You only have to read the headlines on the research reports coming out of Asia to get a sense of the mood – and it’s sombre.
“Always darkest before the dawn” (Nomura). “Steadying the ship in a stormy world” (BNP Paribas). “Navigating uncertainty” (Fidelity). “Declining growth premium” (Deutsche Bank). “Navigating the macro minefield” (Goldman Sachs).
US-China trade disputes, a quixotic US president, and Brexit chaos may cloud the big picture, but in Asia there are several local factors adding to the feeling of uncertainty, ranging from a slowing Chinese economy to elections in Indonesia and India and potential disruptions to trade.
For banks in the region, though, the outlook isn’t all bad.
If the trade war intensifies, there is work to be done on re-routing supply chains through other markets such as Vietnam.
If, as those like DBS economist Taimur Baig argue, the Indian and Indonesian elections bring clarity and more settled markets, the banks will be able to get on with underwriting deals in the aftermath.
If the uncertain macro environment leads to currency volatility, banks can provide hedging solutions for their corporate clients.
China gets many negative headlines right now, and it faces a tough year. As the People’s Bank of China has paused in its work of tightening up the banking sector and drifted back in the other direction, there is a real danger that poor lending decisions will be made in an environment of easy credit, which could make an already bad situation worse.
China was trying to clean up its banking industry, well aware that it had too much off-the-books shadow lending, too much debt in the wrong areas, too many poorly run institutions below the top tier. It is only because of the trade war that it has reversed course; long term, those problems remain. Chinese lenders need to make smart decisions.
For foreign banks, though, 2019 may present great opportunity in China. UBS has become the first bank to take majority control of its securities joint venture, HSBC’s special case notwithstanding; many more will follow in 2019, and it will be fascinating to see what they do in these new circumstances. They are gaining control very late in the day, of course, but China will continue to be full of exciting opportunities. There is a lot of work to be done.
2019 must be a year when the international banking and investment industry is brought into the fold on at least some of the [Belt and Road Initiative] projects
This may also be a year when China shows its true intentions as regards the Belt and Road Initiative; is BRI a form of Marshall Plan that can be used to gain geopolitical influence, as appeared to be the case when China took control of a Sri Lankan port and extended excessive debt loads to small but politically vital states like Djibouti, or is it a global infrastructure initiative within which the private sector is a crucial component as lender, adviser and contractor?
Right now, it’s both, and it might well continue to be both. But 2019 must be a year when the international banking and investment industry is brought into the fold on at least some of the projects. The Export-Import Bank of China and the China Development Bank only have so much money to go around; BRI has to go beyond those policy bank-led deals and generate projects that are attractive on purely commercial terms. Otherwise the backlash against the initiative will intensify, Chinese policy lenders will start getting stretched, and the whole idea will fail to realize its potential.
A consensus seems to be forming that, economically, Asia will face a year of two halves: volatility and pressure in the first half, stability and recovery in the second.
Rob Subbaraman at Nomura goes so far as to call the second half of 2019 “the defining moment when Asia ex-Japan starts to be widely appreciated as the undisputed locomotive of the world economy.”
That would be an important turning point for the region: an Asia viewed in that way would be less beholden to external shocks beyond its control.
In fact, the demographic and economic shifts in the global ledger towards Asia have been understood for years. What matters more than anything to the banks that operate within the region is an ability to spot the difference between good opportunities and too much risk.