LEHMAN Brothers had a turbulent year in Asia during 1994, hitting headlines not just for deals but also rows - notably with two Chinese state entities it sued for debts. Like most United States investment banks in Hong Kong, it saw the frantic pace of deals in 1993 slow down and the markets become sluggish. Obviously, there was plenty of room for sceptical comment from New York on the cost and size of the Hong Kong operation - even Wall Street has not seen rents like those at Lehman's Hong Kong office in Pacific Place. But far from retreating from the fray as some US banks seem to be doing, Lehman is spending money on reinforcing its operations in the territory. The firm had researchers spend six months interviewing thousands of Asian institutional investors in countries from Japan to New Zealand and has produced a huge report on the market. The press summary of the report does not specify individual fund managers' likes and dislikes, but it is easy to imagine that the full report - two four-inch thick binders - does. To Stephen Taran, the effort put into this survey is clear evidence of how far Lehman has been put off working in the region by a tough year - not at all. 'Daniel Tyree came out from London, where he had a great job, to head this office. It is obvious he would not have done if he didn't see the future. Likewise, this survey was inspired and directed from New York,' said Mr Taran, who is a senior vice-president at the firm and the chief credit research manager in Asia. Luckily for him, the report found a surprisingly large pool of money already native to Asia and a group of investors open to investment ideas. There are about $2.3 trillion in Asian institutions such as banks, insurance companies, fund managers and corporate treasuries. About a third of these institutions will buy equities, mainly in domestic markets, which in Asia are highly liquid but have very volatile prices. About a fifth will use US government securities and a similar proportion Eurobonds in dollars and floating rate notes. Because of the preponderance of bank and corporate cash in the market, investors in the region are still biased towards short maturities, but that is changing, according to Mr Taran. The size of the debt investment pool is most likely to grow quickly. 'Asia is an improving credit risk. The last downgrade in Asia was India, in 1991. By contrast, in Europe there have been several downgrades,' Mr Taran said. 'In Scandinavia only Denmark has not been downgraded. Italy has been downgraded twice. Since India was downgraded, Singapore has achieved an AAA rating, Malaysia has been upgraded twice by Moody's [Investors Service] and once by Standard & Poor's. 'Thailand has been upgraded by S & P and Korea by Moody's. Indonesia is now investment grade rated - everyone wondered whether it would make it. 'India is upgraded and China has been rated by Moody's.' More funds for equity and debt investment are being generated from Asian householders at an astonishing rate. Already the pool of capital in Asia represents 60 per cent of Europe's investment cash. But European salaries on a buying power parity basis are three times those in Asia. The difference is high savings rates by individuals in that region, a change abetted and fed on by Western fund managers such as Fidelity and Templeton which have only started marketing funds directly to Asian consumers in a serious way in the past five years. Mr Taran said liberalisation of capital flows in the region was also helping to expand the range of products and currencies investors would buy. 'What leads? Trade leads,' he said. Exporters generate foreign currency, which circulates in the regional banking system in increasingly diverse ways, from loans to commercial paper to medium-term notes and in more complex hybrids. Mr Taran gave the example of South Korea, which in efforts to join the economic club of the top countries, the Organisation for Economic Co-operation and Development, has relaxed a range of banking regulations and in doing so increased flows of capital. If the progression continues, Mr Taran sees a radically different investment scene in Asia by 2000. 'About 12 per cent of Asian investors use or intend to use Asian government securities from other countries, while nine per cent buy, or intend to buy, British government securities and about 14 per cent use continental European government securities,' Mr Taran said. 'In five years, I can see, or I would like to see, the use of Asian government bonds being more than the total of the others,' he said. The survey also managed to boost a pet product of Lehman Brothers - the dragon bond. Dragon bonds are normally US dollar-denominated debt issued, listed and syndicated in Asia outside Japan. Tomo Hayakawa, former treasurer of the ADB, is granted much of the credit for developing the concept of dragon bonds and for their initial success but last year, with interest rates rising, investors highly cautious and Mr Hayakawa gone from the bank, Lehman was left to struggle to keep the issues coming. 'There is a core of large investors who use dragon bonds,' Mr Taran said. The survey found that 18 per cent of non-Japanese institutions used or intended to use dragons. The strongest support for dragons came from Hong Kong, where 19 per cent of investors use them, and from Singapore, where almost 15 per cent are dragon fans. The ultimate value of the survey could be if it helps to keep New York's mind off Hong Kong office rents and firmly on Asian opportunities.