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Asia’s securities markets: Turning the corner on Covid-19

27 April 2020

As Asia’s securities markets emerge from Covid-19 at different stages, a Deutsche Bank Securities Services-hosted webinar assessed the impact of policy and operational responses by governments and financial regulators on the region’s capital markets and how these markets could change. flow’s Janet Du Chenne reports on the key takeaways

During the global lockdown, webinars and video conferences have replaced meetings as an effective means of staying informed. For this reason, more than 100 securities industry practitioners participated in a Deutsche Bank webinar on 16 April, the fifth hosted by the Corporate Bank division since the lockdown began in March, to hear how Asia securities markets are responding to the Covid-19 challenges.

With the escalating health crisis in Asia spilling over into the economic and financial sector, Boon-Hiong Chan, Head of Securities Services Market Advocacy, Deutsche Bank and moderator of the webinar, introduced Head of China Macro Strategy, Linan Liu to set the scene with an analysis of the impact on the regional financial markets risk.

Liu predicted that the “once in a century pandemic” would likely cause global growth to be replaced by a deep recession. However, she noted different signs of containment in Asia offering light at the end of the tunnel. North North Asian countries and regions such as China, Hong Kong SAR, Japan, Singapore, South Korea and Taiwan have introduced measures to contain the outbreak, while South East Asian countries have already implemented them. India imposed a nationwide lockdown on 24 March, while a movement control order (MCO imposed a week earlier by Malaysia was recently extended by a further fortnight to 12 May.

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US$65bn

of outflows since the start of this year

This combination of social distancing domestically as well as the likely dramatic decline in exports for Asian economies makes for the most challenging macro environment in decades, noted Liu. “We expect the worst recession since the Asian financial crisis given these unprecedented challenges and significant uncertainty over the growth outlook,” she added.

Financial markets in the region are also reeling from extensive global financial market volatilities, with Asian equities and fixed income suffering almost US$65bn of outflows since the start of this year. “In Asian FX we’re seeing anywhere between 0-15% of depreciation against the dollar given global dollar liquidity tightened towards the end of March,” said Liu. Liquidity concerns such as these have prompted aggressive responses by Asian governments to prevent the sharp contraction of economic activities.

 

Worse than the 2008 financial crisis?

According to Deutsche Bank Research, however, overall financial stress in the US is by no means comparable to the global financial crisis in 2008, when three month Libor spreads were tighter that they are now. “So we are clearly better off than during the Financial Crisis during 2008 but worse off than during the 2010 European sovereign debt crisis,” said Liu.

The equities volatility index, or Vix, is above the levels seen 12 years ago, she noted. “Global asset performance can be used as a background to argue that Asian financial assets are more or less in line with the rest of the market and are not necessarily underperforming”.

 

Countries reopen their economies

This outlook is somewhat tempered by the emerging positive results from social distancing and lockdown measures, which are prompting countries to begin reopening their economies.

“We expect the overall economic activities to resume about a month after the lockdown and it might take two to three months to weather,” claimed Liu. “Near-term recovery is unlikely to take overall growth back to pre-outbreak levels. Given the loss of consumption, production and income during the lockdown it may take a longer time to repair but activities may normalise over time, and we should see a material rebound to sequential growth.”

 

Governments learn from past crises

Previous crises have equipped governments and regulators in many Asian countries with the wherewithal to act. In countries such as China, India and Malaysia, governments did not hesitate to respond with sweeping measures to cushion the financial and economic impacts on society, the economy and financial services.

Asian central banks also started cutting rates to prevent a tightening of domestic financial conditions. For example, China has reduced policy rates by 30 basis points so far this year and released about 1.7 trillion renminbi – or about US$240bn – of liquidity through reserve requirement ratio cuts. It has also launched targeted liquidity facilities to support credit growth to the private sectors.

India cut policy rates by 75 basis points in the first quarter of 2020 and Deutsche Bank’s Research team forecasts a further 75 basis point cut in Q2, which would take the policy repo rate to 3.65%. “We expect RBI to inject liquidity, to buy government bonds and provide targeted liquidity to support credit and growth,” noted Liu. Malaysia is expected to cut its rates by 100 bps.

 

Focus on fiscal

Given that currency depreciation pressure presents constraints for further monetary easing, many countries have now focused on fiscal stimulus. “For example, we expect China to announce a fiscal stimulus package up to 6 trillion renminbi that will take the 2020 fiscal deficit to 6% from 2.8% last year and an additional issuance of government bonds and local government bonds,” said Liu. The issuance of these new bonds could push the augmented public debt to GDP ratio to 91%.

