Is Shinzo Abe offering Japan’s Samurai bonds as a foil against China’s debt diplomacy?

  • Japan’s prime minister is offering 200 billion yen (US$1.75 billion) in aid to help wean Malaysia off its financial dependence on China’s loans
  • Money is fungible, and governments borrowing money in global bond markets are free to direct those funds to projects
PUBLISHED : Sunday, 11 November, 2018, 5:04pm
UPDATED : Sunday, 11 November, 2018, 5:04pm

Chequebook diplomacy is gaining ground in Asia as China, Japan and the United States compete for economic and strategic influence in the region.

The latest case is Japanese Prime Minister Shinzo Abe’s offer of 200 billion yen (US$1.75 billion) in aid to help wean Malaysia off what has become its financial dependence on China.

Malaysia will use the aid, in the form of a loan, to replace some of its debt to China, whose lending to Malaysia and others for the Belt and Road Initiative has been described as debt-trap diplomacy.

Such refinancing makes economic sense, even if it does appear unlikely to enhance Sino-Japanese relations.

Last week’s Japan-Malaysia agreement has been viewed as a payback by Japan to Malaysia, which for years made Japan its model for its own development under an official Look East policy. Malaysia has also recently cancelled some major China-funded infrastructure projects.

But there is more to it than just that. What is significant about the deal between Abe and Malaysian Prime Minister Mahathir Mohamad when the 92-year-old leader visited Tokyo is that Japan has offered its Samurai bond market as a place for Malaysia to raise money with, in effect, a Japanese government guarantee.

The Samurai market offers yen financing at low interest rates to foreign governments and private borrowers. It is interesting that Indonesia and the Philippines have been among recent borrowers, suggesting that the market is being used to refinance Chinese debt on a wider scale.

There is an important lesson to be learned from this: neither Malaysia nor any other country need to be so dependent upon Chinese loans for financing infrastructure, if governments and international bond markets do their job properly in facilitating such mega financing.

China has written big cheques for Malaysia and other countries, such as Sri Lanka in connection with its Belt and Road Initiative (BRI).

No one has been willing, or been able to, compete with China’s clout. This is not a criticism of China, but an indictment of the lack of initiative by other governments.

Now, whether by intention or otherwise, Abe’s agreement to give a government guarantee via the official Japan Bank for International Cooperation to Malaysian borrowing through the Samurai market - where it will pay just 0.65 per cent interest - has indicated a possible new approach.

Abe’s scheme is neat because it shifts the liability of giving aid from an already highly indebted Japanese government onto the capital market. If Japan wants to compete with China’s state-backed chequebook diplomacy, it can only be done by means of tapping the financial markets.

When China launched the BRI, the country had some US$4 trillion in foreign exchange reserves to back up the programme. This meant that Beijing could put its money where its mouth is, and China’s launch of the Asian Infrastructure Investment Bank (AIIB) with access to international capital markets added even more clout.

Japan and the US are determined that China shall not gain huge economic and strategic advantage in and beyond Asia, through supplying half the world with connecting infrastructure. But government resources in Japan and the US cannot match those of China.

The answer to this, and to the wider problem of building or renewing often outdated and even dangerous infrastructure in Asia, the US and Europe, is that private financial institutions have a lot of money (some estimates say over US$100 trillion) to invest in infrastructure if only they can feel safe in doing so.

Investors need guarantees, which are unlikely to be called except in a minority of cases, before they can stump up cash, and the only entities able to supply such guarantees on a meaningful scale are governments.

Therefore Abe can take a bow if this is what he is doing in Malaysia’s case.

The Samurai market, the Eurobond Market, the Asia Bond Market and the Yankee bond market are massive in aggregate sizes and liquidity. The money is there to borrow if only governments are willing to offer guarantees to sovereign borrowers.

Malaysia’s borrowing in the Samurai market is unlikely to be called “infrastructure” debt, and far less likely to be called “paying off China” debt. But money is fungible, and governments borrowing money in global bond markets are free to direct it to key projects which they judge to be of merit.

Then when Beijing comes calling, and asking countries along the Belt and Road routes to participate in BRI projects - which can often be to their advantage in connecting them to neighbours and the rest of the world - they need not accept debt-diplomacy loans as part of the package.

Likewise, if Donald Trump’s administration needs infrastructure to make America great again, or if the European Union wishes its recently launched European Connectivity (with Asia) programme to be taken seriously, they need to get serious about offering official loan guarantees.

The Abe initiative toward Malaysia, along with Samurai market access Japan is giving to other Asian borrowers, could set a valuable new precedent.

But the policy needs to be more clearly articulated so that borrowers are aware of it, and so that other international bond market authorities can follow suit.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs