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Financiers led by HSBC chief executive Noel Quinn put on a united front in November when Hong Kong hosted the Global Financial Leaders Summit. Timed to coincide with the resumption of the Hong Kong Sevens rugby tournament after a two-year coronavirus-induced hiatus, the conference was designed to herald a return to business as usual. “We have to help Hong Kong through this next phase of post-pandemic restrictions and continued economic growth to strengthen the confidence of Hong Kong as an international financial centre,” Quinn told the conference. Quinn has more motivation than most to seek a return to normalcy as the bank he runs stands as a symbol for the challenges facing Hong Kong. As an international bank deriving the bulk of its profits from the Asia-Pacific region, its future is under threat from rising Sino-US tensions and the challenges of the pandemic. During Covid, the UK regulator banned HSBC from paying a dividend in return for financial support, a move that angered retail investors and has thrust the bank into a fight with its biggest shareholder, Ping An Insurance, which is calling for a break-up. HSBC has rebuffed the calls, arguing that its strength lies in acting as a crucial bridge between East and West. It’s hard not to draw a parallel between HSBC’s travails and Hong Kong’s shifting status from being an international financial centre to one more dependent on China than ever before. “Since 2015, Hong Kong’s capital markets activity has become highly concentrated around mainland China,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis in Hong Kong. “Hong Kong used to be a real global offshore centre. You would have foreign companies listing or using US dollar bonds. All of that business disappeared because onshore [Chinese] companies needed Hong Kong to expand overseas. So because of that concentration, it’s hard for Hong Kong to maintain a balanced profile as a global offshore centre.” Benjamin Quinlan, CEO and managing partner of Hong Kong-based consulting firm Quinlan Associates, takes a similar view. “Hong Kong has run a dual narrative for a long time. Partly it’s an international financial centre and partly it’s part of the Greater Bay Area [the cities of the Pearl River delta]. It’s a difficult approach to straddle both and the two often don’t coalesce with each other,” he said.Price to pay Putting so many of its eggs in the China basket paid off for much of that period, but there was a price to pay once the pandemic began, with both China and Hong Kong putting in place severe restrictions, both in terms of people’s daily activities and their ability to travel. Deal volumes were also affected by China’s property crisis, its dispute with the US (and the move to delist companies from US exchanges) and its efforts to get what some saw as over-mighty tech companies to toe the line. Take Hong Kong’s equity capital market, where Chinese companies dominate issuance. Hong Kong IPO volumes shrank 70% in 2022, even as mainland equity offerings remained healthy. One result of that collapse in deal volumes linked to mainland China is that banks moved to diversify their revenue streams, building out businesses across the smaller and more fragmented markets of South-East Asia, using Singapore as a hub. That dynamic was accentuated by a security crackdown in Hong Kong at the behest of Chinese authorities in the aftermath of widespread protests in 2019 that resulted in China’s National Security Law being introduced in Hong Kong the following year. As a result, over the last couple of years, rather than Hong Kong being a magnet for banking talent, it became a place to avoid as tough Covid restrictions and (to some extent) disillusionment with the political situation prompted senior expatriate bankers to return home, retire or relocate to Singapore and Dubai where they wer

In anticipation of its centenary, the government of Indonesia in 2019 unveiled “The Vision of Indonesia 2045” which set goals to become an advanced, prosperous and fair country by that date, along the lines laid out in the United Nations’ Sustainable Development Goals. While the aim of becoming a fully developed nation by 2045 might look to cynics as an example of time-washing, the vision exemplifies the grand legacy ambitions long harboured by President Joko Widodo. The president, known by his nickname of Jokowi, has been in office for over eight years and his term is scheduled to end in August 2024. Infrastructure has been key to his ambitions, together with enhancing regulatory oversight, fiscal prudence and industrial transformation. The latter comes with an increased focus on ESG inputs: appropriate given Indonesia’s status as one of the world’s biggest greenhouse gas emitters. Indonesia made a symbolic statement of intent in the ESG stakes in 2018 when it brought Asia’s first sovereign green bond via a US$1.25bn five-year sukuk. That coincided with the announcement by Jokowi of a pledge to cut emissions 29% by 2030 and for renewable energy to account for 25% of Indonesia’s energy mix by 2025 along with a reduction in the use of dirty coal for energy generation. That focus on decarbonisation has continued, with Indonesia signing a deal during the G20 summit in Bali in November 2022 to decommission several coal-fired power plants early under the Asian Development Bank’s energy transition mechanism. The recent establishment of the green industrial area in Bulangan, North Kalimantan, as well as the plan to relocate Indonesia’s capital from Jakarta to Nusantara – a plan that makes sense given that the current capital is fast sinking because of depleted groundwater and rising sea levels – to be built according to environmentally friendly, sustainable criteria illustrate Jokowi’s alignment with the ESG zeitgeist. “Jokowi’s administration has given some level of confidence to international stakeholders on Indonesia’s capability to maintain macroeconomic stability and economic prospects in the medium term in the midst of challenging geopolitical dynamics and the global economic slowdown,” said Billy Anugerah, head of South-East Asia investments at SC Lowy in Singapore. Still, questions remain about the reality on the ground, and Indonesia’s ability to transform from a high-risk credit proposition mired in byzantine legal process and vested interests to a model of low-risk transparency anchored in international best practice and fully aligned with sustainability objectives. One thing Jokowi will be hoping to avoid is a full-scale banking crisis during the last days on his watch which would shine a light on the failure to amend Indonesia’s arcane bankruptcy laws, unchanged as they are from the days of the Asian financial crisis of the late 1990s. It is relatively easy for a creditor to initiate bankruptcy proceedings against a debtor under Indonesia’s PKPU court-supervised process. There is no minimum debt amount nor a restriction on the number of times a creditor can file. At the same time, local courts do not recognise foreign court judgments related to default, making offshore debt restructurings arduous. Jokowi has long pledged to reduce red tape and streamline the legal process – the bankruptcy laws would be a good place to start if he is thinking about his legacy.Distressed loans The portents are cause for concern: Indonesian banks are saddled with around US$44bn of distressed loans, according to the Financial Services Authority (Otoritas Jasa Keuangan, or OJK), many made during the height of the Covid-19 pandemic. Banks are rushing to get them off the books before a government forbearance programme expires in March 2024, having been extended for another year for certain sectors. “Rising interest rates

