As we reach the end of 2020, it is clear that we have experienced a year that has fundamentally changed the way the world operates. Changes that would have required years to complete in normal times have taken place in just months – including the rapid adoption of new technology and growing awareness of sustainability issues. These developments can be felt in the financial system, where capital markets have had an extremely active year in Asia.
It has not been smooth sailing for Asian capital markets in 2020. Early on in the year, when the pandemic started, liquidity in the banking sector became constrained - placing stress on corporates and institutions that needed funding to sustain or expand their operations.
“When central banks responded, it led to a 180 degree turnaround in the situation, with a flood of liquidity that made it clear that there was going to be plenty of monetary support,” said David Liao, Head of Global Banking, Asia Pacific at HSBC. “This set the tone for the markets.”
When markets became liquid again, there were many companies looking for funding to ensure that they were firmly capitalised. The next step would be for businesses to understand their current trajectory during the pandemic and how they are positioned for the post-COVID world.
“Liquidity is driving Asia’s highly active capital markets in both equity and debt, and I expect this to continue,” said Mr. Liao. “The key question is whether this flood of liquidity can trickle down to the real economy, and on this I am less optimistic. You could have a situation where you have large corporates that are well funded, while SMEs struggle.”
How challenging the future will be for companies is very sector-dependent, he said. The tech industry for example, has had a standout year, with everything from video conferencing to ecommerce becoming part of everyday life for many people. Sectors related to travel, such as hotels and airlines, on the other hand, will likely struggle for some time to come.
Chinese fundraising strong
The most active country in Asia for fundraising has been China, where the economy quickly rebounded due to its successful management of the pandemic. By the end of the third quarter, three of the world’s top five IPO markets were in Greater China. Shanghai was at the top, with USD38.2 billion worth of IPO proceeds, outperforming the Nasdaq, which was at USD31.1 billion. Hong Kong and Shenzhen were at USD23.4 billion and USD10.5 billion respectively .
In terms of growth, Shanghai IPOs have raised 153 per cent more than last year. The sharp increase is due to a variety of factors. The local economy is buoyant relative to the rest of the world, while companies in growth sectors require funding to allow them to expand.
A newly reformed ChiNext market in Shenzhen, along with the STAR Market that was launched in Shanghai last year, are platforms that connect this demand for capital with investors looking for New Economy exposure. Hong Kong’s equity capital markets have also had a strong year, with the city benefiting from large Chinese companies coming back to list on a home market.
“I remain convinced that there is space for three different financial centres in Greater China,” said Mr. Liao. “And I remain hopeful that the financial framework in Hong Kong, the operating environment, and the rule of law will keep Hong Kong as a top-three global financial centre.”
Shanghai and Shenzhen however, remain primarily domestic markets that have access to large pools of local liquidity. That said, these two markets have made significant steps in the ongoing process of internationalisation – a process that Mr. Liao describes as simplifying access and widening the pipe to international investors. Highlights this year include changes to the Qualified Foreign Institutional Investor programme (QFII), which in November merged with its renminbi sister programme, RQFII, after the removal of the investment quota in May.
Focus on sustainability
Another consequence of the pandemic is that it has thrown into focus the harmful relationship that the human race currently has with nature. We can see this in the capital markets via a sharp pickup in conversations with issuers relating to sustainability, said Mr. Liao. In the Asian bond market for example, there has been strong issuance in so-called COVID bonds, which are designed to direct capital towards projects that relieve the social impact of the pandemic.
“We are talking more with issuers that are keen to articulate their own ESG strategy and align with the Paris Agreement, because at this moment there is hope that there will be progress, as there has been some inertia in recent years,” said Mr. Liao.
The role for banks going forward will be to integrate sustainability considerations into the risk profiles of companies they work with. This is more than just promoting deals with companies deemed inherently green and discouraging investments in fossil fuels. It is taking consideration of a company’s individual sustainability journey and assessing its progress – for example, a traditionally coal-reliant energy firm that is successfully transitioning towards more renewable alternatives.
“So when we talk about financing companies and sustainability, it is not as straightforward as saying some sectors are bankable and some are not,” said Mr. Liao. “It is about being willing to work with companies – regardless of sector – that are genuinely committed to a more sustainable future.”
