Asian Financial Observation Quarterly Report(2020 Q2)

In the second quarter of 2020, as the COVID-19 pandemic showing divergent trends, the Asian economies are on different tracks, with most Asian economies have seen unprecedented declines, but part of economies are showing clear signs of recovery. Within the regions, there is also a clear divergence in several levels of economic performance, with the production side recovering faster than the expenditure side, the three major industries in the production side and the development speed of consumption and investment in the expenditure side have also shown obvious differences. Financial markets and industries warmed up significantly during the quarter, with currency, exchange rate, stock, and bond markets rebounding, and banking, securities, and insurance industries showing marginal signs of improvement. However, as the impact of the COVID-19 pandemic continues, the growth and transformation of the real economy will inevitably be affected, and the balance between safety and efficiency, short-term and long-term considerations will be the main theme of future policy implementation.

I.Divergence in economic recovery

IISurged risk of unemployment 

III.Intertwining of inflationary and deflation risks

I.Asian monetary market: ample liquidity and downward interest rates

II.Asian exchange rate market: currency depreciation before appreciation, with overall growth

III.Asian stock market: stock index trending higher and foreign capital returning

IV.Asian bond market: scale increasing and yields declining

I.Asian banking industry: spread narrowing and local risk declining

II.Asian securities industry: scale showing divergent trends, and profitability rebounding

III.Asian insurance industry: scale modestly growing, revenue mixed

I.Monetary policy: conventional and unconventional policies steadily advancing

II.Exchange rate policy: institutional safeguards and interventions in tandem

III.Fiscal policy: expenditure and revenue continue to gain momentum

IV.Regulatory policy: divergent trends begin to emerge

V.Financial cooperation: assistance measures strengthening

Writing Group：AFCA Think Tank Department【Quarterly Overview】In the second quarter of 2020, as the COVID-19 pandemic showing divergent trends, the Asian economies are on different tracks, with most Asian economies have seen unprecedented declines, but part of economies are showing clear signs of recovery. Within the regions, there is also a clear divergence in several levels of economic performance, with the production side recovering faster than the expenditure side, the three major industries in the production side and the development speed of consumption and investment in the expenditure side have also shown obvious differences. Financial markets and industries warmed up significantly during the quarter, with currency, exchange rate, stock, and bond markets rebounding, and banking, securities, and insurance industries showing marginal signs of improvement. However, as the impact of the COVID-19 pandemic continues, the growth and transformation of the real economy will inevitably be affected, and the balance between safety and efficiency, short-term and long-term considerations will be the main theme of future policy implementation.

   【Macro Economy】   

In the second quarter, most Asian economies experienced the largest contraction in their history, which partly dampened the process of transformation in many economies and exposed risks accumulated over the years, but some economic indicators have begun to show signs of recovery. After the impact of the COVID-19 pandemic, the economy began to recover shakily. It is particularly important to make sustainable deployment of long-term economic decision-making under the pressure of the change of pace in economic growth.

I. Divergence in economic recovery

In terms of the PMI, the global and Asian economies began to fall to historic lows in the second quarter and showed signs of recovery towards the end of the quarter. The manufacturing, services and composite PMI for the world and most Asian economies fell well below the threshold starting in the second quarter of 2020. At the peak of the outbreak in April, business activity in the manufacturing and services sectors declined at an unprecedented pace, with global manufacturing, services and the composite PMI at 39.60, 23.70 and 26.20 respectively, and Asia at 43.90, 30.00 and 34.40 respectively. It is worth mentioning that China was relatively less affected by the COVID-19 pandemic, with all three indicators above 40, which is a relatively high among all the economies studied. In India, however, all three indicators are at their lowest levels, with the PMI for services, which accounts for more than half of India’s GDP, falling to 5.4, the lowest level in the world, and reaching single digits for the first time, mainly due to the country’s strict blockade measures implemented at the end of March, which brought the Indian economy to a virtual standstill. With the gradual lifting of precautionary measures, the global and Asian economies, after the worst of the period, began to improve. In June, the global manufacturing, service and comprehensive PMI rose to 47.90, 48.10 and 47.90, while the Asian three indicators rose to 47.40, 49.50 and 48.20, but only China’s three indicators and Turkey’s manufacturing PMI rebounded above the threshold.

Source: CEIC, sorted out by the author

Figure 1.1 PMI of global and major Asian economies

In terms of year-on-year GDP growth, most economies experienced a historic slump in the second quarter, but a small number of economies rose. Among the 25 representative economies in Asia, the decline rate of 8 economies exceeded 10%. Only four economies - China, Brunei, Vietnam, and Uzbekistan - achieved year-on-year GDP growth. On one hand, it has to do with the economic structure of the economies, with tourism and entertainment being the sectors most affected by the COVID-19 pandemic. Macau, Malaysia and the Philippines, three economies with entertainment or tourism as the mainstay of their economies, ranked first, third and fourth in terms of GDP decline. In particular, Macau’s GDP fell by 67.8% year-over-year in the second quarter, much higher than other economies, mainly due to the fact that its economic model is dominated by the relatively homogeneous gaming industry, which accounts for 50% of GDP and 84% of revenue, and exports of gaming services and other tourism services fell 97.1% and 93.9% respectively. On the other hand, it depends on the effectiveness of COVID-19 pandemic prevention and control. India is the country with the third highest number of confirmed cases of COVID-19, behind only to the United States and Brazil, and its GDP declined by 23.9% in the second quarter, the biggest contraction in decades.

Source: CEIC, sorted out by the author

Figure 1.2 year-on-year GDP growth of major global and Asian Economies

With the gradual lifting of the ban on the COVID-19 pandemic, the production side recovered faster than the expenditure side. At the end of the second quarter, many countries gradually lifted the blockade measures, and the policy of resumption of production led to the resumption of many industrial activities, but the recovery of demand was still slow due to the fact that the social quarantine measures were not completely lifted, and under the pressure of declining employment and income, residents still have concerns about consumption, resulting in slow recovery of demand.

In terms of the production side, the primary industry is superior to the secondary industry, and the secondary industry is superior to the tertiary industry. With many Asian economies entering the agricultural season, the agricultural sector has become the only bright spot in economic development. Due to heavy rains during the monsoon season, agriculture in India grew by 3.4%, agriculture in Malaysia by 7.2%, and agriculture, forestry, and fisheries in the Philippines by 1.6%. The manufacturing sector, on the other hand, benefited directly from the resumption of work, with a catch-up in industrial activity and a partial restart of construction activity resulting in a smaller contraction in the second quarter than in the services sector, and with technology manufacturing leading the expansion in some economies that are still on a downward trajectory. In Singapore, a better-than-expected rebound in semiconductor demand and expansion in the biomedical manufacturing, electronics, and precision engineering clusters led to a 2.5% year-on-year increase in manufacturing, while the services sector, still affected by travel restrictions, contracted 2.4% year-on-year.

In terms of expenditure side, public consumption grew, private consumption and investment recovered at varying paces, and import and export remained sluggish. Governments in most economies have increased public spending in the expectation of infrastructure-led economic growth, with public construction investment increasing by 29.6% in Macau, public sector consumption increasing by 2.3% in Malaysia, and government spending increasing by 22.1% in the Philippines. In terms of private consumption and investment, on the one hand, due to weak labor market factors such as reduced worker hours and wages, as well as a lack of business confidence brought about by uncertainty, India’s private consumption declined by 26.7% and fixed investment by 47.1%, while Malaysia’s private consumption and investment declined by 18.5% and 26.4%, and the Philippines』 private consumption declined by 15.5% and fixed investment by 37.8%; On the other hand, the government’s stimulus package boosted private consumption and investment. In Macau, investment in large private construction projects increased, while the decline in private construction investment has narrowed from the previous quarter; In South Korea, private consumption increased by 1.5% from the previous quarter, while China’s manufacturing investment declined by 13.5 percentage points in the second quarter from the first quarter, real estate investment achieved positive growth of 1.9%, and total retail sales of consumer goods decreased by 15.1 percentage points from the first quarter. In terms of import and export, the second quarter still showed a significant decline as domestic and external demand remained weak in most economies.

II Surged risk of unemployment 

The impact of the COVID-19 has blew the labor markets of developed economies in Europe and America hard, especially America, where the unemployment rate rose by 7.8% to 11.2% in June 2020 compared to the end of 2019. Inevitably, the blockade led to massive layoffs and wage cuts, and unemployment in Asia also began to rise, reaching 4.95% in June, 2020, up 0.8% from March, 2019. In terms of unemployment rate increases, Saudi Arabia, Hong Kong(China), Israel, Singapore, Azerbaijan, and India were the most severe, with unemployment rates all increasing by more than 1% in a quarter, among which Saudi Arabia’s labor market has deteriorated the most, with the unemployment rate rising by 3.31% to a record high. It is noteworthy that the non-oil private sector, the engine of job creation, contracted by 10%, causing a significant blow to Saudi Arabia’s economic transformation plan, which aims to create sufficient private sector jobs for Saudi Arabia’s young people, with those aged 20-29 accounting for 63.1% of the total unemployed population in the second quarter.

