Asurfeit of liquidity has turned even conservative central banks in Asia into yield hogs. The Chinese government invested $3 billion (Rs12,120 crore) in buyout firm Blackstone Group LP in May. Who would have thought such a thing was possible even two years ago?
If Asian central banks have excessive foreign reserves, corporations in the region have their own problem of plenty: surplus cash. There’s now so much of it on corporate balance sheets that treasury managers may get desperate and take inappropriate risks to boost returns.
A typical company in Taiwan has become increasingly liquid in recent years. According to Bloomberg, cash and marketable securities as a percentage of total assets last year stood at more than 18% for Taiwanese companies that are publicly traded, 2 percentage points higher than in the previous year. This measure of corporate liquidity was less than 13% in 2000.
At least some of the impetus to hoard cash may be attributable to Taiwan’s political stand-off with mainland China and its impact on business confidence.
However, the growing pile of cash isn’t limited to Taiwanese companies. You also see it in Singapore, a bastion of political and economic stability. South Korea and India, too, haven’t been immune.
This accumulation of cash appears counterintuitive, especially from the perspective of strong economic growth in Asia in the past few years.
Typically, one would expect companies to be carrying more cash when they are coming out of an economic slump, not when they are in the middle of a boom. Asian companies are, simply put, much less aggressive now than they were before the financial crisis of 1997.
Banks are regulated more carefully now than they were in the past. Some of the risk aversion could also be because of improved corporate governance: Boards of directors now subject new investment proposals to greater scrutiny.
Economists Edith Ginglinger and Khaoula Saddour at the University of Paris-Dauphine, said in a study this year that they have evidence to show that “firms with strong shareholder rights hold more cash”.
There may also be other forces at play.
In bank-dominated financial systems of Asia, a rising interest-rate environment can be expected to produce situations where bank managers insist that their corporate clients maintain higher short-term liquidity.
Alternatively, the trend could be a confirmation of Morgan Stanley’s global head of currency research Stephen Jen’s “asset shortage hypothesis”.
In the current business cycle, the creation of new, investment-worthy assets has been slow globally, and particularly in Asia. That has inflated the price of existing assets, forcing companies to be less aggressive about investing than they would have been otherwise. And that, too, may partly explain the build-up of cash.
The one country in Asia where you see a departure from the overall trend is China. There, the average of cash and cash equivalents to total assets has, in recent years, been little changed at about 18%.
This may show that Chinese companies are already so highly liquid that they don’t have a precautionary motive to carry more cash on their balance sheets.
They may also be, to a large extent, financially unconstrained. Enterprises in China don’t need bank funds because their own accumulated profits—which in the case of state-owned companies aren’t distributed as dividends—are more than ample to finance new projects.
According to a study last year by Louis Kuijs, a World Bank economist in Beijing, almost 75% of enterprise investment in China is financed by retained earnings.
Of course, this lack of financing constraint has a flip side: Monetary tightening just doesn’t work in China.
For US companies on the Standard & Poor’s 500 Index, cash and marketable securities in proportion to total assets peaked at about 13% in 2005 before edging lower last year. That still leaves American companies more liquid than in 2000, though the trend seems to have reversed.
By comparison, in Asia, excluding China, the evidence that the flight to liquidity has run its course is still largely absent. As a result, the treasurer has his job cut out.
He must resist any attempt by the chief executive to turn the treasury into a profit centre. Such follies have been committed a number of times in the past, in markets both developed and emerging; and the results have seldom been great.
One example is the infamous “financial engineering” episode in the Japanese economy in the mid-1980s. As export profits vanished following a steep climb in the yen, Japanese companies surrendered themselves to their treasurers’ ingenuity. The treasurers borrowed cheap and dabbled in equities, real estate, art and derivatives, causing an economywide asset-price bubble, which finally burst in 1990.
This is the time to focus on corporate risk management systems in Asia. The case for urgently strengthening them there is very evident. Bloomberg
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