Japan made waves in the green finance world with its announcement in May 2022 that it would issue ¥20trn (US$157bn) of bond instruments to finance its transition efforts. There was just a little hiccup with the yet-to-be-ratified grand plan: the financing instrument of choice is transition bonds. This is a vaguely defined category of fixed-income instruments to help, as the name implies, companies move to renewable energy sources. This softly-softly approach is perhaps not surprising, given that coal and natural gas still make up 68% of electricity generation in Japan, making the country one of the largest global economies still so heavily reliant on fossil fuels. But the approach has led to criticism. Among those questioning Japan’s plan is the Asia Investor Group on Climate Change, which represents US$39trn in assets under management from investors across 11 Asian markets, with over 65 investor members. Anjali Viswamohanan, director for policy at AIGCC, said that Japan – and several other countries in Asia – are attempting to align sustainable finance frameworks with their national priorities rather than with recommended mitigation pathways to achieve the 1.5-degree target as recommended by credible bodies such as the Intergovernmental Panel on Climate Change. “It is important that they aim to be credible structures that are aligned with international benchmarks to help ease investors’ decision-making process relating to climate investments,” Viswamohanan said. ESG financing specialists worry that focusing on transition bonds will simply allow Japan too much wiggle room and that a genuine transition will be too slow. There is, though, some pushback on the view that Japan is not taking green finance seriously. “Japan does not focus only on transition finance instead of green finance,” said Sachie Ii, sustainability chief strategist at Mizuho. “Japan continues to emphasise green finance. On the other hand, high-emission companies often have low green assets. But that doesn’t mean that they’re not doing carbon-reduction activity. They’re actually doing it in a painstaking way. And while the target project’s [for transition finance deals] current emissions might be high in the transition period, after that the amount of reduction in the CO2 emission will be much higher.” Japan certainly has some geopolitical cover for its stance. The November 2022 G20 meeting recognised “the need to take actions to enable transition finance to support orderly, just and affordable transitions towards a low-greenhouse gas emissions and climate-resilient economy,” according to a G20 joint statement.Cornered market With ¥150trn of combined private and public investment needed for Japan to become a carbon-neutral society, the government has doubled down on its strategy, planning to issue sovereign yen bonds as transition instruments rather than the more widely recognised format of green bonds. The transition bond label has faced resistance elsewhere, and some deals already priced have raised concern because they financed gas projects instead of renewables. Sustainable Fitch argued in a November 2022 report that the transition finance label is problematic due to the confusion around its applications. Nneka Chike-Obi, head of Asia-Pacific ESG research at Sustainable Fitch, said in the report that, in the agency’s own research, the term “transition” refers to activities that reduce greenhouse gas emissions, particularly from hard-to-abate sectors, in alignment with the goals of the Paris Agreement. Others, like the International Capital Market Association, have rejected the standalone use of the term, urging issuers to align with either a use-of-proceeds angle under the categories of green, social or sustainability bonds, or to issue sustainability-linked bonds tied to transition targets. However they are defined, Japan has been the

To see the digital version of this report, please click here To purchase printed copies or a PDF, please email shahid.hamid@lseg.com

To see the digital version of this report, please click here To purchase printed copies or a PDF, please email shahid.hamid@lseg.com