Source: CEIC, sorted out by the author

Figure 1.3 Asian representative economies’s unemployment rate in Q2

III. Intertwining of inflationary and deflation risks

On the one hand, the major economies in Europe and America have influenced the global deflation risk, and the CPI has obviously declined. By June 2020, the CPI of the United States has dropped by 1.58 percentage points compared with the end of last year, and the CPI of the European Union has dropped by 0.91 percentage points. Under the influence of the COVID-19 pandemic, most CPI in Asia also showed a significant decline. In mid-2020, CPI in Asia (except Lebanon) declined by 1.05 percentage points to 3.28% compared with the end of last year, and CPI in 11 economies showed negative values. However, the inflation risks of many Asian economies represented by Lebanon continue to rise. In June 2020, the COVID-19 pandemic broke the 「False」 prosperity brought about by the exchange rate system of the Lebanese pound peg to the US dollar. The Lebanese CPI soared more than 10 times compared with the level at the end of 2019, reaching 89.74%, much higher than other economies. In addition to Lebanon, there are 12 Asian economies whose CPI continues to rise, mainly due to the rising prices of food and other necessities. In the long run, the risks of inflation and deflation in Asian economies will continue to be intertwined on account of the great uncertainty on the supply side and the demand side, coupled with the possible impact of loose monetary policies.

Table 1.1 Global and Asian representative economies’s CPI（%）

Source: CEIC, sorted out by the author

In the second quarter, the Asian financial markets are recovering as the control of the COVID-19 pandemic in most parts of Asia gradually improves and fiscal and monetary policies continue to be implemented. In terms of asset classes, risk assets outperformed safe-haven assets; In terms of the regions, the markets of Indonesia, Vietnam, and South Korea developed well, while Bangladesh, the Philippines, and Singapore performed weakly. At present, risks and opportunities co-exist in Asian financial markets. Long-term large-scale stimulus measures may sow the seeds of currency and debt crises, while high investor sentiment is still driving the development of biopharmaceutical and other COVID-19 pandemic-related industries.

I. Asian monetary market: ample liquidity and downward interest rates

In the second quarter of 2020, the money supply continued its upward trend from the previous quarter and grew at a significantly higher rate, while monetary market interest rates continued their downward trend. However, residents and depositors remain cautious about consumption and investment due to the uncertainty of the COVID-19 pandemic, while central banks of various economies need to be alert to the currency crisis that could be triggered by expanding monetary market aggregates.

The broad money supply of Asian representative economies[1] grew by an average of 9.41%, 4.07%higher than the same period last year. Among the representative economies[1] in Asia, India’s broad money in the second quarter grew the fastest year-on-year, reaching 12.35 percent, which was 2.26 percentage points higher than the same period of last year. Wherein, the currency held by the public increased by 8.2%, while time deposits grew by 4.1%, but savings and demand deposits fell by 8%, reflecting an increase in cash withdrawals by depositors to meet their needs during the period of quarantine and to protect themselves against salary cuts or unemployment.

The narrow money supply of Asia’s representative economies grew by an average of 14.33%, 9.86 percentage points higher than last year, with Singapore and South Korea increasing by 23.29% and 21.02% respectively, 22.05 percentage points and 17.55 percentage points higher than last year, far outpacing other Asian economies. The main reason is that in addition to the massive economic assistance measures introduced, money supply growth has been driven by the currency multiplier effect caused by the very low interest rate level. On May 20, Singapore’s one-month swap rate fell below zero for the first time in nearly nine years, and South Korea cut its target rate to a record low of 0.5% in May.

The rise in money supply during the quarter was largely due to policies adopted by Asian economies to maintain reasonably abundant liquidity to encourage consumer spending and to meet rising demand as businesses resume operations at an accelerated pace to address corporate financing difficulties. However, whether the implementation of the policy will affect individuals and entities and boost consumption and business investment will depend on the COVID-19 pandemic trends and the return of confidence. On the other hand, the risk of a currency crisis caused by a sustained increase in the money supply needs to be guarded against.

Table 2.1 Money Supply of Asian Representative Economies in 2020 Q2 

Unit: LCY(Trillions)

Source: CEIC, sorted out by the author

Note: For comparability of data, M3 data is used for broad money supply in India and Japan, while M2 data is used for other economies.

Interest rates in some Asian monetary markets showed a downward trend as a whole. In India, Bank of Mumbai’s interbank outright rate (three-months) saw the biggest decline, by 1.24 percentage points to 4.69% from 5.93% at the end of the previous quarter, partly due to the Central Bank of India Policy Board’s continued easing of monetary policy to restore the necessary growth and partly due to the state-owned Indian banks』 policy of revising interest rates on products related to external benchmarks. The interbank offered rate of Kuala Lumpur, Malaysia(3-month), South Korea (3-month) and Singapore (3-month) also declined significantly to 2.28%, 0.69% and 0.56% from 2.80%, 1.18% and 1.00%, respectively, at the end of the previous quarter.

However, monetary market interest rates rose in China and Japan. The interbank offered rate (3-month) of Shanghai, China rose to 2.130% from 1.933% at the end of the previous quarter, and the interest rate for the issuance of negotiable certificate of deposit showed an upward trend. The interbank offered rate (3-month) of Tokyo, Japan rose to 0.070% from 0.069% at the end of the previous quarter due to changes in market supply and demand.

Source: CEIC, sorted out by the author

Figure 2.1 The money market interest rate trend of Asian representative economies

II. Asian exchange rate market: currency depreciation before appreciation, with overall growth

Due to the development of the COVID-19 pandemic and the progress of the resumption of production, the currencies of the representative economies in Asia showed a depreciating trend against the U.S. dollar before appreciating, with overall growth.

As the COVID-19 pandemic continued to spread in April, currencies in all representative Asian economies depreciating. Wherein, the IDR/USD continued the devaluation trend at the end of the last quarter, with the largest devaluation among the representative economies in Asia, from 15,194.57 in March to 15,867.4 in April, while the JPY/USD was relatively stable, falling slightly to 107.74 in April from 107.67 in March.

However, since May, the exchange rate of most Asian economies against the U.S. dollar has continued to appreciate. On the one hand, the resumption of production and work and economic recovery have promoted the appreciation of Asian currencies. On the other hand, due to the serious COVID-19 pandemic situation in the United States, economic fundamentals have been unable to support the strengthening of the US dollar, which is also the need for the United States to further depreciate in order to protect its own stable economic recovery. Among the representative economies, Indonesia’s rupiah rose most significantly. Influenced by the prevention of the COVID-19 pandemic and the restoration of market confidence, the monthly average of the IDR/USD exchange rate returned below 15,000 in June, reaching 14,195.96. 

Table 2.2 Monthly averages of Asian major currencies against the US dollar

Source: CEIC, sorted out by the author

Source: CEIC, sorted out by the author

Figure 2.2 Month-to-month change of monthly averages of Asian major currencies against the US dollar

During the quarter, only China’s RMB depreciated among representative Asian economies. Especially in late May, the RMB/USD fell below 7.14, and on May 27, the onshore RMB fell below 7.17 and the offshore RMB fell below 7.19, close to the 7.2 in September 2019 (the weakest level since the global financial crisis). The reason is partly due to the increase in uncertainties in Sino-US relations, and partly reflects the effectiveness of the market-oriented reform of the RMB exchange rate formation mechanism, and the short-term exchange rate has changed from government-led to market-led. Under the influence of news and market expectations, the price taboo was broken, with greater room for volatility. In June, China’s economic indicators continued to rebound, and the RMB shockingly appreciated to 7.08, reflecting the Chinese economic indicators continue to recover, there is limited room for exchange rate depreciation in the long term.

III. Asian stock market: stock index trending higher and foreign capital returning

During the quarter, as a number of economies eased social restrictions and steadily introduced stimulus measures, and as hopes for economic recovery outweighed risk concerns, risk markets in representative Asian economies saw opportunities for growth, with stock index trending higher, the scale increasing, the price-earnings ratio rising, and the foreign investment situation improving.

Major stock indexes in Asia are on an uptrend. With the spread of COVID-19 showing signs of slowing, Asian stock markets follow the global trend and rise as a whole. Although global stock markets tumbled during the quarter as a result of a surge in new infections, Asian stocks stopped the downtrend. In the second quarter, the average stock index of Asia’s representative economies[2] rose 13.11% quarter-on-quarter. Among them, Vietnam has the largest increase, reaching 24.54%, which is mainly due to the success in controlling the spread of the COVID-19 pandemic, active buying by local investors, and confidence boosted by the IMF’s forecast that Vietnam will be one of the fastest growing economies in Asia this year. However, due to the COVID-19 pandemic and increased risk aversion, the Bangladesh’s stock index is still declining, down 0.48% quarter-on-quarter in the second quarter.

Source: CEIC, sorted out by the author

Figure 2.3 The quarter-on-quarter comparison of Asian representative economies stock index in Q2 

Source: CEIC, sorted out by the author

Figure 2.4 The quarter-on-quarter comparison of Asian representative economies stock market size in Q2

The overall size of Asian stock markets rebounded. Stock market capitalization in representative Asian economies[3] rose 14.79% quarter-on-quarter, with Vietnam, Thailand, and South Korea showing the largest quarter-on-quarter increases of 24.52%, 22.63%, and 21.39%, respectively. Bangladesh and Singapore saw the smallest quarter-on-quarter increases of 0.08% and 8.47%, respectively. Singapore was mainly affected by MSCI’s announcement to move a series of derivatives contracts from Singapore to Hong Kong.

