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.”

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