Liquidity Crunch in Asia
THEME
Water, water everywhere but not a drop to drink
Source: Credit Suisse.
■ Tightened liquidity for corporates is not just a blip, after which life
returns to the good old days. Financial turmoil has led to a premature
shift in credit supply and availability. Despite the massive liquidity
injected into the banking system and coordinated rate cuts by central
banks, the liquidity crunch is not over yet, as reflected in the sharply
contracted money multiplier.
■ In the new world, credit availability is expected to be rationalised with
poor credit continuing to be discriminated. However, the credit
tightening is not across-the-board without distinction. In this report, we
study the impact of the liquidity crunch on 216 companies in
59 sectors across 10 markets in the region.
■ China stands out in the credit crunch as the least affected emerging
market amid the financial contagion. The China Internet, telecoms and
winery sectors are particularly top ranked. India cement players have
limited amounts of leverage with a large proportion of existing loans
being fixed-rate debt. Malaysia infrastructure plays have no problems
with short-term financing, receivables collection and bad debt risks.
■ Hong Kong manufacturers are squeezed on financing and impacted by
weakened overseas demand. Macau gaming players are deferring
some of their projects when funds are too stiff to raise. India’s real
estate companies are sacrificing growth to generate liquidity. The
highly geared Chinese property developers are thirsty for cash flow
amid the property market downturn. Their liquidity problems are also
spreading to suppliers, such as construction machinery companies.

Water, water everywhere, but not a
drop to drink
Headwind or cyclone?
It is as if we are in The Rime of the Ancient Mariner by Coleridge where the sailors are
surrounded by salt water, yet they can drink none. Despite the huge injection of liquidity
into the system, the unprecedented financial turmoil has led to a sharp rise in the
systematic risk of the credit market. In the US, the money supply is only rising at a fraction
of the rate of growth of the monetary base, resulting in a sharply contracted money
multiplier. This means there is a limited impact for corporates outside the financial system
accessing the liquidity created when the lenders are too cautious to lend. In Asia, except
China, other markets are enduring a similar phenomenon as in the US. Nevertheless, the
credit tightening is not across-the-board without distinction. We study the impact of the
liquidity crunch on 216 firms in 59 sectors across 10 markets in the region.
China is the promised land, where the liquidity issues of the companies are not the same
as other countries. China’s financial system is very liquid, with Chinese banks having low a
loan-to-deposit ratio and NPL. The Chinese banks have limited exposure to toxic assets,
so that they do not have the pressure of deleveraging and being forced to tighten credit.
In India, despite the unprecedented easing and cash reserve ratio reduction, domestic
liquidity has not really eased significantly. A huge inventory liquidation cycle has been
initiated by the crunch in working capital, particularly in steel and sugar. The credit crunch
is exerting pressure on the Indian real estate, banks, construction and metals sectors.
Policy measures should address money unavailability in six months.
Companies in Taiwan also have relatively high gearing in general. Taiwanese real estate
and downstream companies have the highest short-term to total debt levels. Specific
sectors, such as manufacturing in Hong Kong, real estate in Indonesia, fertiliser and oil &
gas in Pakistan, commodities and water in Singapore, small telcos and contractors in
Thailand, are all experiencing liquidity issues in certain aspects.
Sectors smoothly sailing in calm sea
China stands out in the credit crunch as the least affected emerging market amid the
financial contagion. The China Internet, telecoms and winery sectors are particularly top
ranked thanks to their low gearing or net cash positions, with their domestic customers
facing limited credit tightening issues. India cement players have limited amounts of
leverage with a large proportion of existing loans being fixed rate debts. Malaysia
infrastructure plays have no problems with short-term financing, receivable collection and
bad debt risks. Our stock picks are Netease, Tencent, Perfect World, China Mobile,
Kweichow Moutai, Yantai Changyu Pioneer-B, Grasim, India Cements, Ultratech Cement,
IJM Corporation and Gamuda.
Sectors sailing in a perfect storm
Leveraged companies working in deteriorating industries are double hit. Hong Kong
manufacturers are squeezed by banks on financing and also impacted by weakened
overseas demand. The Macau gaming players are deferring some of their projects when
funds are too stiff to raise. Indian real estate companies are sacrificing growth to generate
liquidity due to the severe liquidity crunch. Highly geared Chinese property developers are
thirsty for cash flow in the midst of the property market downturn. Their liquidity problem is
also spreading to their suppliers, such as construction machinery companies. Stocks that
we avoid are Lee & Man, Nine Dragons, Techtronic, Galaxy Entertainment, Las Vegas
Sands, DLF, Unitech, Parsvnath, China Overseas Land, Guangzhou R&F, Hopson
Development and Shimao Property.

Headwind or cyclone?
It is as if we are in the mariner’s poem by Coleridge where the sailors are surrounded by
salt water, yet none can they drink. Despite the huge injection of liquidity into the system,
the unprecedented financial turmoil has led to a sharp rise in the systematic risk of the
credit market.
The US interbank rates rose 200 bps in a month to 4.8% in mid-October 2008 (Figure 5),
reflecting the lack of confidence amongst banks. Higher bank costs and concerns over the
economic slowdown are making the lenders not want to lend money to other banks and
their customers, resulting in a credit freeze-up in a variety of sectors in different markets.
The influence is not limited to the debt financing of a generic company, but also affects its
power to offer credit to customers, the ability to stock up inventory, credit offered by the
suppliers (or collectively, a working capital crunch), and capital expansion plans, which
would impact the company’s profitability and cash flow.

After pumping massive liquidity into the banking system and coordinating rate cuts by the
Central banks, interbank rates have come off and there is seemingly an abatement of the
tightened liquidity. However, do lower interbank rates mean that the liquidity crunch is
already over?
The answer is No. Liquidity outside the banking system is still tight and the crunch is by no
means over yet.
The liquidity crunch is not over yet
Although the US Fed programmes have injected vast amounts of liquidity into the financial
system to help ease the credit tightening, the money supply (M1) is only rising at a fraction
of the rate of growth of the monetary base (Figure 6). As a result, the money multiplier has
sharply contracted from 1.65x in mid-September 2008 to the current levels of only 1.02x,
which denotes that there is a limited impact for the corporates outside the financial system
accessing the liquidity created (Figure 7). A softening of the headline interbank rates does
not mean the sky clears, as market participants are more savvy than that.
In Asia, except China which has a very liquid financial system, other markets are
experiencing a similar phenomenon as in the US, and that is corporates have difficulties in
accessing the liquidity in the financial system when the lenders are too cautious to lend.