Source: CEIC, sorted out by the author

Figure 2.5 Trade volume/market size of Asian representative economies

Trade volume of business in the Asian stock markets declined before rising, with a marked increase in June. Trade volume of business in Asia’s representative economies was largely influenced by the COVID-19 pandemic, and ended the quarter on an upward trend compared to the end of the previous quarter. China’s trade volume/market capitalization, although declining, was still the highest among the Asian economies, at 39.16% in June, and the market was actively traded. The Sri Lankan stock market, which resumed trading after a long trading hiatus, outperformed other Asian economies with a 356.05% increase in turnover, after a slump in the previous quarter.

Source: CEIC, sorted out by the author

Figure 2.6 PE ratio of Asian representative economies

The price earning ratio of Asian representative economies is generally on the rise. At the end of the second quarter, the average price earning ratio of stock markets in Asian representative economies[4] was 18.36, with the South Korea stock market showing the largest increase in price earning ratio to 24.18 from 14.66 at the end of the previous quarter, mainly due to the increase of price earning ratio of stocks in biopharmaceutical industries, which was 98.1 for biopharmaceutical companies, 83.6 for media and entertainment companies, 51.2 for IT, 38.3 for energy and chemical industry, and 24 for semiconductors. The price earning ratios of the stock markets in Japan and Thailand were the second and third largest, rising to 24.30 and 18.87, respectively, from 18.40 and 13.04 at the end of the previous quarter, while the price earning ratios of the stock markets in China and Hong Kong, China were relatively stable, rising modestly to 13.9 and 10.27, respectively, from 13.44 and 9.46 at the end of the previous quarter.

The foreign investment situation in Asia’s representative economies has improved. In the second quarter, foreign outflows from most of the representative economies began to decline, with Japan’s net foreign transactions rising from JPY-235.902 billion in March to JPY-48.8016 billion in April, South Korea’s outflows declining from USD10.543 billion in March to USD3.963 billion in April, and India’s outflows declining from USD7.885 billion in March to USD30 million in April. Thailand’s outflows fell from USD2.45 billion in March to USD1.439 billion in April, and Malaysia’s outflows fell from USD1.314 billion in March to USD612 million in April. The stock markets of some other economies began to experience net inflows as a result of the favor of foreign capital. China and Taiwan, China began to see inflows of foreign capital in April. Domestic stock holdings by institutions and individuals outside China rose to RMB2,126.819 billion in April from RMB1,887.378 billion in March. Foreign investment in China and Taiwan, China turned from a net outflow of USD12.077 billion in March to a net inflow of USD818 million in April.

IV. Asian bond market: scale increasing and yields declining

Under the influence of positive factors such as the dovish stand of the Federal Reserve and major international central banks, as well as the impact of the large amount of fiscal stimulus in Asian economies, the Asian bond market began to recover, with the size of the bond market rising and market interest rates slowly moving down. Although some countries are still experiencing outflows of foreign capital, the situation has improved from the previous quarter.

The bond local currency markets size of the representative economies[5]  in Asia all rose. In the second quarter, the overall size of the local currency outstanding bond market in Asia’s representative economies was USD28.29 trillion, up 3.43% quarter-on-quarter. The fastest increase was in Indonesia, which rose 23.29% quarter-on-quarter, far outpacing the rest of Asia’s representative economies, driven by a 25.33% quarter-on-quarter increase in government bond. Thailand had the second largest increase, up 8.2% from the previous year, with its government bond increasing by 10.25%, central bank bond increasing by 10.22%, and corporate bond increasing by 3.19%, mainly due to the Thai government’s proactive fiscal policy and the Central Bank of Thailand’s policy to support small and medium-sized enterprises and the corporate bond market. The Central Bank, together with the Department of Finance, provided soft loans to small and medium-sized enterprises on the one hand, and designated bond funds to purchase corporate bonds on the other to enhance market liquidity. The Philippines ranked third, up 7.08% quarter-on-quarter, with government bonds up 8.71% and corporate bonds up 1.38%. The Philippines engaged in a large domestic bond issuance campaign, with public debt rising to a record USD171.44 billion in April.

Source: CEIC, sorted out by the author

Figure 2.7 Bond market size of Asian representative economies 

The trend in bond market yields was moderate, with an overall slight decline. Yields on 10-year government bonds in representative Asian economies declined by an average of 0.21 percentage points, with the Philippines showing the steepest decline, with average 10-year bond yields declining by 1.01 percentage points in the second quarter from the previous quarter, mainly due to a series of interest rate cuts by the central bank and measures to support market liquidity, as well as the more severe COVID-19 pandemic situation in the country, which created a great deal of uncertainty about economic development and caused investors to resort to safe-haven assets. In the second quarter, Singapore and Hong Kong, China also saw large declines, with average 10-year government bonds yields declining by 0.65 and 0.64 percentage points, respectively. At the same time, as investors in some Asian economies began to shift to riskier assets, average 10-year government bond yields rose during the quarter, with Indonesia and Vietnam rising 0.66 and 0.16 percentage points, respectively, and Japan’s average yield moving to 0.005 from -0.034 in the previous quarter.

The overall trend of foreign investment is outflow, but the scale of these outflows has begun to decline. In the second quarter, outflows continued in the local currency bond markets of most of Asia’s representative economies. Wherein, the decline was most severe in Indonesia, where foreign holdings of local currency-denominated government bonds as a percentage of outstanding government bonds fell 2.54%, but the rate of decline was 3.32 percentage points less than in the previous quarter. On the other hand, foreign investors continued to increase their positions in Chinese bonds, with the ratio of foreign investment in China’s bond market rising by 0.46% quarter-on-quarter, keeping the long-term inflow trend unchanged, mainly due to the stable political order, rapid economic development and high domestic and foreign market interest rate spreads, which increased the value of its investment. The outflow of foreign investment in Malaysia’s bond market turned into an inflow, with the foreign investment share up 0.58% quarter-on-quarter from the previous quarter.

Source: CEIC, sorted out by the author

Figure 2.8 Asian representative economies』 Foreign Holdings in LCY Government Bonds

   【Financial Industry】   

In the second quarter, as the marginal impact of the COVID-19 pandemic began to fade, the size and profitability of the industry showed a recovery momentum, and Asian banking, securities and insurance industries showed signs of stabilizing. However, the impact of the COVID-19 pandemic has not yet completely dissipated, and there is still a need to continue to provide financial services to support affected enterprises and populations and prevent the occurrence of systemic risks.

I. Asian banking industry: spread narrowing and local risk declining

In the second quarter of 2020, large commercial banks in China and Japan remain leaders among the world’s top 1,000 banks in Asia due to the efforts of Asian economies to cope with the COVID-19 pandemic, and the banking industry in emerging Asia, including Indonesia, improves in overall strength and moves up the list of the world’s top 1,000 banks. Despite the increase in non-performing loans due to the COVID-19 pandemic, Asia’s banking industry is better prepared for the expected new emergence of non-performing loans than it was during the global financial crisis in 2008, with stable capital to weather the economic uncertainty.

(I) Business scale

1. Overview of banking assets in Asian economies

In terms of asset size, the total asset size of the banking industry in major Asian economies, including China, Japan, Hong Kong(China) and Singapore, has reached USD59.37 trillion, up 3.25% year-on-year. By the end of the second quarter of 2020, China’s RMB/foreign currency assets still ranked first in Asia, with total RMB/foreign currency assets reaching USD43.7 trillion, up 2.39% year-on-year. The RMB/foreign currency assets of large commercial banks reached USD17.79 trillion, accounting for 40.7% of the total, while those of joint-stock commercial banks reached USD7.86 trillion, accounting for 18.1% of the total. Japan’s banking industry had the second largest amount of assets, amounting to USD11.34 trillion, while Hong Kong(China)'s banking industry had the third largest amount of assets, amounting to USD3.23 trillion.

Source: CEIC, sorted out by the author

Figure 3.1 Asian representative economies’s banking asset size in 2020 Q2

In terms of asset growth, asset size has risen in representative Asian economies. Singapore’s banking industry saw the fastest growth in asset size in the second quarter of 2020, with a 15.34% year-on-year increase in banking assets, mainly due to rapid growth in interbank loans, cash assets and central bank deposits, which offset a decline in loans and advances (including bill financing). Interbank loans grew by 45%, central bank deposits by 23.18%, and cash assets by 19.66%, while loans and advances (including note financing), which account for the largest share, declined by 0.98%. China’s banking industry saw the second fastest growth in assets, with a 9.88% increase, while Japan’s banking industry saw the third fastest growth in assets, with an 8.40% increase.

In terms of the direction of loan investment, the representative economies of Asia have increased their support for corporate finance in the public sector. The loans of Chinese enterprises (institutions) increased by RMB8.8 trillion compared with the beginning of the year, an increase of RMB2.5 trillion year-on-year, and the growth rate of mid- and long-term loans for manufacturing was 24.7%, a record high in the past decade. At the end of June, the loan balance of inclusive small loans was RMB13.5 trillion, an increase of 26.5%, 3.4 percentage points higher than the end of the previous year. The number of micro and small business entities supported by inclusive small loans reached 29.64 million, an increase of 21.8% year-on-year. Business loans in Singapore grew by 0.55% year-on-year, SGD234,400 more than last year, with business service loans growing at the fastest rate of 23.81%, transport, storage and communication loans at 7.15%, construction loans at 5.31%, and manufacturing loans at 1.18%. Malaysia’s total outstanding loans increased by 4.1% year on year in June, among which commercial loans increased by 4.2% year on year. In terms of private business, the investment directions of loans from representative Asian countries are divided. China's household loans grew at 14% at the end of June, 1.5 percentage points lower than the end of the previous year, while Singapore’s consumer loans declined by 3.44% year-on-year, with equity financing declining the most by 26.06%, credit card business by 17.09%, auto loans by 7.45%, and housing loans by 1.33%. On the other hand, however, household lending in Malaysia improved due to an increase in housing and securities lending, which grew by 3.5% in June.

