Remember the proverbial drunk looking for his wallet under the lamppost, and not where it may have fallen? Global monetary tsars are behaving a lot like that.
To them, containing the impact of the coronavirus seems to be all about lowering the price of money. While that shores up asset prices that are tumbling globally, the effect on actual activity, particularly in ravaged Asian economies, could be the opposite of what’s intended. Multinationals don’t need cheap money as much as they need banks that can confidently commit more capital to Asia, where demand will rebound after the disease subsides. For central banks to reduce lenders’ profit margins by slashing interest rates cuts them off at the knees. And that could, in turn, hurt corporate expansion.
If the Federal Reserve were to ask chief financial officers of firms whose supply chains have been disrupted by the outbreak in China, South Korea, Singapore and Japan, it’s not the cost of funding that’s keeping them awake at night, but availability of liquidity in the right places.
The corporate banking rails on which money moves across countries are provided in Asia by Citigroup Inc, HSBC Holdings Plc and Standard Chartered Plc. From hedging currency volatility in countries where firms buy and sell stuff to funding their vendors’ working capital and deploying the cash generated in different countries, multinationals in Asia rely on these three “global locals,” as banking consultant Greenwich Associates calls them.
The US-China trade war has already triggered a search for production bases that aren’t too reliant on the People’s Republic. The coronavirus has further shown the folly of keeping all eggs in one basket. But a fresh location requires local-currency funding in a new country. Turning on such taps is easier for HSBC, Citi or StanChart, recently ranked by Greenwich Associates as the top three in market penetration for banking and cash management for large companies in Asia. “Over the past 12 months, securing reliable financing has replaced cost optimisation as the top priority,” say the firm’s analysts Gaurav Arora and Winston Jin. “It makes sense for large Asian companies to turn to banks that span multiple countries and have deep expertise in transaction banking.”
Just when there’s demand for their services, rate cuts, like the Fed’s half-percentage-point reduction, which is bound to lead to more easing now that the entire US yield curve has dipped below 1% for the first time, will damage lenders by crimping their ability to eke out a decent net interest margin and investor returns.
Unable to achieve the return that shareholders want, HSBC is cutting 35,000 jobs; StanChart, which last year earned just 6.4% on its tangible equity, two percentage points less than HSBC, may be fishing for a new chief executive, according to a story this week by Bloomberg News. Citi’s boss Mike Corbat has been asked why he doesn’t trim down operations in Asia to earn the 19% that Jamie Dimon garners at JPMorgan Chase & Co. Citi managed only 12% last year. Indeed, as Greenwich’s Arora says, JPMorgan’s appetite to take on the risk of large companies in Asia has risen exponentially over the past few years because Wall Street’s biggest spender on new technology isn’t distracted by the problems dogging HSBC or StanChart.
Against this backdrop, if central banks further weaken the profit outlook for the global-local banks by their zeal to cut rates, these lenders may be reluctant to open up their balance sheets to corporate clients, especially with the epidemic prompting them to step up loss provisions to deal with future bad loans. They may also lose critical transaction banking talent to local and increasingly aggressive Japanese rivals that can currently support firms in just a few countries.
Had the coronavirus been hurting global demand more than supply, cutting rates boldly would have been the right response. But so far, demand destruction is mostly a problem in China, where car sales fell by a record 80% in February.
The rest of the world is mostly facing a supply crunch “- or in the case of oil, a glut, sparked by a price war among the world’s largest crude producers. One way to deal with supply shocks is to ensure that the nuts and bolts of banking that support production, storage, transport and distribution don’t get corroded by the oxygen of cheap money. Since the 2008 crisis, central banks have gotten so intoxicated by their monetary powers “- and so blinded by the idea that they alone can save the world “- that they’re missing this important link.