Mid-year policy outlook: Asia

Political outlook

• The approval rating of Japanese Prime Minister Fumio Kishida has shot up 9%, and his image as a global leader has also been enhanced since the G7 summit began on May 19. However, the recent dismissal of his executive policy secretary (who is also his eldest son) over the secretary’s use of the prime minister’s private residence for a private party suggested intermingling public and private interests, sparked public outrage, and eroded support for the Japanese leader. The likelihood of riding on his improved approval rating after the G7 summit and holding a quick election to cement his support has dimmed.
• The approval rating of President Yoon Suk Yeol of South Korea has also been sliding recently due to his hard-pushed labour reform and eradication of labour union corruption, as well as dropping demands that the Japanese government compensates Korean forced labour victims during the Japanese colonial period. Although his critics accused him of being soft on Korea’s historical enemy, the reconciliation with Japan could allow South Korea to foster a closer relationship with like-minded allies in the region and position South Korea as a pivotal player in maintaining the international order, and not just a small regional power concerned only with affairs on the Korean Peninsula.
  
• Thailand’s reformist opposition, the Move Forward Party (MFP), has secured a landslide victory in the May general election after voters outright rejected the military-backed parties that ruled Thailand for nearly a decade. Although the MFP may face opposition persuading the new parliament to endorse its leadership, voters have clearly sided with reform. Whichever major party leads the next government, military rule is most likely over, and the election result affirms a desire among voters to strengthen democratic institutions and impose more accountability on the military. More assertive foreign policy may be pursued by the next government, and a reassessment of Thailand’s relations with autocratic regimes will likely follow.
  

Fiscal outlook

• With the advent of new Bank of Japan Governor Kazuo Ueda, the market expects the removal of Japan’s negative interest rate policy and normalization of Japan’s monetary policy to follow, even though these plans have likely been delayed due to the fallout of the Silicon Valley Bank (SVB) failure and the ensuant market volatility.
• China’s GDP grew by 4.5% in Q1 2023 on the back of an economic rebound after ending its zero COVID-19 policy. However, the job market remains fragile, with youth unemployment at a record high of 20.4%. Consumer prices barely grew whilst borrowing by households and companies also slumped in April. The official Purchasing Managers’ Index also fell to 48.8 in May. Against this backdrop of weak economic data, further fiscal stimulus or monetary policy easing from the People’s Bank of China could be in store.
  

Geopolitical outlook

• There have recently been some positive signs for increased US-China engagement, including the meeting between China’s Foreign Minister Qin Gang and US Ambassador Nicholas Burns, and the meeting between China’s Minister of Commerce Wang Wentao with US Secretary of Commerce Gina Raimondo and US Trade Representative Katherine Tai. The focal point of these engagements is trade.
  
• Although Beijing declined Washington’s proposal for US Defense Secretary Lloyd Austin to have an official meeting with his Chinese counterpart Li Shangfu, the two spoke briefly on June 2 during the Shangri-La Dialogue in Singapore.
  
• These senior official contacts can hardly be said to be sustained rapprochement between the two countries, but they hopefully are the first steps to keeping an open dialogue.
  
• Taiwan remains the key hurdle in the normalisation of relations between China and the US. The recent inking of a trade agreement between Washington and Taipei has added another damper to the already vulnerable US-China relations.
  
• It is expected that tension in the Taiwan Straits will likely continue to rise as Taiwan gets ready for the January 2024 presidential election.
  

Policy and regulatory outlook

Banking reform

• The key jurisdictions in Asia Pacific managed to survive largely unscathed from the banking crisis triggered by the collapse of SVB. Banking and financial regulators in the region (including Australia, Japan, and Singapore) rushed to issue statements to the press confirming that their respective banking systems remained resilient and had minimal exposures to the failed banks in the US and to Credit Suisse and that their banks remained well-capitalized with healthy liquidity positions.
  
• Since the banking system in Asia remains largely resilient and was minimally impacted by the fallout of SVB and other regional banks in the US, banking regulators in the APAC region have not rushed in to propose banking reforms.
  
• Likewise, Chinese financial regulators’ response to the US banking crisis was largely muted. Although no immediate impact of the SVB fallout was felt in the Chinese banking system, the matter served as a warning shot to Chinese financial regulators to further reduce financial risks and to prioritize risk prevention and control.
  
• Li Yunze, a career banker who has been working for decades at China’s state-owned banks, was appointed as the chief of the newly established National Financial Regulatory Administration, which replaces the China Banking and Insurance Regulatory Commission and brings supervision of the industry, excluding the securities sector, into a body directly under the State Council. The appointment of Li sends a clear signal that China will steadily push forward to improve the efficiency and quality of the financial sector in serving the real economy and to safeguard China’s financial security to deal with potential financial risks amid a volatile external environment.  
  

Energy policy

Chinese water supply authorities recently warned that the country is expected to face more frequent extreme weather events, including droughts, this year. Extreme climate events such as heavy rainfall and heat waves could hit the country in the summer. Operating with extreme weather in mind, power producers in China are expected to increase the use of high polluting and cheap coal. The recent weak economic data may also spur an increase in coal use, given local authorities are incentivized to keep power costs as low as possible for businesses and industries to expand.

Russia’s invasion of Ukraine has pushed Japan to reevaluate its energy strategy, as a sharp rise in the price of LNG has renewed Tokyo’s commitment to phasing out Russian coal and oil imports. In February, Japan’s Cabinet formally adopted a policy to allow the operation of nuclear reactors beyond their current 60-year limit alongside the building of new units to replace aging ones. This represents a major shift in the energy policy of Japan which was scarred by the Fukushima nuclear reactor meltdown and was once an ardent advocate for phasing out nuclear power.

ESG

Hong Kong, Singapore, and Japan have each introduced mandatory requirements for financial services firms to disclose and manage climate-related risks in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework; however, the Singapore rules go further and also include broader environmental risks. Australia recently announced its intention to introduce mandatory climate risk reporting in line with the TCFD.

A number of jurisdictions, including Singapore and Taiwan, have introduced rules regarding standards and disclosure for ESG products. Meanwhile, Japan has also proposed requiring ESG investment trusts to provide a clear narrative description of their investment strategy and the manner in which their ESG investment trust status is reflected in their investment portfolio, or they can no longer carry “ESG” in their product name. While the requirements are largely principles-based and therefore avoid the prescription of the EU regime, many of these frameworks are notable in that they explicitly call out exclusionary ESG strategies as not being sufficient to be designated as ESG products.

China has had a green bond catalogue for some time, and the People’s Bank of China’s latest issuance of the Green Bond Endorsed Projects Catalogue in 2022 was a renewed effort to bring standards of domestic green bond issuances closer to international practices. We have also been seeing other jurisdictions in Asia Pacific starting to explore the idea of green taxonomies, including Singapore, an ASEAN project, and Australia, albeit most of these initiatives are currently voluntary both for companies and for market participants.