2. Overview of banking liabilities in Asian economies

In terms of the scale of liabilities, the total liabilities of the banking industry in major Asian economies such as China, Japan, Hong Kong(China), and Singapore reached a cumulative total of USD55.77 trillion, an increase of 9.18% year-on-year. China still ranks first in Asia in terms of the scale of total liabilities. As of the end of the second quarter, China’s RMB/foreign currency liabilities were US40.1 trillion, of which USD17.79 trillion was owed by large commercial banks, up 9.8% year-on-year, and USD7.86 trillion was owed by joint-stock commercial banks, up 11.5% year-on-year. Japan’s total liabilities were USD10.46 trillion, and Hong Kong(China)’s total liabilities were USD3.12 trillion, ranking second and third respectively.

In terms of the growth rate of liabilities, among the above four representative economies, the fastest year-on-year growth rate of the banking industry’s liability balance was in Singapore (15.79%), with the liability balance rising to USD1.1 trillion, of which, Singapore’s interbank loan balance grew the fastest by 17.07% year-on-year to USD0.36 trillion, while non-bank customer deposits grew by 11.77% year-on-year to USD0.48 trillion. The debt balances of China, Japan and Hong Kong,China also increased in the second quarter, growing at 9.50%, 8.41% and 3.53% year-on-year respectively, a slight improvement from the first quarter growth rate.

(II) Profitability

With the decline of operating income and the increase of non-performing loans, the provision for asset impairment losses has expanded. Therefore, the profitability of representative Asian economies declined significantly in the second quarter. Due to the influence of policies, large commercial banks need to undertake more responsibilities to support the real economy, and the relative profitability has suffered the greatest impact.

In terms of net profit, the banking industry in representative Asian economies experienced a decline in profitability in the second quarter. Among them, the Bank of Thailand recorded the largest decline in profitability, with its commercial banks posting a consolidated net profit of THB30.4 billion in the second quarter, down 41% from THB51.6 billion in the same period last year, mainly due to an increase in non-performing loans and pressure from the new Thai Financial Reporting Standard 9 (TFRS9), which requires increased provisioning for expected loan losses. Kasikorn Bank (K-Bank), one of the four largest commercial banks in Thailand, recorded the highest decline in net profit, falling 78.9% in the second quarter from the same period last year. The net profit of Chinese commercial banks was negative for the first time, with a total net profit of RMB426.7 billion in the second quarter, down 24.06% from the same period last year, down significantly from the 5% growth rate in the first quarter, which is related to the stricter identification of non-performing loans since the second quarter. Specifically, large state-owned banks, joint-stock banks and agricultural and commercial banks fell 27.86%, 26.58% and 28.01% respectively, while urban commercial banks fell only 3.09%, with better profitability. In 2020, South Korea’s net income for the second quarter was USD3.066 billion, down USD580 million or 15.91% year-on-year, mainly due to a 30% decline in net profit from USD2.485 billion to USD1.740 billion, impacted by the decline of commercial banks, which account for 4/5 of total profit. Conversely, Specialized Bank’s net income reversed the sharp decline of the previous quarter and increased by USD166 million in the quarter compared to the same period last year. The banks in Singapore continued to see year-on-year declines in net profit, mainly due to increased provisions in response to the COVID-19 pandemic. DBS Bank, Bank of Overseas Chinese and United Overseas Bank, which are the largest banks by asset size, saw the net profit declines of 22%, 40% and 40%, respectively, year-on-year.

Source: CEIC, sorted out by the author

Figure 3.2 Year-on-year growth rate of Asian representative banking’s net profit in Q2

In terms of return on net assets, the ROE of China’s banking industry was 10.35% in the first half of the year, down 1.74 percentage points from the end of last quarter and down 2.67 percentage points from the same period last year, while the average ROA was 0.83%, down 0.17 percentage points from the same period last year. Large commercial banks saw the largest decline, down 0.21 percentage points, mainly due to the fact that they have taken on more responsibility for supporting the real economy. South Korea’s first-half  ROE was 6.68%, down 1.69 percentage points from 8.37% in the same period last year, mainly due to a sharp decline in net profits of South Korea’s domestic banks offsetting the impact of capital growth. In Singapore, major commercial banks』 ROE ranged from 6% to 10%, with United Overseas Bank posting the largest decline at 8.0% in the first half of the year, down 5.4 percentage points year-on-year, while DBS Bank’s and Bank of Overseas Chinese’s first-half ROE was 9.5% and 6.1%, down 3.6 percentage points and 0.48 percentage points respectively from last year. The ROE of Kazakhstan’s banks fell sharply in June, from 28.48% in May to 0.27% in June. Moody, the International rating agency, said that decline in the profitability of Kazakhstan’s banking industry was due to a combination of factors, including higher credit costs, tighter net interest spreads and losses on fixed-income bonds.

(III) Capacity development

In general, the difference in net interest spread between representative Asian economies is large, with countries such as Indonesia having higher net interest spread and remaining competitive, but there is a general trend of narrowing net interest spread across the region, and some Asian banks have begun to seek transformation, driving up non-interest income.

In terms of absolute value of spread, Indonesia has the highest net interest spread among representative Asian economies and has the strongest growth capacity. The net interest spread of major banks in Indonesian ranged from 3.04% to 4.46%, including 4.46% for commercial banks, 4.52% for State Banks, 5.94% for regional development banks, and 3.04% for foreign banks. The net interest spread of Chinese banks was 2.09% in the second quarter, including 2.03% for large commercial banks, 2.08% for joint-stock commercial banks, 2.00% for urban commercial banks, and 2.42% for rural commercial banks. Singapore’s major commercial banks had net interest spreads below 2.0%, with DBS Bank, Bank of Overseas Chinese, and United Overseas Bank representing large commercial banks with net interest spreads between 1.48% and 1.62%. The South Korea’s banking industry had a net interest spread of 1.42% in the second quarter. Malaysia’s largest bank, Bank Negara Malaysia, the net interest spread of which was 1.43%.

Source: CEIC, sorted out by the author

Figure 3.3 The net interest spread of Indonesia's main banks 

In terms of the change in spread, most of the representative countries in Asia experienced a decline, mainly due to the impact of national policies to guide the decline in social financing costs and to guide banks to increase credit support to the real economy. Indonesia’s banking industry saw a slightly larger decline in net interest spread, with commercial banks 』net interest spread declining by 0.44pp year-on-year to 4.46%, state banks』 net interest spread declining by 0.78pp year-on-year to 4.52%, regional development banks』 net interest spread declining by 0.02pp year-on-year to 5.94%, and foreign banks』 net interest spread declining by 1.2pp year-on-year to 3.04%. The three largest commercial banks in Singapore also saw sharp declines, with DBS Bank, Bank of Overseas Chinese, and United Overseas Bank dropping 0.29pp, 0.19pp and 0.33pp respectively, while South Korea’s net interest spread continued to narrow, falling 0.19pp to 1.42% from 1.61% in the same period last year. China’s banking industry also saw some decline in net interest spread, which fell 0.09pp to 2.09% from 2.18%, a two-year low. However, the Philippines saw an increase in net interest spread, with the banking system’s net interest spread rising by 0.27pp year-on-year to 3.9%.

In terms of non-interest income, some Asian banks saw growth. In South Korea, non-interest income totaled KRW3.6 trillion in the first half of the year, up KRW0.3 trillion, an increase of 7.9% year-on-year, of which securities income and foreign exchange/derivatives income increased by KRW0.3 trillion each. Siam Commercial Bank, Thailand’s leading commercial bank, recorded a significant increase in non-interest income in the first half of the year, up 19.7% year-on-year to THB24.36 billion, mainly due to strong growth in recurring income from bancassurance and wealth management businesses, a large portion of which came from mutual funds and brokerage, as well as higher non-interest income driven by net gains from trading and foreign exchange transactions and other operating income.

(IV) Risk assessment

In the second quarter of 2020, credit risk trends in representative Asian countries diverged, with non-performing loan ratios declining in some countries, but credit risk remains severe in some countries. At the same time, better risk control and capital management frameworks in the Asian banking industry help banks maintain adequate risk buffers.

