Everyone knows that the COVID-19 pandemic first appeared in the Chinese city of Wuhan at the beginning of last year before spreading throughout the world. Although some countries in Asia, most notably India, have been hit hard by the virus, the majority have not. Indeed, China recovered very quickly thanks to a distinctly robust response. Other Asian countries, such as Singapore, Taiwan and Vietnam have also fared very well compared to Europe and the Americas, where the virus has had the greatest impact overall.
The difference in infection levels and the effectiveness of Asian government responses to the pandemic have not only preserved lives, but also helped to protect national economies.
In this context, it is therefore no surprise that over the past year, many banks in Asia have enjoyed high levels of liquidity thanks to increased deposit growth, slow credit growth and concerted action from Asian central banks.
Notably, the trend started before the pandemic hit. Most of Asia-Pacific’s largest banks began 2020 with an increased ability to withstand short-term cash outflows: 13 of the 17 largest Asia-Pacific banks surveyed by S&P Global Market Intelligence last year reported higher liquidity coverage ratios in Q4 of 2019, compared to the previous quarter. According to Moody’s, this improvement in liquidity was because of higher deposit growth, slower credit growth, as well as support actions from central banks.
In the months immediately following the spread of the pandemic, Asian central banks expanded liquidity support further to help cushion its impact on banks. By last autumn, Asian economies, especially China, had started to open up thanks to many countries in the region deploying a successful strategy, which emphasised contact tracing, rapid testing and social distancing from the outset.
Assuming that the impact of the pandemic continues to diminish in the second half of this year, as the vaccination rollout continues, this improvement in liquidity can be expected to facilitate the renewed expansion of capital markets in Asia. This will serve to solidify the region as a leader in sustainability markets as well as in pandemic response.
This scenario is, of course, predicated on a significant uptick in vaccination roll out. It is one area where the Asia Pacific region has been lagging. While the US and Europe have vaccinated the majority of their adult populations, Asia is some way off the pace. Singapore comes out top, having inoculated roughly 30% of its population, followed by China at around 15% with others countries well behind.
But overall, Asian banks have met a range of pandemic-related challenges with notable resilience, as well as taking steps to combat climate change, both of which will ultimately benefit wider society in the region.
More than 40 of the world’s 100 largest banks by total assets are Asian. Not only are they growing at a rapid pace, but they are also delivering innovation in banking services, reflecting the increasingly pivotal role of diverse Asian economies in global trade and economic growth. Meanwhile Asia’s best-known fintech innovators, such as Alipay and WeChat Pay, are world leaders in scaling digital payments.
These growing Asian banks are also becoming more creative with their offerings, exploring innovative ways to raise capital. Their ability to adapt when faced with serious challenges is demonstrated by the growth of the sustainability market, as well as the creation of COVID bonds.
Asian banks have become increasingly sensitive to environment, social, and governance (ESG) factors and are rejecting dealings with companies suspected of human rights abuses, child labour, or unsafe working conditions. Green bonds issued in Asia, historically focused on the real estate sector, are now including clean transportation, which is a major growth area as is the number of car companies looking to use bonds to develop their electric vehicle fleets.
In combating climate change, there has been a sharp uptick in issuers developing products in the sustainability market, such as climate resilience projects. Meanwhile, some Asian banks have stopped financing new thermal coal-mine or coal-fired power station projects. Prominent among them is Singapore’s OCBC Bank, the first bank in Southeast Asia to announce that it would no longer fund new coal-fired power plants.
Equally notable has been the introduction of COVID bonds. Originally introduced by the World Bank in response to the 2014 Ebola outbreak, COVID bonds have been popular with Asian investors. Issued by central banks, they are designed to direct capital towards projects which are aimed at relieving the social impact of the pandemic. Asian banks have been at the forefront of using pandemic bonds as well as social bonds to support resilience.
There is good cause for optimism that the increased liquidity of Asian banks will trickle down into the real economies of the countries in which they operate – from well-funded corporates to the SME market. In turn, this will help to reduce the likelihood of an economic downturn in most Asian countries.
Manoj’s article was published in The Banker, 17 June 2021, and can be found here.