Teething problems inevitable as China opens up, says Eastspring

There are two main topics European-based clients are concerned with when they meet Eastspring Investments’ fixed income director David Lai during one of his regular trips from Singapore to London and continental Europe.

The first worry is the US, where many private banks and their customers are expecting a recession, with very slow growth at best. The second relates to turbulence in Mr Lai’s region, where the Chinese story has become a more complex one. But rather than blaming companies for poor performance, it is the regulators which are coming under fire.

“They have undermined people’s confidence about the authorities’ ability to handle problems if the economy deteriorates,” says Mr Lai, gently breaking a wholegrain bread roll as we wait for our fish to be grilled in the 1776 bistro, at the back of London’s 1 Lombard Street restaurant, popular with city financial types.

But he is “not in the China hard landing camp” and is prepared to forgive central bankers for their “policy blunders” and expects them to improve with experience. “It is a learning process. The Chinese authorities are new to opening up the economy, they didn’t have to deal with this kind of market in the past, which is now also international,” he says.

Dealing with the internationalisation of the renminbi has been a particularly tricky challenge, says Mr Lai, rising perfectly to his own challenge of cutting up and consuming a delightfully grilled dover sole. 

Since the onset of Chinese market turmoil, Mr Lai has seen divergent returns across emerging market regions. The Asian bonds, of which he oversees $2.8bn in a flagship fund, are “delivering a resilient performance”, he says inscrutably. Part of his mission to Europe involves persuading distributors to consider Asian fixed income as a separate asset sleeve to their global emerging debt portfolios.

Top tier, US dollar-denominated Chinese corporate bonds are currently top of his buy-list, with banks, state owned enterprises (SOEs) and private companies all included in the mix. As top tier banks and SOEs are seen as strategically important, government support is likely, if needed. The big four Chinese banks will eventually become more internationalised, even if the lion’s share of their business will remain in China for the time being.

The problem for China’s regulatory overlords is knowing when to listen to the market and when to ignore it, says the softly spoken, bespectacled Mr Lai, who is not holding his breath for an Asian passport pact between regional regulators. This would potentially allow groups such as the $125bn-strong Eastspring to distribute funds more easily across borders, in the way they do in Europe from a Luxembourg hub under Ucits regulations.

“It’s hard to predict,” says Mr Lai, shifting a frugal side portion of spinach. “Asia has a lot of different jurisdictions and it’s harder to bring everything onto the same page, much harder than arranging the European passport,” he believes, inferring it would take a minor miracle for the Japanese, Korean, Hong Kong, Singaporean and Thai regulators to come up with a mutually agreeable working framework for regulation.

“We are far from a single currency or fiscal union in Asia,” says Mr Lai, well aware that most of the excited chatter among the city bankers around us is about Brexit and the case for staying in or out. Mr Lai believes most commentators are too focused on the UK and are not realising the broader implications for Europe as a whole.

The situation in his Southeast Asian home region seems a world away from the excited and divided capital he has flown into. Smiling, he chooses his words about Asian inter-country relations carefully. “We are seeing more co-operation, but not necessarily integration.”