On 26 March India announced a fiscal package of 1.7 trillion INR (€20bn) at 0.8% of GDP. “We expect the fiscal deficit in India to rise to 5% in fiscal year of 2021, and India's public debt to GDP ratio to rise to 76% in the fiscal year of 2021,” noted Liu. “Similarly in Malaysia we expect fiscal stimulus to take the deficit to 5.7% in 2024 and the debt to GDP ratio likely will rise to 80% of GDP.”

In addition, many governments are implementing measures to ensure business as usual while enforcing lockdown and social distancing. This policy has notably been evidenced in China and India where measures from the top have filtered down and key individuals in the financial and capital markets have readily executed back-up continuity plans.

 

We expect the overall economic activities to resume about a month after the lockdown.

Linan Liu, Deutsche Bank

Linan Liu

Demonstrating continuity

Highlighting these examples during the webinar, Sriram Krishnam, Securities Services Country Head in India said the government responded with a strategy where the foremost step was to save lives. It initially introduced a 21-day lockdown from 25 March and extended this until 3 May, taking India’s number of lockdown days announced so far to 40.

Then, in addition to the INR 1.7 trillion fiscal package, the government provided benefit grants to almost 800 million people in the past couple of weeks. Central bank the Reserve Bank of India (RBI) also announced a three month moratorium on the payment of term loans, and interest on cash credits overdrafts and working capital facilities.

The government then focussed on maintaining essential services, including banking and financial services, and keeping them intact. Securities market participants in India prepared for an extended period of home working. “For example, in Deutsche Bank India, almost 90% have been enabled to work from home with the remaining 10% being contract or temporary workers not requiring work from home as such. So we are able to service clients during this time in the fullest possible way,” notes Krishnan.

In addition to these work from home (WFH) measures, trading hours for foreign exchange and government bonds have been reduced by four hours, temporarily easing pressure on the infrastructure and intermediaries in the market. This relief is particularly welcome for the mutual funds industry, whose complexity and breadth of products requires pricing exercises that extend into longer hours on a daily basis.

In India, one of the biggest takeaways is the government’s involvement and the readiness of people to execute back-up continuity plans. Since the start of lockdown, the entire country has understood the significance of what we are going through and why we are going through it, said Krishnan. “There is a lot of learning from the steps put in place as precautions, in order to not catch this disease at the same time, while essential services remain open.”

“India has responded to lockdown in a dignified way and there has been great discipline in terms of how we've conducted ourselves.”

 

Enabling the flow of investment

To enable the flow of investment, capital markets regulator the Securities and Exchange Board of India (SEBI) relaxed certain requirements relating to investor documentation. New accounts for foreign investors can now rely on scanned images of the documents. “This is a relief for foreign investors who are looking to set up new accounts and start investing in India at a time when it is great to make such investments given that the markets hit a 10-year low”, says Krishnan.

KYC reviews for existing accounts can also rely on scanned images for domestic mutual funds, portfolio managers, alternative investment funds and venture capital funds and SEBI has also relaxed timelines for various filings of returns for investment funds.

Elsewhere, in addition to the reduction in working hours, the RBI also extended the deadline for legal entity identifiers for participation in the non-derivatives market by six months. But arguably the most significant form of relief has come in the form of a moratorium on monthly payments on term loans, which means borrowers do not have to pay instalments for the next three months.

 

Co-ordinating decisive actions

In China, similar government intervention was welcomed. From 1 February onwards, the People’s Bank of China (PBC), Ministry of Finance (MOF), China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE) jointly announced 30 measures to be taken in the financial sector to help respond to the outbreak of COVID-191. Stanley Song, Head of Securities Services, China at Deutsche Bank elaborates on what these swift actions meant for the country’s capital markets. “Even during the lockdown, the impact on trading in the China equity and the bond markets was very minor,” he claimed.

 

Even during the lockdown, the impact on trading in the China equity and the bond markets was very minor

Stanley Song, Deutsche Bank

Stanley Song

Continuing to open up

In addition to the aforementioned fiscal and policy measures, the government also pressed ahead with its market liberalisation programme, which includes the elimination of foreign ownership limits on mainland-based fund management companies starting 1 April.2

Foreign asset managers immediately welcomed this measure. On 3 April, J.P. Morgan Asset Management reached an agreement with Shanghai International Trust Co. to take 100% ownership of their Shanghai-based fund management company joint venture, China International Fund Management Co. Ltd.3

A day earlier, Vanguard and Ant Financial launched its first investment fund roboadvisory platform, offering Chinese investors access to 6000 mutual funds through payments app Alipay and Ant Fortune4 , a wealth management platform.