This material is issued in Asia by The Hongkong and Shanghai Banking Corporation Limited, which is regulated by the Hong Kong Monetary Authority and registered with the Hong Kong Securities and Futures Commission (“SFC”) (CE number AAA523); in Europe by HSBC Bank plc, which is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority; and in United States by HSBC Securities (USA), Inc., which is a member of FINRA, NYSE, and SIPC and in other jurisdictions by its respective affiliates (collectively “HSBC”). In order to service the needs of our clients, the trading and sales trading departments of HSBC may take principal positions in the instruments or products which this material relates. Additionally, the sales and trading department of HSBC, and/or other divisions of the HSBC Group, may make markets, buy, sell, underwrite, hold positions in, or enter into transactions including derivatives, in instruments or products, directly or indirectly, to which this material relates. Accordingly, recipients should not regard this document as an objective or independent explanation of the matters contained herein. Information contained herein should not be regarded as investment research for the purposes of the rules of the Financial Conduct Authority or any other relevant regulatory body. As such, this document has not been prepared in accordance with regulatory requirements designed to promote the independence of investment research and is not subject to the same prohibitions relating to dealing ahead of the dissemination of investment research. HSBC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified. Opinions expressed herein may differ from the opinions expressed by other divisions of HSBC, including its research department. Opinions and estimates expressed reflect our current opinions which may change at any time without notice. In addition, the analysis provided is not sufficient to or intended to form the basis of any investment decision. Any charts and graphs included are from publicly available sources or proprietary data. Where information is derived from public sources, HSBC accepts no responsibility for its accuracy. Any indicative trade details provided should not be regarded as complete or as representing the actual terms on which HSBC may trade. Figures included in this document may relate to past performance or simulated past performance (together “past performance”). Past performance is not a reliable indicator of future performance. This document is for reference and information purposes only. You are solely responsible for making your own independent appraisal of, and investigation into, the products, investments and transactions referred to in this document and you should not regard any information in this document as constituting investment advice. Neither HSBC nor any of its affiliates is responsible for providing you with legal, tax or other specialist advice and you should seek your own independent advice accordingly. Receipt of this document shall not be regarded as creating any form of adviser/client relationship, and HSBC may only be regarded by you as acting on your behalf as financial adviser or otherwise following the execution of an engagement letter on mutually satisfactory terms. Except in the case of fraudulent misrepresentation, neither HSBC nor any of its affiliates, officers, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or part of this material. This document is solely intended for Professional Clients, Eligible Counterparties, Eligible Contract Participants and Institutional Professional Investors as those terms are defined under the rules of the FCA, the U.S. Securities Exchange Commission (“SEC”), the U.S. Commodity Futures Trading Commission (“CFTC”) and the Financial Industry Regulatory Authority (“FINRA”), the Hong Kong Securities and Futures Commission, respectively, and is not intended for distribution to, or use by, retail clients, or to any person or entity in any jurisdiction or country where such distribution would be contrary to law or regulation. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without prior consent of HSBC or any associate, is prohibited. The products and services described herein may be offered by different entities within HSBC. Some of the products and services described herein may not be available in every jurisdiction globally. The sender of this document is a member of the sales and trading department and not of the research department of HSBC. The sales and trading department of HSBC is engaged in selling and trading in securities to which this document relates or is relevant. Any commentaries in this document are based on the individual opinions of the sender and may be changed at any time without notice. Opinions expressed in this document may differ from the opinions expressed by other divisions of HSBC Group including its research department.
HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority Registered in England No. 14259 Registered Office: 8 Canada Square, London, E14 5HQ, United Kingdom Member HSBC Group.
HSBC Bank plc. HSBC Bank USA, NA. are swap dealers registered with the CFTC. All swap transactions arising from this communication must be effected through a swap associated person of the appropriate HSBC swap entity and all securities transactions arising from this communication with U.S. investors must be effected through HSBC Securities (USA) Inc. Communications with US persons in connection with securities products specified herein will be made by, or chaperoned by, employees of HSBC Securities (USA) Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission, in accordance with applicable law. HSBC Securities (USA) Inc. is a registered broker-dealer with FINRA and SIPC member.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC.
Copyright 2018. ALL RIGHTS RESERVED.