The Economist - USA (2022-01-15)

60 Finance&economics TheEconomistJanuary15th 2022

ings  has  gone  hand­in­hand  with  the

transformation  of  conservative  institu­

tional investors into big players in distant

corners  of  financial  markets.  A  prime  ex­

ample is Norinchukin Bank, an agricultur­

al  co­operative  in  Japan.  It  holds  some

¥4.8trn  ($42bn)  in  clos  (securities  made

up of portfolios of loans) most of which are

denominated  in  dollars.  Before  it  slowed

purchases  in  2019,  it  was  widely  consi­

dered the largest buyer of clos in America.

Stepping outside

Taiwan’s  insurers,  such  as  Cathay  Life  In­

surance and Fubon Life Insurance, have be­

come influential institutions in a number

of international markets. Their total assets

have  nearly  tripled  over  the  past  decade.

And more of them are now held overseas.

By the end of 2020 almost 60% of their as­

sets  comprised  foreign  investments,  up

from 30% in 2010. 

Such institutional investment is now so

widespread  that  Formosa  bonds,  foreign­

currency  bonds  issued  in  Taiwan  by  a

range  of  global  firms  and  governments,

have  taken  off  since  the  securities  were

designated as domestic rather than foreign

debt, allowing insurers to skirt regulatory

limits  on  foreign­security  ownership.  By

the  end  of  2021  the  outstanding  value  of

dollar  Formosa  bonds  alone  was  $195bn,

compared with $84bn six years earlier. 

South Korea’s National Pension Service

has  also  sought  more  overseas  exposure,

announcing  a  flurry  of  global  ventures.

Foreignassetsmadeup37%ofthepension

fundlastyear,nearlydoublethesharein

2013,andthefirmaimstoincreasethatto

50%by2024.Thestrategyistochasere­

turnsnotonlyabroadbutalsoinlessliquid

asset classes, before the fund’s benefit

payoutsstarttoincreaseintheearly2040s.

Malaysia’sEmployeesProvident Fund

(epf), whichmanagesmandatorypension

investmentsforthecountry’sprivate­sec­

toremployees,providesanotherillustra­

tionofAsianinstitutions’foreignreach.

Last yearitlaunched whatit calledthe

world’slargestshariaprivate­equityfund,

withBlackRock,HarbourVestPartnersand

PartnersGroupeachmanaginga thirdof

theallotted$600m.Theepf’sforeignas­

setshavealsoclimbed,from29%oftheto­

talinmid­2017to37%inmid­2021.

The result ofall this activityis that

Asianinstitutionalinvestorshavebecome

enormous swingbuyersin certainmar­

kets.“They’redisproportionatelylargein

Australia,”saysMartinWhettonofCom­

monwealthBankofAustralia.Thecountry

isthethird­largestlocationofassetsfor

Japaneselifeinsurers,hesays,andtendsto

makeupabout10­15%oftheirportfolios.

MrWhettonpointsoutthatpurchasesof

AustraliandollarassetsinNorthAsiaare

largeenoughtoshiftthecountry’scross­

currencybasis(thepremiumthattraders

pay to temporarily exchange other curren­

cies for Australia’s). 

Some institutions have made promises

of guaranteed payouts to clients and, as in­

terest rates have sunk to rock­bottom lev­

els,  have  had  little  option  but  to  hunt  for

yield  in  less  highly  rated  or  more  illiquid

asset  classes.  Industry  insiders  note  that

insurers in the region have moved increas­

ingly into emerging­market debt and high­

er­yielding  Asian  bonds.  Private,  illiquid

assets  have  also  become  more  popular.

Asian  investors  have  long  been  drawn  to

private equity and property, says Anish Bu­

tani of bfinance, an investment consultan­

cy. Now “we’re really seeing a surge of ac­

tivity in infrastructure and private debt”. 

To  observers  such  as  the  bisand  the

imf, all this signifies greater financial risks

than when more holdings took the form of

safe,  highly  liquid  reserve  assets.  Cross­

border  financial  flows  can  be  volatile  and

flighty,  transmitting  stress  from  one  part

of  the  world  to  another,  and  posing  risks

both  to  the  buyers  and  the  markets  in

which they participate. Although many in­

stitutions must pay clients in their domes­

tic  currencies,  few  appear  to  hedge  their

entire  foreign­currency  exposure.  Private

assets are harder to sell quickly at reliable

prices,  potentially  posing  liquidity  pro­

blems  should  investors  need  to  pull  out.

Precise,  coherent  figures  on  the  composi­

tion,  riskiness  and  liquidity  of  holdings

are still hard to get hold of, making it diffi­

cult to gauge the overall picture. 

Understandingwhat’sgoingoncould

become more important still, if China

eventuallyfollowsthepathofEastAsian

economies.Atpresentitsreservesofmore

than$3trndwarfitsotherfinancialhold­

ings.Ashiftingcompositionofforeignas­

setsisnota matterofdestiny,andwould

requiresomelooseningofChina’scapital

controls. Butevena marginalmoveto­

wards more portfolio investment could

producehugeflowsofcapital.“Chinesein­

surershavealotofinterestininvesting

overseas,”saysRickWeiofJPMorganAsset

Management.“Theywanttodiversifytheir

holdings, increase returns and match their

liabilities  with  longer­term  assets.”  Even

after  more  than  a  decade of  rampant

growth  in  Asia’s  privateforeign  holdings,

more may be yet to come.n

Risk shifts

Foreign financial assets*, private as % of total

Sources:IMF;national statistics; The Economist

*Grossforeignassetsexcluding foreign direct investment

†Averageofteneconomies in East and South-East Asia

2

100

80

60

40

20

0

201715131109072005

South Korea

Regional

Malaysia average†

Taiwan

Japan

Foreign affairs

East and South-East Asia*,

foreign financial assets†

Sources:IMF;national statistics; The Economist

*China,HongKong, Indonesia, Japan, Malaysia,

Philippines,Singapore, South Korea, Taiwan and Thailand

†Grossforeignassets excluding foreign direct investment



30

20

10

0

201715131109072005

$trn

Reserves

Portfolio and other

financial flows

25

20

15

10

5

0

201715131109072005

% of world

Uranium

Atom and abroad

K

azakhstanis oftencalled  the  Saudi

Arabia  of  uranium.  In  fact  its  market

share, at more than 40% of the world’s nuc­

lear  fuel,  is  not  far  off  the  share  in  the  oil

market  of  the  Organisation  of  the  Petro­

leum Exporting Countries and Russia com­

bined.  So  when  unrest,  followed  by  harsh

repression,  shook  the  country  early  this

month,  buyers  of  the  metal  shuddered.

Spot uranium prices jumped by 8% on Jan­

uary 5th alone, to $45 per pound, according

to uxc, a data provider. With protests now

quashed, the market has settled. Neverthe­

less,  the  commodity,  which  is  often

dubbed  “yellowcake”,  seems  set  for  a  tur­

bulent decade.

The  immediate  impact  of  the  Kazakh

turmoil may be limited. Although the prot­

ests happened far away from uranium­pro­

The Kazakh crisis sends a warning shot

to buyers of nuclear fuel