Credit risk of some countries needs attention. Among the representative Asian countries, Mongolia and Pakistan have significantly higher credit risk than other representative Asian economies, with non-performing loan ratios at around 10%. Fitch, the international rating agency expects that the asset quality of Mongolian banks will come under pressure in 2020 and 2021 due to the impact of the COVID-19 pandemic on businesses and individuals. By the end of June 2020, reported overdue loans in the Mongolian banking system have increased from 4.5% of total loans at the end of 2019 to 5.8% of total loans, while the reported non-performing loan ratio have increased from 10% to 11%. In addition, there is an underestimation of the non-performing loan ratio due to the support measures taken by the Central Bank of Mongolia, which allow for delayed recognition of consumer non-performing loans and restructuring of loans. The non-performing loan ratio of Pakistani banks has been slowly increasing since December 2019. The non-performing loan ratio rose to 9.67% in the second quarter from 8.58% at the end of the last year. Experts point out that the high level of non-performing loans is largely due to higher policy rates. Since July 2019, the Monetary Policy Committee of the State Bank of Pakistan has kept the policy rate at a high level of 13.25% until the outbreak of the COVID-19 pandemic in March, when it was significantly reduced to 7%, but it is still at a high level. According to Moody’s, the international rating agency, high interest rates undermine the ability of borrowers to repay their loans, and high concentrations of loans to a single borrower or to specific sectors (such as agribusiness, sugar, and the energy sector) also hide risks.

Source: CEIC, sorted out by the author

Figure 3.4 The non-performing loan ratio of Asian banks

Credit risk trends in the major representative countries are divergent. Credit risk continues to rise in some countries, with Oman, Pakistan, and Kyrgyzstan showing the highest year-on-year increases in non-performing loans of 1pp, 0.85pp, and 0.82pp to 4%, 9.67%, and 8.6%, respectively, reflecting the increased credit risk in these countries due to the COVID-19 pandemic, with Oman showing the highest increase in personal loans, accounting for 38% of total loans. The amount in the second quarter of 2020 amounted to OMR 8.452 billion. It was noted that banks have significant exposure to the consumer sector and household credit can deteriorate rapidly in adverse scenarios, while high indebtedness increases household vulnerability to adverse macroeconomic shocks. On the other hand, credit risk in Brunei, Georgia and Kazakhstan has weakened, with non-performing loans declining by 0.96pp, 0.48pp and 0.41pp year-on-year to 4.31%, 2.39% and 8.97% in the second quarter.

Source: CEIC, sorted out by the author

Figure 3.5 The year-on-year growth rate of representative Asian banks』non-performing loan ratios

Robust capital adequacy ratios are the backbone of Asia’s banking industry. The capital adequacy ratios of Asia’s representative economies are above 13%, which is higher than the Basel standard, with Indonesia and Brunei having the highest capital adequacy ratios of over 20%, at 22.55% and 20.55% respectively. With the exception of Malaysia, Nepal, and China, which declined slightly, capital adequacy ratios in Asia’s representative economies increased in the second quarter, with Turkey, Kazakhstan, and Pakistan saw the largest increases of 1.62, 1.5, and 1.45 percentage points, respectively, from the first quarter, reflecting the fact that that the risk control and capital management framework of Asian banks helps banks maintain sufficient risk buffers against the background of declining loan quality in the whole industry.  

Source: CEIC, sorted out by the author

Figure 3.6 Asian banking capital adequacy ratio by the end of Q2,2020

II. Asian securities industry: scale showing divergent trends, and profitability rebounding

Entering the second quarter of 2020, capital markets survived a major test of the COVID-19 pandemic and stock markets in major economies rebounded strongly. Major securities companies in Asia took advantage of this good opportunity to accelerate their business transformation and cope with various challenges with all their strength, with securities companies expanding in size and institutional profitability generally rebounding.

(I) The business scale among the leading institutions showing divergent trends

The second quarter of 2020 saw a divergence in the asset size of leading institutions in Asia's representative economies, with a general reduction in long-term assets and a marked increase in short-term assets. The two Japan's securities giants have seen their assets increase and decrease, with Nomura Securities' assets standing at USD386.181 billion at the end of the second quarter of 2020, down by 2.32% year-on-year and down by 5.58% quarter-on-quarter. Conversely, Daiwa Securities' assets standing at USD238.498 billion, rose by 12.06% year-on-year and rose by 7.70% quarter-on-quarter. This is mainly due to the different focus of the two securities businesses, with Nomura Securities accounting for a higher proportion of long-term investment and Daiwa Securities accounting for a higher proportion of short-term investment, and the stock market rallying significantly in the second quarter as a result of the COVID-19 pandemic, with short-term investment ushering in a good opportunity for development, Daiwa Securities growing in size, compared to the lower trend of long-term investment, Nomura Securities decreasing in size. The total assets of South Korea's 56 securities companies reached USD491.487 billion at the end of the second quarter, with an increase of USD12.428 billion, or rose by 2.6%, from USD479.059 billion three months earlier. This was due to an increase in the bond holdings of securities companies, among the major securities companies, Mirae Asset Daewoo Co., Ltd., Samsung Securities, Korea Investment Holding Co., Ltd. and NH Investment Securities Limited have also seen increases and decreases in asset size, where Korea Investment Holding Co., Ltd., which ranked second in terms of asset size, saw its asset size fall by 9.46% year-on-year, again mainly due to an 11.84% decline in long-term assets such as long-term investments. The remaining three securities companies all saw an increase in size, particularly in short-term investments, which grew by 135.54%, 122.08% and 29.05% for Mirae Asset Daewoo Co., Ltd., Samsung Securities and NH Investment Securities respectively. At the same time, the asset size of the China's securities industry remains on a steady expansion trend. As of 30 June 2020, there were 134 securities companies in China, with 3 new securities companies added compared to the same period last year. The total assets of the securities industry in China amounted to USD1.13 trillion, with an increase of 13.10% compared to the same period last year, and the total assets of the five leading securities companies, namely CITIC Securities, Haitong Securities, Guotai Junan Securities, GF Securities and Huatai Securities, accumulated to USD 414.623 billion, grew by 12.26% year-on-year and grew by 1.71% quarter-on-quarter, where CITIC Securities, which ranked first in terms of size, ended the second quarter with assets of USD137.717 billion, with the highest year-on-year increase of 23.15%.

(II) Substantial improvement in the profitability of institutions generally

In terms of operating income, South Korea's securities companies reported operating income of USD4.142 billion in the second quarter of 2020, with an increase of USD1.769 billion from three months ago and a quarter-on-quarter increase of 74.55%, noting that brokerage commission income increased by 74.60% year-on-year to USD2.584 billion in the first half of the year based on the growth in stock market trading volume. Brokerage commission income as a percentage of total commission income has increased by 7.3% compared to three months ago to 53.7%. China's 134 securities companies achieved operating income of USD16.254 billion in the second quarter, grew by 49.37% year-on-year, of which the five securities companies with the largest asset size, CITIC Securities, Haitong Securities, Guotai Junan, GF Securities and Huatai Securities, achieved operating income of USD7.278 billion in the second quarter, grew by 41.79% year-on-year, where Huatai Securities posting the highest growth, grew by 77.90% year-on-year. The Nomura Securities, Japan's largest securities company, accumulated operating income of USD4.778 billion in the second quarter, grew slightly by 0.52% year-on-year and grew by 39.03% compared to the previous quarter, but operating income at Daiwa Securities, the second largest by assets, remained on a downward trend, with operating income of USD1.195 billion in the second quarter, down by 29.08% year-on-year and down by 19.92% quarter-on-quarter.

In terms of net profit, the two Japan's securities giants achieved a significant rise in net profit, with a combined net profit of USD1.488 billion, grew by 122.63% year-on-year and grew by 789.36% quarter-on-quarter, with Nomura Securities turning from a loss of USD319 million in the first quarter of 2020 to a profit of USD1.325 billion in the second quarter, grew by 513.39% quarter-on-quarter and grew by 155.25% year-on-year, Daiwa Securities' net profit in the second-quarter grew by 9.25% year-on-year and grew by 55.96% quarter-on-quarter. South Korea's securities companies reported a net profit of USD1.506 billion in the second quarter of 2020, with an increase of USD1.074 billion from three months earlier and a quarter-on-quarter increase of 348.5%. China's securities companies made a net profit of USD11.744 billion in the first half of the year, grew by 24.73% year-on-year, while 124 out of 134 securities companies made a profit, with all five leading brokerages making a profit in the second quarter, for a combined net profit of USD2.461 billion, grew by 99.96% year-on-year and grew by 31.61% quarter-on-quarter.

III. Asian insurance industry: scale modestly growing, revenue mixed

The second quarter figures reflect the good ability of the Asian insurance industry to withstand pressure. As a result of the COVID-19 pandemic, health insurance has developed relatively well, becoming an important growth driver for property insurers and at the same time boosting the premium growth rate of life insurers, overall, although premium income in Asian economies has been mixed, profitability has clearly improved.

(I) Small increase in asset size

At the end of the second quarter of 2020, total assets of China's insurers amounted to USD311 million, with an increase of 6.9% from the beginning of the year. The total assets of personal insurance companies amounted to USD263 million, grew by 9.6% from the beginning of the year, while those of property insurance companies amounted to USD338.983 billion, grew by 5.3% from the beginning of the year, those of reinsurance companies amounted to USD72.5 billion, grew by 20.5% from the beginning of the year, and those of insurance asset management companies amounted to USD9.082 billion, grew by 0.5% from the beginning of the year. The total assets of South Korea's two major insurance companies both rose slightly, with Samsung Life's total assets at USD263.33 billion at the end of the second quarter of 2020, grew by 2.65% quarter-on-quarter, and Hanwha Life's total assets at USD121.669 billion, grew by 2.37% quarter-on-quarter. At the end of the second quarter, the assets of Singapore insurance companies stood at USD226.305 billion, grew by 5.93% quarter-on-quarter, of which life insurance fund assets were USD187.679 billion, grew by 7.39% quarter-on-quarter, while general insurance fund assets were USD7.495 billion, down by 8.28% quarter-on-quarter.