In addition, regulators and market infrastructures continue to improve administrative procedures to facilitate the development of the funds industry. New securities laws have been officially implemented since 1 March to address important provisions for alleviating the problems presented by short selling, restrictions on holding structures, insider trading, and using non-public information to trade .

The scope of the laws application notably included depository receipts, asset backed securities and asset management products as quasi-securities. Other market improvements included the simplification of the FX settlement processes and facilitation of high value fund remittance to support the financial system and also standardising the checklist for private fund managers so that they can set up and raise funds in a more efficient and transparent way.

 

Financial Market infrastructures respond

To ensure they can accommodate the capital markets during times of global volatility, financial market infrastructures have remained resilient and robust. The China Central Depository & Clearing Company (CCDC) and Shanghai Clearing House (SCH) introduced a new rolling method of settlement to address time zone differences for failed bond trades (see Figure 1). Foreign counterparties are given a grace period where settlements have failed due to insufficient funds at the time of contractual settlement date. “This is a first and allows investors across different regions facing different local holidays to facilitate bond settlement without incurring penalties for failed trades,” commented Song.

Figure 1: Rolling settlement for the China Interbank Bond Market (CIBM) to address time-zone differences

 

Source: China Central Depository & Clearing Company (CCDC) and Shanghai Clearing House (SCH)

Against the odds

Malaysia has also responded with measures to contain the spread of the pandemic while keeping essential services running. This comes despite a whirlwind change in government at the beginning of the year just as a second wave of Covid-19 hit the country. Jacqueline William, Head of Securities Services, Malaysia & Sub-ASEAN recalls the experience: “We all felt like we were in a really bad movie where you try to squeeze in as many plots in a short time, but what happened after was pretty surreal. The entire nation shifted its attention to what matters most, which really is just coming together and moving forward.”

 

Joint regulatory actions

William explains that all agencies including policymakers, the various ministries, the private sector, the central bank, the stock exchange, the securities commission, were all aligned to protect the welfare of the most vulnerable while containing the spread of the virus and to ensure that there would be no disruption whatsoever to essential services, and to ease processes in capital markets.

Many financial institutions also introduced split operations prior the introduction of the control order on 18 March. What followed were two stimulus packages: the first US$4.8bn was directed towards Malaysian society’s most vulnerable; and the second - and rather larger – US$57bn package was granted to support small and medium sized enterprises and low and medium income households and to provide fiscal injection to strengthen the national economy.

From a macro perspective, the 2020 GDP growth forecasted by the Bank of Negara, Malaysia’s Central Bank remains at negative 2% to 0.5%. The jobless rate is projected at about 4%, with a peak of unemployment expected in the second and third quarter and a recovery in Q4. Despite these projections and expectations for a 100 basis point cut to interest rates, rating agencies such as Fitch, S&P and Moody’s have maintained Malaysia's investment grade sovereign credit rating. Fitch however lowered its rating outlook in April to negative from stable. “The Bank of Negara has been engaging with us as custodians and our clients to understand the challenges we all presently face and what needs to be done to continue to make Malaysia an investment destination for them,” said William.


From a banking and capital market perspective, all payment systems and all payment modes have remained operational. There has been no disruption to the trading of equities and bonds and no shortening of the settlement cycle.
“The overall objective of the regulator is to makes it as simple as possible for the trading community to operate during the control order,” said William. She highlighted the introduction of specific initiatives including full discretion given to brokers not to impose margin calls on any securities or collateral for purchase, waivers of listing fees and the deferment of reporting. The only change has been a temporary suspension of short selling.

 

Digitalisation to trump paper trails

While the coronavirus pandemic has shone a light on the effectiveness of government intervention, it also demonstrates the proactive nature of policy makers, and banking and capital markets regulators to keep systems running and the infrastructure stable during these times of volatility.

Importantly, many regulators have introduced measures to alleviate the processing burden facing the investment industries in many Asian markets and to ensure the resilience of financial markets infrastructures. This serves to highlight the importance of digitalisation and automation as a means to stimulate industries that are paper-based and rely on manual intervention and to standardise settlement processes. For this reason, webinar participants concluded that digitalisation and automation are likely to be given new momentum to trump over paper trails.

 

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