Why Asian Market is in the Crosshairs
New York City’s Asian market is on the rise, but it could be facing a setback this year if a $1.5 billion bond proposal by the state Department of Financial Services gets approved by the New York State Assembly.
The proposal to buy back $9 billion in state bonds from the Asian Financial Services Association is the latest effort to shore up the market, which has grown at an unsustainable rate of 9.4 percent a year for the past six years.
The Asian market grew by nearly 8.4% a year in 2015, and is expected to continue growing.
The bond proposal would allow the state to borrow money from the bank for $1,527 billion to cover the cost of buying back $7.9 billion from Asian-American investors and firms in recent years.
The Asian-owned companies are in the process of merging with Chinese ones to become the world’s largest Asian-based financial services group, which would add $1 trillion to the global economy, according to the New Jersey-based Asian Investment Council.
The move would boost the value of New York state’s bond portfolio by $150 billion, or about 12 percent, over the next 20 years.
“There are huge potential for the Asian-related companies to gain traction in the global markets, but in the face of a huge risk that the bond-financing process could result in massive losses, the Asian market could face a slowdown,” said Brian Loughlin, an economist at BMO Capital Markets in New York.
The state’s debt is a big reason Asian-Americans are not making as much money as other groups of investors, and they are being priced out of the market by more-affluent investors.
The state could still be able to boost the market further by investing more in Asian companies, but the Asian firms that are on the receiving end of the bond would likely be hurt.
Asian companies are less exposed to the risk of bond defaults and more likely to be in financial trouble than they are in other countries, said Loughliner.
The $1 billion is about half the size of the Asian Investment Fund, which was created in 2006 to help Asian companies invest in U.S. companies.
A separate $1 million bond from the U.K. is expected later this year.
The bonds will be backed by a $3.9-billion fund of state funds, which includes $1-billion in state pension funds and $4.5-billion from the New Yorkers pension fund.
The investment fund has more than 2,500 investments, including $1-$2 billion in Asian firms.
In addition, the fund has a $7 billion in foreign equity and a $2 billion foreign real estate investment fund, according the state.
The new bond would be issued by a New York-based investment company, which will hold a voting interest.
A bond issued by the Asian financial services association will also be backed from the state, according a spokeswoman for the state’s treasurer.
The Asia-based bond would have the same interest rates as the state bond, but would have higher yields.
The bond would mature at the same time as the $9.4 billion bond would, and bondholders would have to pay the same amount of interest, as opposed to a bond issued at the higher interest rate.
“These are some of the most expensive bonds out there,” said Lachlan Gaffney, an analyst at Capital Economics.
The $1 bill is about 5.6 times as expensive as the current bond, which is a 10-year, $6 billion bond.
That is about $4 billion more than the Asian investment fund.