(II) Premium income mixed

During this quarter, premium income in representative Asian economies was mainly affected by large fluctuations in life and health insurance premium income, which was mixed. On the one hand, life insurance has grown significantly in some regions where life insurance is underdeveloped, but on the other hand premiums have fallen sharply in the major life insurance developed regions.

On the one hand, a number of Asian economies have seen premium income rise. China's premium income reached USD148.176 billion in the second quarter, grew by 13.85% year-on-year, with the premium income of life insurance grew by 15.46% and the premium income of property insurance grew by 10.40%. This is mainly due to the premium income of health insurance leading the rising trend, with the premium income of health insurance in property insurers was USD 10.678 billion in the first half of the year, grew by 40.41% year-on-year, and the premium income of health insurance in life insurers was USD 56.54 billion, grew by 16.45% year-on-year, far outstripping other types of insurance. Similarly, premium income in South Korea rose slightly by 3.7% year-on-year to USD 42.755 billion in the second quarter, with the premium income of life insurance rose by 3.45%, mainly due to an increase in savings and protection insurance planning, and the bancassurance channel making a major contribution to the year-on-year growth; the premium income of non-life insurance rose by 4%, partly on the basis of the continued inflow of renewal premiums and partly as a result of higher income from motor insurance and miscellaneous premiums. Premium incomes in China Taiwan go up and down, with an overall decline of 6.96 percentage points to USD27.933 billion, with the premium income of life insurance down by 7.58% and the premium income of non-life insurance rose by 4.48%.

On the other hand, the decline in premium income was more severe in both Japan and India. Japan's premium income in the second quarter was USD84.3 billion, a year-on-year contraction of 13.66 percentage points, mainly due to the impact of the decline in the premium income of life insurance, which fell by 17.35% year-on-year, while the premium income of non-life insurance fell by only 1.82%. Some experts pointed out that an ageing population, low birth rates and low interest rates are key factors constraining the growth prospects of Japanese life insurers, and that the reduction in insurance rates in 2019 is also putting pressure on the insurance industry. India's cumulative premium income in the second quarter was USD11.711 billion, fell by 12.83% year-on-year, again mainly due to the sharp decline in life insurance, the premium income of which fell by 18.64% year-on-year, and the premium income of non-life insurance declined to a lesser extent, by 4.24%. Primarily stemming from the fact that sales through the bancassurance and agency channels, which account for more than 90% of new business premiums of Indian insurers, have been severely prejudiced by the blockade, Indian insurers are striving to accelerate online sales to offset the adverse impact of offline distribution channels.

(III) Improved profitability

The net income of South Korean's insurers in the second quarter was around KRW3788.3 billion, with non-life insurers' net income in the first half of the year was KRW1715.6 billion, with an increase of KRW230.6billion year-on-year, or rose by 15.5%, compared to the same period last year. The income side is mainly based on an increase in direct written premiums such as long-term insurance renewals and an increase in auto insurance as the number of registered vehicles increases, while the expenditure side of the business was affected by the COVID-19 pandemic, with lower claims related to auto insurance etc. Life insurance companies made a net profit of KRW2072.7 billion in the first half of 2020, with a decrease of KRW54.9 billion or fell by 2.6% compared to the same period last year, with higher non-recurring income and lower interest income compared to the last year. In the first half of the year, China's insurance industry also made a profit, with the overall net profit of the industry exceeding USD28.249 billion, but emerged the negative growth compared to the same period last year, down by 8.8% year-on-year, of which personal insurance companies made a net profit of nearly USD17.655 billion, a plunge of 21% year-on-year. Property insurers benefited from slower growth in claims expenses and a surge in underwriting profits, making a net profit of USD5.367 billion, down slightly by 5.8% year-on-year. It is worth mentioning that on the asset side, the investment income of the industry in the first half of the year substantially rose by 35.07% year-on-year, with income of over USD 62.147 billion. On the liability side, life insurance companies made early preparations for the transformation, and surrender expenses in the first half of the year were reduced by more than half year-on-year, relieving the cash flow pressure brought about by the industry's massive sales of short and medium duration insurance in the past few years, in addition, property insurers have been affected by the COVID-19 pandemic, with people's travel activities have been significantly reduced and claims expenditure has been significantly reduced.

The prevention and control of the COVID-19 pandemic and economic and social recovery and development remained the main policy theme in the second quarter, with active fiscal and monetary policy continuing to progress steadily, however, localized improvement in the COVID-19 pandemic has led to a resumption of conventional regulatory and exchange rate measures to stabilize financial markets.

I. Monetary policy: conventional and unconventional policies steadily advancing

During this quarter, as the COVID-19 pandemic continued to ferment, central banks in Asian economies continued to be under pressure to adopt conventional monetary policy, regulate the currency market and stabilise the economy; on the other hand, faced with the limitations of conventional monetary policy, central banks in various economies have innovated unconventional monetary instruments to reach out to the real economy with precision.

(I) Conventional monetary policy

Reduce the key interest rate. The Bank of South Korea cut its benchmark interest rate by 25 basis points from 0.75% to 0.5% on 28 May, which is the lowest level of interest rates in its history. India reduced the reverse repo rate by 25 basis points to 3.75% in April and continued to reduce the reverse repo rate to 3.35% in May, while reducing the repo rate by 40 basis points to 4%. The Bank of Thailand cut the policy rate by 25 basis points to 0.5% on 20 May, this policy has led large Thai commercial banks to cut the minimum lending rate (MLR), minimum retail rate (MRR) and minimum overdraft rate (MOR). Bank Negara Malaysia cut the overnight policy rate (OPR) from 2.5% to 2%. The Turkish Central Bank cut its policy rate by 100 basis points in April and 50 basis points in May to 8.25%. The Central Bank of the Philippines cut its benchmark interest rate by 50 basis points to 2.75% and in June cut the overnight reverse repurchase facility rate by another 50 basis points to 2.25%, while the overnight deposit and lending rates were cut to 1.75% and 2.75%, respectively. Indonesia cut its policy rate by 25 basis points to 4.25% in June. The Central Bank of Armenia cut the policy rate by 50 basis points to 4.5% on 17 June. Bangladesh's Central Bank cut the policy rate by 50 basis points to 5.25% in April. The Bank of Mongolia cut the policy rate by 100 basis points to 9%. The Central Bank of Georgia cut the refinancing rate by 50 basis points to 8.5% in April.

Reduce the reserve requirement ratio. on April 3, the People's Bank of China (PBOC) cut the targeted required reserve ratio 1 percentage point for small and medium-sized banks and reduced the interest rate on financial institutions' excess reserves at the central bank from 0.72% to 0.35%. Bangladesh Bank reduced its cash reserve ratio (CRR) by 100 basis points to 4% in April. The Royal Monetary Authority of Bhutan reduced the cash reserve ratio (CRR) by 200 basis points to 7% on 27 April. The Lao People's Bank has reduced the foreign currency reserves requirement from 10% to 8% and reduced the local currency reserves requirement from 5% to 4%. The National Bank of Tajikistan has temporarily reduced its reserve requirements for financial institutions by 200 basis points to 1% and reduced the reserve ratio for foreign currency deposits by 400 points to 5.0%.

Take open market operations. The People's Bank of China conducted the medium-term lending facility (MLF) operation of RMB100 billion on 15 April, and restarted the reverse repurchase operation after a lapse of more than a month, putting in RMB10 billion, RMB120 billion and RMB120 billion on 26, 27 and 28 May, and continued to carry out frequent reverse repurchase operations in June, carrying out reverse repurchase operations of RMB120 billion, RMB120 billion, RMB200 billion, RMB180 billion and RMB100 billion of reverse repurchase operations on 18, 22, 23 and 24 June respectively, and the Bank of Japan decided to purchase the necessary amount of Japanese government bonds on 27 April and lifted the ceiling on the purchase of Japanese government bonds. On 9 April, the Bank of South Korea committed to provide an unlimited supply of short-term liquidity through repurchase agreement operations, and this commitment will continue until June. The Turkish Central Bank increased the size of the open market operations cap on 17 April, raising the ratio of the nominal size of the open market operations portfolio to the total assets of the Turkish Central Bank's analytical balance sheet from a maximum of 5% to 10%.

(II) Unconventional monetary policy

A direct financial asset purchase scheme is in place. The People's Bank of China announced on 1 June that it would use a dedicated refinancing limit of RMB400 billion to purchase 40% of new inclusive small and micro credit loans issued by eligible local corporate banks between 1 March and 31 December 2020 through an innovative monetary instrument, in order to facilitate banks to increase credit lending to small and micro enterprises. The Bank of Japan raised the maximum amount of commercial paper and corporate bonds that can be purchased on 27 April, raising the total maximum amount of commercial paper and corporate bond holdings to JPY20 trillion. On 22 April, The Bank of South Korea created a special purpose vehicle of KRW10 trillion for the purchase of corporate bonds and commercial paper and created KRW 40 trillion fund to help key major industries operated by the South Korea Development Bank to provide support to seven key industries in South Korea, and on 20 May, announced its intention to create a special purpose vehicle (SPV) of KRW10 trillion to purchase subprime debt and bonds with high credit ratings s over a six-month period. Bank of India raised funds for investment-grade bonds, commercial paper and non-convertible bonds of non-banking financial companies (NBFCs) in the Targeted Long-Term Refinancing Operation 2.0 (TLTRO-2.0) in April, with the new investment amounting to about 0.4% of GDP. The Bank of Thailand announced THB400 billion in measures to provide liquidity to the local bond market by designating bond funds to purchase corporate bonds.

