corporations for alternatives to traditional bank financing, and now that they have enjoyed a taste, there is no turning back.

Most importantly, the region’s governments have also embraced development of local bond markets as critical to growing their economies. Every capital in the region fancies itself a financial hub. That can throw up duplication and higher costs to banks and fund managers, but it also instils competition.

The biggest factor is of course China, which today has the world’s third largest bond market. Were it to be fully open to global capital, it would instantly become 10% to 12% of leading sovereign benchmark indices. While that is not likely to happen, China is clearly opening in degrees. Last year it allowed foreigners access to its interbank RMB bond market for the first time, for example.

The growth of the dim-sum bond markets in Hong Kong, Singapore, Taiwan and London also heralds a new opportunity for global money. As one fund manager at our conference, Ken Hu of BOC HK Asset Management, pointed out that once the renminbi goes offshore, it becomes a hard currency. It can be freely traded.

Another panellist, Goldman Sachs’ Lee Eu-Han, says once London and some day New York achieve a critical mass in offshore renminbi activity, it will become a 24-hour traded currency.

This comes at a time when Western pension funds, insurance companies, mutual funds and other long-term investors are looking for alternatives. Yes, financial repression in the form of Basel 3 and Solvency 2 is forcing Western institutions to buy ever more of their governments’ debauched bonds. But there is a growing awareness that they need to be globally diversified, and that emerging markets, especially Asia, can offer attractive fundamentals, variety, and increasing depth.

The hazard for global capital is that Asian governments are willing to turn off the tap as they see fit. Governments here have always viewed finance as a tool to serve them, not as an end or an industry to itself. FinanceAsia magazine’s March cover story explains how China is liberalising its bond market as a means of extending the government’s control over the economy; benefits to the private sector and to investors are by-products subject to authoritarian whim.

This value system is not just the preserve of the Chinese Communist Party; it is deeply embedded in Japan, Taiwan, Korea, India and elsewhere. That means that as global flows in and around Asian securities markets increase, premiums will remain high because of the very credible risks of government controls being imposed, even if just temporarily.

This does not mean an end to capital flows. Asia needs global finance more than ever. It does make finance more costly, however, and less predictable. It is Asian governments that intend to call the shots, and bankers and investors had better get used to it. That's the reality for Davos Man in the 21st century.