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Six trends shaping Asia’s financial services landscape in 2022

Alfred Lee
Alfred Lee
Managing Director, Data & Analytics, Asia Pacific, LSEG

Alfred Lee analyses the key trends that will influence financial services in Asia Pacific during 2022, from the lingering impact of the COVID-19 pandemic and Asia’s role in fighting climate change, to the state of U.S.-China relations and the looming threat of rising interest rates.

  1. Businesses have spent much of 2021 grappling with COVID-19 disruption and adjusting to the ‘new normal’ but support from governments in the Asia Pacific region have helped mitigate the initial economic fall-out.
  2. COVID-19 will continue to influence the economic outlook in the region over the course of 2022, but there is hope that it will also prove to be a year of transition, adaptation and revival.
  3. In this article, we explore key themes that will be instrumental in shaping Asia Pacific’s financial services industry in the year ahead.

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Businesses have spent much of 2021 grappling with the continued disruption from the pandemic and adjusting to the ‘new normal’. However, the policy support programmes implemented by many governments in the Asia Pacific region have helped to address the initial economic fall-out from the crisis over the course of the year.

What is clear however is the pandemic is far from over with all its twists and turns, including the latest Omicron variant surfacing in late November and the attendant rollercoaster ride that has resumed on the financial markets.

Market opportunities for financial services firms?

The pandemic will invariably continue to influence economic outlook in the year ahead, but we remain hopeful that 2022 will be a year of transition, adaptation, and revival. Amid this state of uncertainty as experts scramble to assess the new variant, taking a long-term view to identify silver linings to the COVID-19 cloud can help investors and market participants capture the opportunities that 2022 will bring.

In this article, we explore key themes that will be instrumental in shaping Asia Pacific’s financial services industry in the year ahead.

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1. The shift from pandemic to endemic

More and more countries in the APAC region are coming to terms with the pandemic, evidenced by the progressive easing of restrictions, steady resumption of economic recovery and activity, and with governments in Singapore, Australia, Vietnam and New Zealand shifting away from “zero Covid” strategies to live what experts agree will be a globally endemic disease.

Share of people vaccinated against COVID-19. Six trends shaping Asia’s financial services landscape in 2022

Although Asia Pacific lags the U.S. and Europe in their COVID-19 vaccination drive earlier in the year, many countries in the region such as Singapore, South Korea and Japan have ramped up their vaccination programmes significantly over the past few months.

APAC region 2021YTD GDP growth

Nevertheless, risks still remain for the region in the year ahead and the path to recovery across Asia Pacific will likely be unequal and uneven.

As the Asian Development Bank noted in its report earlier, economic growth in some Southeast Asian economies such as Thailand, Indonesia and Malaysia may fall behind other parts of the region, driven in part by continued struggles with outbreaks of the disease and uneven progress of vaccinations.

2. Thaw in U.S.-China bilateral relations on the cards?

After years of rising U.S.-China tensions since the Trump administration, the video summit between U.S. President Joe Biden and China’s President Xi Jinping on 16 November (Beijing time) may indicate that a new era is underway.

During the meeting, both leaders discussed a host of issues including Taiwan and trade but issued public statements subsequently that emphasised ways to avoid conflict. The two leaders agreed that they should establish “guardrails” to manage their differences and highlighted cooperation in areas such as climate change.

While the meeting did not produce any significant concrete outcomes or usher in changes to economic or trade policies, it signalled that U.S.-China relations might soften in the year ahead, despite fundamental differences between the world’s two largest economies.

Looking ahead, it will be crucial to see how U.S. and China will work to address contentious issues at the heart of their competition, which will have profound implications for global and Asia Pacific markets.

This is especially so for regional trade stability and the future of regional trade initiatives such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

With China’s bid to join the CPTPP in an attempt to replace the U.S. as the economic powerhouse at the centre of the agreement, and with trade ministers in the U.S., Europe and Japan renewing their trilateral partnership, the competition for international economic leadership will remain a key element in the U.S.-China relationship in 2022.

3. Uncovering long-term opportunities in China

China, the world’s second-largest economy, has rebounded from the pandemic in 2021 with GDP growing by 9.8 percent year-on-year in the January-September period. However, there are signs of a slowdown are emerging – from the recent power crunch, declining factory activity, weak consumer confidence and a slowing property sector.

A key driver of growth in China, the real estate sector has been shaken by tightening regulations and a deepening liquidity crisis. Given the strong interlinkages between the overall financial health of China’s property sector and global financial markets, monitoring and preventing the manifestation of contagion risks will remain top of mind for market participants in the coming year.

China GDP growth 2018-21. Six trends shaping Asia’s financial services landscape in 2022
Source: Refinitiv Datastream

At the same time, the recent policy and regulatory moves, including the government’s “common prosperity” agenda aimed at ensuring the country’s development benefits all of its people, has also raised concerns about its implications for various industry and China’s long-term outlook.

While it is impossible to predict which sectors may be directly impacted in the near future, China’s 14th five-year plan (2021-25) approved in March, offers a helpful guide.