Easing of restrictions to accelerate the flow of money. On 27 April, Japan expanded the range of eligible counterparties and broadened the range of collateral for private debt, including household debt, in a bid to ease restrictions on access to currency. In April, India extended the coverage of the Bank Lending Guidelines for Deferred Commercial Real Estate Projects to non-banking finance companies (NBFCs). The Turkish Central Bank announced in April that the limit on government domestic debt securities (GDDS) sold by primary dealers to the central bank was independent of the repo transaction limit, supporting the primary distributorship system and broadening monetary policy transmission.

Take special deposit and loan schemes. The Bank of South Korea launched a special loan scheme of KRW10 trillion in April to provide local banks and stockbrokers with special mortgage loans, the mortgage including AA-rated corporate bonds, and this loan scheme is the first time the Bank of South Korea provided loans to brokerage and insurance companies. On April 1, the Bank of India created the Ways and Means Advances (WMA) to lend to the government to address its potential temporary cash flow shortfalls and raised its limit by 60% in mid-April, raising the central government's WMA limit from INR1.2 trillion to INR2.0 trillion for the remainder of the first half of FY 2020/21. The Saudi Arabian Monetary Authority (SAMA) announced in June that it was injecting SAR50 billion into the banking industry by injecting interest-free deposits into all banks for one year.

II. Exchange rate policy: institutional safeguards and interventions in tandem

Under the impact of the COVID-19 pandemic, the administration of exchange control and central banks of each Asian economy continued to take a series of exchange rate measures to provide liquidity to the market and stabilize exchange rates.

First, putting in foreign currency funds. Hong Kong, China, launched a liquidity facility of USD10 billion in April to access US dollar funds from the FIMA Repo Facility and lend such funds to local banks in the form of repurchase transactions. The Central Bank of Azerbaijan conducted regular and special foreign exchange auctions in April with the participation of the State Oil Fund and met foreign exchange requirements at 1.7AZN/USD. The Central Bank of Georgia entered into foreign exchange swaps with banks and microfinance institutions in mid-April. At the end of June, the Bank of Israel provided additional US dollar liquidity through foreign exchange swaps of up to USD15 billion.

Second, safeguarding the exchange rate mechanism. The HKD triggered the strong-side exchange guarantee of HKD7.75 to USD1 on April 21 under the pegged exchange rate system in Hong Kong, China, and the HKMA took steps to ensure that the exchange rate between the US dollar and the Hong Kong dollar remained stable at a level of no higher than 7.85. The Maldives Monetary Authority (MMA) has increased its foreign exchange interventions and used other available measures to maintain its currency peg with the US dollar.

Third, restricting capital outflows. In April, Sri Lanka suspended investment-related remittances to restrict capital outflows. Turkmenistan has announced that from 15 May, Turkmenistan companies engaged in export operations must transfer 100% of their foreign exchange earnings to the Central Bank's Reserve Stabilization Fund at the official exchange rate, instead of the previous 50%.

III. Fiscal policy: expenditure and revenue continue to gain momentum

In the second quarter of 2020, Asia is still facing a severe test due to the COVID-19 pandemic, with finances are not only under pressure from falling revenues and rising expenditure, but also face a trade-off between short-term emergencies and long-term development. This paper examines the major fiscal policies issued by Asian economies, focusing on the effects of fiscal policy and the sustainability of public debt in each economy.

(I) A two-pronged approach on the revenue side

Some Asian economies have continued to increase tax and fee reductions, issue public bonds and borrow external debt, resulting in higher deficits. China has set up 46 new cross-border e-commerce pilot zones, where cross-border e-commerce retail exports are exempt from VAT and consumption tax. Extension of some expired tax incentives for micro and small enterprises, self-employed businesses and farmers until the end of 2023. In May, the government's work report announced that the deficit had widened to 3.6%, breaking the rule of thumb that the deficit would not break below 3. Japan issued an additional JPY31.9 trillion of public bonds, taking new issuance for the current fiscal year to a record JPY90 trillion, bringing the total market bond issuance for the year to a record JPY212 trillion, including the mature issuance planning of borrowing new loans to repay the old during the year. Turkey raised the ceiling for special-purpose domestic government bond issuance by the Ministry of Finance from 3% to 5% of the 2020 budget forecast revenue. Indonesia reduced taxes on the tourism sector and individuals, and permanently reduced the corporate income tax rate from 25% to 22%, and from 2022 it will be reduced to 20%. The national budget was revised in June and the deficit is expected to reach 6.34% of GDP. Pakistan raised its fiscal deficit target for 2019-2020 from 7.2% to 9.5%, set a fiscal deficit target of 7% for 2020-2021, and received emergency loans from the International Monetary Fund (IMF) and the Asian Infrastructure Investment Bank (AIIB) in April and June respectively. The Philippines' public debt rose to a record USD171.44 billion at the end of April, grew by 1.5% quarter-on-quarter, with 67% of the debt coming from domestic lenders and 33% from abroad.

Some Asian economies have started to focus on national deficits and to raise fiscal revenues by increasing taxes, especially new types of taxes. From 1 April, the Indian government would levy the digital tax at 2% on foreign enterprises that provide digital services in the country, including both Internet enterprises that focus on Internet advertising and e-commerce trading websites. A draft bill requiring foreign digital service providers to pay the value-added tax (VAT) was passed in Thailand on 9 June, requiring non-resident digital services companies or platforms with annual revenues of more than USD5.7 trillion to pay the VAT at 7%. In May, Indonesia announced that from 1 July it would levy the VAT at 10% on digital products sold over the Internet by non-residents who have a significant presence in the Indonesian market, including streaming services, Apps and digital games. In May, Saudi Arabia announced that it would take new fiscal measures to boost non-oil revenues, including an increase in the VAT from 5% to 15% from 1 July and tariffs on a wide range of imports (approximately 3,000 items) since 20 June. In May, representatives of the Philippines House of Representatives submitted the Digital Economy Tax Act, which aims to generate an additional PHP29.1 billion in revenue annually.

(II) No reduction in policy intensity on the expenditure side

In terms of size, the fiscal stimulus in many Asian economies has been strong. Japan launched two emergency economic packages of JPY117.1 trillion in the second quarter, totaling JPY234 trillion (USD2.18 trillion), equivalent to about 40% of Japan's GDP, and ranking among the world's largest fiscal stimulus packages to fight the COVID-19 pandemic. In the second quarter, the South Korea government introduced a second supplementary budget to increase spending by KRW8 trillion and a third supplementary budget for a KRW35.5 trillion package, with the third supplementary budget being a one-off addition of an all-time high, as well as a phased implementation of support measures on the scale of KRW150 trillion, accounting for 7.84% of GDP. Singapore launched three rounds of stimulus measures on 6 April, 21 April and 26 May, totaling SGD41.9 billion, accounting for 8.88% of GDP. Together with the two rounds of stimulus measures introduced in the first quarter, the total stimulus amounted to SGD92.9 billion, accounting for 19.2% of GDP. Thailand passed a stimulus package of THB1.9 trillion on 2 June, accounting for 13.11% of GDP, and a domestic tourism stimulus package of THB22.4 billion on 16 June.

In terms of targeting, SMEs and the unemployed remain the focus of subsidies in most Asian economies. In order to cushion the impact of the COVID-19 pandemic on employment, South Korea has launched a series of support measures, which mainly include maintaining jobs for small businesses and small medium and large-sized enterprises, providing support for the unemployed, helping to create jobs in the public and private sectors, and providing living security for workers and the unemployed. India has focused its policy on providing support to small and medium-sized enterprises (SMEs) and providing relief funds to migrant workers, urban traders, etc. Thailand hopes to mitigate the impact of the COVID-19 pandemic through an economic stimulus package that focuses on economic and social recovery and assistance to small and medium-sized enterprises. Malaysia has expanded wage subsidies, especially for micro, small and medium-sized enterprises (MSMEs). Turkey has extended the short-term work allowance system. Saudi Arabia uses the Unemployment Security Fund to provide wage and benefit support to private companies that retain employees. Cambodia approves new investment projects to create new jobs, reduces electricity prices and revitalizes the economy.

IV. Regulatory policy: divergent trends begin to emerge

In the second quarter, the focus of financial regulation in Asian economies remained on mitigating the impact of the COVID-19 pandemic on their economic and financial systems, but some economies have gradually withdrawn some of their loose measures as the COVID-19 pandemic has eased, with an emphasis on stabilizing financial markets. In the long term, financial market reforms that are tailored to national conditions and benchmarked against international best practice, as well as innovation in the context of financial technology, will remain the way forward.

