Mid-year policy outlook: Asia

Political outlook

• Despite talk of opposition from retired party elders against his campaign to clamp down capitalist forces, President Xi Jinping looks likely to be re-elected for a third term at the upcoming National Congress of the Chinese Communist Party (CCP), which will be held in November 2022. Premier Li Keqiang and a couple other prominent Politburo Standing Committee members are expected to retire, but it remains unclear who will be promoted to replace them.
• We expect China’s dynamic zero-COVID policy to remain for a while, as the war on COVID was fought under Xi’s personal leadership and he was most recently still very complimentary of China’s anti-pandemic policy, and proclaimed that China's COVID response policy has provided useful experience for the world to fight against the virus. Whether China is able to prioritise economic goals over political goals remains to be seen.

Fiscal outlook

• China’s dynamic “zero-COVID” policy translates into mass testing, strict lockdowns, and sporadic mobility disruptions, which resulted in supply chain disruption and dwindling private investment. Whilst the impact of the same policy in 2021 was largely contained, the impact on business activities and consumer spending is much more pronounced in 2022 because of the spread of the omicron variant.
• Mass testing and lockdowns have taken a toll on many Chinese local governments’ finances. Their resource base has already shrunk given they could no longer prop up their balance sheet with land sales and they will struggle to get approval to raise taxes as such moves could destabilise the society. We expect China to increase its central government spending in infrastructure to jumpstart its economic recovery. It will also spend more on maintenance of economic and social stability.
• Renminbi has depreciated in light of China’s less-flattering economic growth prospect this year. People’s Bank of China (PBOC) is already taking steps to slow down renminbi depreciation, including cutting the foreign exchange reserve requirement ratio by 100 basis points (bps) to 8% beginning May 15, 2022. PBOC has also just reduced the reserve requirement ratio for all banks by 25 bps, and we expect this trend of providing more long-term liquidity to the market to continue in gradual phases.
• According to the latest policy announcement in mid-April, PBOC is set to increase direct credit support for small- to medium-sized enterprises and agricultural sectors, and banks are encouraged to lend to property developers, home buyers and private businesses. What concrete steps would be taken to further these goals remain to be seen, but it at least marks a key change from recent years’ focus on prioritising state-owned enterprises over private businesses.

Regulatory outlook

• A slew of environmental-related policies and regulations promoting enhanced environmental disclosures were issued in China last year and earlier this year. However, China’s efforts in promoting environmental protection and peaking carbon emission by 2030 may be more sluggish for the rest of this year, as the Chinese government prioritises rebuilding its economy by investing more in infrastructure and promoting industrial development.
• The market widely believes that to accelerate economic recovery, Beijing will be easing measures which served to clamp down the growth of Big Tech companies. However, until detailed formal policies are implemented, these companies’ future may remain uncertain, as Xi was quoted to have re-emphasised the importance of strengthening antimonopoly efforts against platforms and prevention of a disorderly expansion of capital at a Politburo meeting on April 29.
• China is introducing revised money market fund rules and a draft financial stability law with a view to curbing systemic financial risks. Financial regulators are also issuing detailed policy statements encouraging long-term fund investment (including investment by foreign institutions).
• Elsewhere in Asia-Pacific, regulators will continue to promote the disclosure of environmental risks and how environmental considerations are integrated into the investment process as the risk of greenwashing¹ increases.
• Many jurisdictions in Asia-Pacific are looking at regulating crypto, and some, such as Hong Kong, Singapore and South Korea, have already implemented some form of regulations via imposing licensing and other requirements on virtual asset service providers, which helps to ensure crypto grows in its region in an orderly fashion. We expect more jurisdictions will follow suit.  

Geopolitical outlook

• China’s claims over geological features in South China Seas and its recent conclusion of a security agreement with the Solomon Islands have further alarmed countries in the Pacific Rim and caused countries like Australia to further align with the US. Tension between China and its neighbouring countries is set to continue to rise.
• China finds itself in an awkward position given that its vague stance on Russia in the Ukraine conflict was widely interpreted as its implicit support for Russia. The West’s overwhelming support for Ukraine and extensive sanctions imposed on Russia have also made China rethink its potential military action against Taiwan. The US and other like-minded countries may also be more willing to offer support and protection for Taiwan going forward as a result.
• With its concern over potential sanctions imposed by the West, coupled with inflationary import food prices and anticipated food shortage caused by the Ukraine conflict, China is getting itself prepared for reducing reliance on food imports, and there is going to be a renewed focus on agriculture and creation of more arable land.
• Another key development in Asia-Pacific resulting from the Ukraine conflict is Japan’s renewed focus on its defence policy. Japan is acutely aware of China’s claim over Taiwan and is also concerned that the Russia-Ukraine situation may shift the US government’s attention and resources away from the Indo-Pacific region. The Japanese government is preparing the formal review of its National Security Strategy this year, and the review result could have a major impact on future geopolitics in the Asia-Pacific region.