For instance, the five-year plan’s emphasis on green development, technological innovation and strengthening the domestic market are underlying structural trends in China’s economy that present long-term opportunities for both domestic and foreign investors.

4. Supply chain reconfiguration in a post-COVID world

One of the most significant impacts of the pandemic, combined with the U.S.-China trade tensions, is the rethinking of global supply chains over the past year.

China has long occupied a central role in global supply chains, but the supply shock from nationwide lockdowns has exposed the critical vulnerabilities in the production and supply chains strategies of firms across the world.

Consequently, countries across the globe have been under pressure to be self-sufficient by bringing production closer to home, increasing their domestic production capabilities, or shifting to regional supply chains, as well as diversifying or reducing their dependence on sources that are perceived as risky.

Furthermore, China is promoting its dual-circulation strategy in its latest five-year plan to increase domestic consumption to drive economic growth, while also boosting tech innovation to achieve technological self-reliance.

Cranes and containers are seen at the Yantian port in Shenzhen, following the novel coronavirus disease (COVID-19) outbreak, Guangdong province, China May 17, 2020. Picture taken May 17, 2020.
Cranes and containers are seen at the Yantian port in Shenzhen, following the novel coronavirus disease (COVID-19) outbreak, Guangdong province, China.

Heading into 2022, companies will continue to grapple with this challenge of increasing the resilience of their supply chains while maintaining their competitiveness.

More companies may explore the prospect of moving part of their supply chains out of China, and other Asian economies such as Vietnam and India may offer viable alternatives in this restructuring of global supply chains.

Now more than ever, shifting supply chains require companies to act with agility, closely monitor the evolving regulatory and geopolitical trade environment and plan for potential disruptions in advance to ensure greater flexibility in their businesses.

5. Rising interest rate environment

The Federal Reserve is widely expected to start rising interest rates next year and officials are getting ready to begin winding down the bond-buying programme implemented last year in the early days of the COVID-19 crisis, reflecting a growing consensus that gradually tighter policy will be needed to keep inflation in check.

The Federal Reserve’s policy moves will remain closely watched by market participants as we approach 2022, and this will have a knock-on effect for policymakers in Asia to keep up. In fact, some Asian economies have already started to get ahead of the Fed by hiking interest rates over the course of the year.

For instance, South Korea became the first major Asian economy to raise interest rates since the coronavirus pandemic began by increasing rates from a record low of 0.5 percent to 0.75 percent in August to help curb the country’s household debt and home prices.

Similarly, New Zealand’s central bank hiked interest rates by 25 basis points in October – the first time in seven years – signalling the start of a tightening cycle.

6. Asia Pacific’s changing role in fighting climate change

Asia Pacific will be heavily affected by the climate crisis. How the region rises to the climate challenge in 2022 will shape the long-term trajectory of economic growth in the world’s most populous and increasingly affluent continent.

Thankfully, we have witnessed encouraging progress in environmental, social and governance (ESG) action across APAC over the course of the year.

Countries like China and Singapore have been taking the lead in the region through ambitious initiatives such as China’s launch of the world’s largest carbon emissions trading market in July to incentivise decarbonisation, and Singapore’s deployment of US$1.8 billion under its Green Investments Programme.

China emission allowance spot price

According to data from Refinitiv Lipper, ESG assets under management (AUM) in Asia-Pacific reached US$1,339 billion (as at end-September, 2021), with more than 5,000 sustainability funds domiciled in the region and about 600 new ESG funds launched this year.

Asian policymakers’ recent pledges to carbon neutrality by 2050 (Malaysia, Japan and South Korea) and 2060 (China) also represent a critical step towards net-zero and have a snowball effect that can catalyse further climate action among other countries across the region.

The 26th United Nations Climate Change Conference of the Parties (COP26), attended by key Asian leaders including India’s Prime Minister Narendra Modi and Japan’s Prime Minister Kishida Fumio, was a crucial milestone in the global fight to help limit the rise in global temperatures to 1.5°C which dominated headlines in 2021.

COP26 established a stronger foundation for increased climate action globally, and as addressing the climate crisis requires international collaboration and solidarity, the pledge by the U.S. and China at the summit to tackle climate change together by doing more to cut methane emissions and phase out coal this decade represented a pivotal step in the right direction.

Balancing short-term economic pressures

Ultimately, short-term pressures on governments to accelerate economic recovery and finance other developmental goals, such as poverty eradication in developing countries, weighed on the COP26 outcomes and the pledges at the summit did not go far enough to limit temperature rise to 1.5°C.

Nevertheless, it is important to recognise that the Glasgow Climate Pact reached at COP26 marked the first-ever climate deal that explicitly plans to reduce the use of coal, which is the largest contributor of annual carbon dioxide emissions.

As we head into the new year, countries in the APAC region will be under increasing pressure to step up their climate commitments, while also balancing their country’s respective economic growth needs in an uncertain post-pandemic environment.

Data, technology, and analytics will play a greater role in 2022 and beyond to track and monitor the region’s progress towards a more sustainable future.

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