(I) New initiatives to mitigate the impact of the COVID-19 pandemic

Relaxing regulatory requirements. The China Hong Kong Monetary Authority (HKMA) has cut the banks' existing level of regulatory reserves by half, freeing up more than HKD200 billion of lending space. The Central Bank of India announced a temporary reduction in the liquidity coverage ratio from 100% to 80%, removal of the asset classification requirement during the three-month loan repayment moratorium and directed banks to set the risk weighting of credit lines under the Emergency Line of Credit Guarantee Scheme at zero; the Securities and Exchange Board of India temporarily relaxed the financing rules for listed companies by reducing the average market capitalization of the required public holdings from INR2.5 billion to INR1 billion and reducing the minimum lock-up period for listing from three years to 18 months, and also allowed a relaxation in the minimum subscription ratio for allotments from 90% to 75% of the issue size under certain conditions. The Monetary Authority of Singapore reduced the net stable funding ratio that banks are required to maintain for loans to individuals and enterprises maturing within six months from 50% to 25% until 30 September 2021, and delayed the implementation of the Basel III reforms by one year. Turkey's Capital Markets Board lifted a ban on short selling of the top 30 stocks on the Istanbul Stock Exchange in June. Myanmar allows domestic systemically important banks and non-systemically important banks to reduce their capital protection buffers by 100 basis points and 50 basis points respectively. The National Bank of Tajikistan temporarily exempts from regulatory sanctions for banks that are able to provide adequate loan loss provisions but therefore fail to meet capital adequacy and liquidity ratio requirements. Mongolia eases regulatory requirements for loan classification for banks and financial institutions implementing debt restructuring and new loan provisioning. The Central Bank of Cyprus has extended by 12 months of the time frame for the gradual introduction of capital buffer requirements for some systemically important institutions.

Deferred loan repayments. The HKMA encourages banks to extend the repayment period of trade finance or temporarily convert the trade financing limit into cash overdraft limit for import/export and manufacturing companies that experience liquidity difficulties due to delayed shipments. India extended the deadline for resolution of large default accounts by 90 days in April. In April, Singapore announced that individuals could apply to banks and finance companies for deferred loan installments until the end of the year, convert consumer repayments on unsecured lines of credit such as credit cards into term loans with interest rates capped at 8%, and allow a six-month delay in the payment of life and health care costs from insurance companies, as well as real estate and motor insurance, which can also be applied for in installments and continue to be insured. In April, Brunei extended the benefit of the extension of financing or loan principal to all sectors from affected industries and importers of food and medical supplies, allowing the restructuring or extension of personal loans and hire purchase principal repayments. The Turkish Banking Supervisory Authority has raised the limit on instalment plans for the purchase of airline, travel agency and hotel services by credit card from 12 months to 18 months. Timor-Leste suspends its debt service obligations under the credit agreement, postponing maturity by three months.

Provide policy benefits. China issued the Measures on Supervision and Evaluation of Financial Services for Small and Micro Enterprises by Commercial Banks to improve the availability of loans for small and medium-sized enterprises and reduce financing costs. The China Hong Kong Monetary Authority (HKMA) is actively preparing for the new budget 「Special 100% loan guarantee under the SME Financing Guarantee Scheme」. In April, Japan provided comprehensive financing support for enterprises, with interest-free, unsecured loans available for up to five years. The Securities and Exchange Board of India has reduced broker turnaround and filing fees by 50% for public offerings, allotment issues and share buybacks. The Securities Commission of Malaysia exempted the annual license fee for entities listed on the capital market in April. Brunei exempted the fee for online local inter-bank transfers for six months for all customers. Tajikistan advised banks to exempt penalties for companies and individuals who have difficulty repaying their loans in the period May to October 2020. Timor-Leste reduced the debtor's interest payment obligation to 40% of the original amount, with the Government providing the remaining 60%.

Facilitate financial services. China Hong Kong Monetary Authority recommended that banks shall automatically provide loan extension or deferred loan payment support to eligible SMEs without the need for borrowers to apply, simply by choosing to accept it or not. Japan implemented measures to facilitate the financing of institutions by promoting one-stop procedures for financial institutions, uniformly speeding up various processes, and providing loose conditions for regional banks affected by the COVID-19 pandemic to apply to the government for capital injection. The Singapore Monetary Authority (MAS) partnered with the Association of Banks in Singapore to promote the use of PayNow, PayNow Corporate and SGQR, urging individuals and enterprises to use digital financial services and e-payments, and to minimize visits to premises of financial institutions.

Stabilize financial markets. The South Korea Monetary Authority (KMA) announced that 15 banks and eight bank holding companies began phasing in the Basel III credit risk framework at the end of June. State Bank of India restricts bank dividend payments to save capital. Singapore discourages banks from using capital buffers to buy back shares. In April, the Securities Commission of Malaysia and Bursa Malaysia extended the original moratorium on short selling from 30 April to 30 June. The National Bank of Tajikistan advises credit institutions not to pay dividends or bonuses to shareholders, but to retain these profits in order to increase their capital.

(II) Continuously proceed financial reform and development

Promote the financial market reform and liberalization. China launched a pilot project for public offering of REITs in the infrastructure sector, announced regulations on the management of funds for domestic securities investment by foreign institutional investors, improved the incentive and restraint mechanism for financial services for small and micro enterprises, issued business guidelines to guide the development of the panda bond market, encouraged internal and external opening of the credit rating industry, issued rules for the issuance of shares on the ChiNext board, issued guidelines to promote the reform of the New Third Board, issued clear standards to strengthen administrative penalties for financial violations and many other initiatives to reform the financial market. India promoted governance in commercial banks by consulting the public on a range of initiatives such as empowering the board of directors, strengthening the means of intervention, clarifying the division of responsibilities between the board of directors and management, separating ownership from management, and issuing a regulatory framework for financial infrastructure in financial markets and retail payment systems to enhance regulatory transparency and information disclosure and strengthen the security and stability of the payment system. Singapore has issued three consultation papers on the proposed Environmental Risk Management Guidelines (ERM Guidelines) for banks, insurance companies and asset managers to enhance the resilience of financial institutions in Singapore and the region to environmental risks and to enhance support for the financial sector's transition to an environmentally sustainable economy. Thailand announced that non-bank operators will be allowed to apply for a foreign exchange e-money licence to improve the convenience of doing business and trading foreign exchange. Seven new foreign banks have been licensed to operate in Myanmar, which is the third time Myanmar has granted licenses to foreign banks.

Promote the development and regulation of digital currencies. In May 2020, China opened Closed Beta Testing of its central bank digital currencies in four cities, this is the world's first major central bank to issue digital currencies directly. Amendment to the act on prevention of transfer of criminal, implemented in Japan, requires virtual currency exchanges in Japan to strictly examine a person's identity when opening an account, requires users to submit two types of identity verification (KYC) documents when opening a new account, and requires cryptoassets exchanges operating locally to manage users' assets on the exchange separately from the exchange's own cash flow by seeking the assistance of an independent third party. In April, South Korea announced that it would conduct pilot test on the central bank digital currency and expand its pilot program for a cashless society within the year. The Bank of Thailand is conducting a feasibility study to develop central bank digital currency payments for enterprises based on Project Inthanon, a distributed ledger project initiated by the country's central bank and eight major commercial banks.

V. Financial cooperation: assistance measures strengthening

In the second quarter, international organization and platforms stepped up their assistance to the affected countries and the regional and bilateral cooperation deepened. The IMF used its Catastrophe Containment and Relief Trust to provide debt relief to 25 member countries and approved requests for emergency assistance from 50 of its 189 member countries totaling around USD18 billion. The ADB has provided loans to countries such as Pakistan, Indonesia and Uzbekistan. The AIIB approved the financial assistance needs of countries such as Bangladesh and India, and issued panda bonds to raise funds to help members recover from the crisis. Regional organizations of ASEAN,China, Japan and South Korea, as well as South Asia, urgently developed strategies and launched concrete initiatives to overcome the consequences of the COVID-19 pandemic and give a new impetus to economic recovery. The USA, China, India, Vietnam, Singapore, Malaysia, Turkey and Qatar are also engaged in bilateral trade talks and bilateral financial cooperation.

[1]The Asian representative economies here are Korea, Malaysia, Japan, Saudi Arabia, Thailand, Singapore, India, Indonesia and China.[2]The Asian representative economies here are Pakistan, Korea, Cambodia, Malaysia, Bangladesh, Japan, Sri Lanka, Thailand, Singapore, India, Indonesia, Vietnam, China, Taiwan China and Hong Kong China.[3]The Asian representative economies here are Pakistan, Korea, Cambodia, Malaysia, Bangladesh, Japan, Sri Lanka, Thailand, Singapore, India, Indonesia, Vietnam, China, Taiwan China and Hong Kong China.[4]The Asian representative economies here are South Korea, Malaysia, Japan, Thailand, Singapore, India, China and Hong Kong, China.[5]The Asian representative economies here are Philippines, Korea, Malaysia, Japan, Thailand, Singapore, Indonesia, Vietnam, China and Hong Kong, China.

About AFTT:

AFCA was founded in May 2017. It is the first international financial social organization initiated by China. The think tank (AFTT) under AFCA is composed of more than 100 domestic and foreign experts from 49 countries and regions. Currently, there are 62 domestic experts and 101 foreign experts. With the philosophy of "market location, global perspective, problem orientation, in-depth observation, and smart solution", AFTT has developed AFCA working paper, Asian Financial Observation, Financial Development Report for the Guangdong-Hong Kong-Macao Greater Bay Area, and other bilingual products, conducted Quarterly Seminars, AFTT Annual Forums and other high-level financial activities, sending a strong Asian message constantly on the international stage.