Category Banking & Finance

China’s central bank injects cash into market

China’s central bank on Friday continued to pump money into the interbank market via reverse repos to ensure stable liquidity.

The People’s Bank of China (PBOC) conducted 100 billion yuan (nearly 15 billion U.S. dollars) of seven-day reverse repos with an interest rate of 2.45 percent, and 40 billion yuan of 14-day reverse repos with an interest rate of 2.6 percent.

Offset by 100 billion yuan of maturing operations, the move resulted in a net injection of 40 billion yuan.

In Friday’s interbank market, the overnight Shanghai Interbank Offered Rate, which measures the cost at which banks lend to one another, rose 2.92 basis points to 2.8152 percent.

There was a total of 280 billion yuan of net cash injections for financial institutions from Monday to Friday, down from 510 billion yuan a week ago.

The PBOC has increasingly relied on open-market operations for liquidity, rather than cuts in interest rates or reserve requirement ratios, to maintain a stable money market.

China set the tone of its monetary policy in 2017 as prudent and neutral, keeping an appropriate liquidity level but avoiding excessive injections.

China’s finance industry embraces change

Bank of China chairman Tian Guoli speaks at the Bank of China – Bloomberg Global M&A Summit on Tuesday.

Mergers and acquisitions have accelerated the transformation of China’s financial industry, according to leaders in the field.

Vice chairman and president of China Investment Corporation, Tu Guangshao told the Bank of China – Bloomberg Global M&A Summit on Tuesday that the sector was changing.

“The expansion from trade finance to acquisition finance will provide a strategic opportunity for development of the Chinese financial sector,” Tu said.

“Acquisition finance requires financial institutions to adjust the content of services they provide, improve their product systems, increase the effectiveness of their organizational structures and put risk management well in place,” he continued.

Zhu Min, former deputy managing director of the International Monetary Fund, said M&A is a crucial engine for post-crisis economic growth.

He said it will lead the global economy out of the gloom through supply-side restructuring.

In the first half of 2016, the volume of cross-border mergers and acquisitions led by Chinese buyers reached $149.2 billion, exceeding the total volume in 2015. The amount accounted for 23 percent of the total volume of global cross-border M&A, up from 6 percent in the same period last year, according to Tian Guoli, chairman of Bank of China.

“As the cross-border M&A by Chinese companies has entered a new stage, it is pushing forward the transformation and upgrading of China’s financial sector,” he said.

Bank of China has established an investment and loan linkage mechanism via diversified platforms and has 600 branches in 47 countries and regions.

“During the process of promoting industrial upgrade through cross-border M&A, Chinese companies should also pay close attention to potential risks to avoid shortsighted, irrational acquisitions that are seeking instant benefits,” Tian said.

Certain M&A projects were overpriced and had problems with post-acquisition integration of businesses, he added.

Anbang raises bank stake

Anbang Insurance Group Co raised its stake in China Minsheng Banking Corp Ltd to 19.28 percent last week, according to a disclosure published on Monday by the Hong Kong Stock Exchange.

For Anbang, which is spending more on real estate and financial services investments, it was the ninth share increase in the country’s biggest private lender over the last three months.

China Minsheng shares gained 1 percent in Shanghai trading to close at 10.49 yuan ($1.75). The stock has gained about 70 percent over the last three months.

In December 2014, the Beijing-based insurer raised its stake in Chinese property firm Financial Street Holdings Co to 20 percent, while increasing its shareholding in China Merchants Bank Co Ltd to 10 percent.

ZTE banks on patents to expand

ZTE Corp, a leading Chinese telecom equipment and smartphone manufacturer, aims to increase its presence in international markets and establish itself as a multinational firm through boosting the number of its patents.

“We’ve made the development of intellectual property rights our company’s core strategy, especially when expanding to overseas markets,” said Guo Xiaoming, vice-president of the company, which is based in Shenzhen, Guangdong province.

Guo said that if a company doesn’t have a solid foundation in intellectual property rights, it will be very difficult to establish itself in overseas markets, especially in matured markets such as the United States and Europe.

“We’ve been putting the development of intellectual property rights on top of our company’s agenda. We’ve also been investing heavily in research and development,” he told a media briefing on Monday.

Guo said ZTE invests about 10 percent of its annual sales on research and development every year. It has injected more than 40 billion yuan ($6.42 billion) on R&D over the past five years.

According to a report from the World Intellectual Property Organization in March, ZTE filed 2,309 Patent and Cooperation Treaty applications in 2013, becoming the world’s second largest patent filer.

Panasonic Corp of Japan – with 2,881 published applications — was the top applicant last year. ZTE was the top applicant in 2011 and 2012, while Panasonic headed the applicants’ list in 2009 and 2010.

Rather than the quantity of patents, Guo said ZTE eyes their quality.

“The cost of filing a patent in Western countries is quite high — usually 50,000 to 80,000 yuan for each application. We only file those inventions that have the biggest potential in monetization,” he said.

BEA and DBS open FTZ outlets

Bank of East Asia and DBS Bank were the first among overseas lenders that officially opened their sub-branches in the Shanghai free trade zone yesterday, as they were attracted by potential opportunities in China’s latest financial reform test bed.

In addition, at least six foreign banks have received the nod from the China Banking Regulatory Commission to prepare for a new outlet in the FTZ. They include Citi, HSBC, Hang Seng Bank, Deutsche Bank, United Overseas Bank and ANZ. The FTZ will allow overseas banks to introduce new services and expand more rapidly in the country, said Geoffrey Choi, assurance leader of financial services at Ernst & Young for China.

China Life-AMP JV takes shape

Australian fund house AMP Capital could be selling its range of equity, fixed income and multi-asset mutual funds to Chinese investors by February through its new joint-venture with China’s largest insurance company.

AMP will have a 15% stake in the Bejing-based JV, China Life AMP Management, with China Life controllling the remainder. Pending approval from the China Securities Regulatory Commission (CSRC), the JV will begin operations within the next six months, says Anthony Fasso, international CEO and head of global clients for AMP Capital, which oversees A$131 billion ($117.9 billion) in AUM.

Eventually, China Life AMP may consider multiple avenues to invest in the mainland, such as through the qualified foreign institutional investor (QFII) programme, although there are no firm plans at the moment, Fasso tells AsianInvestor.

The firms are focused on receiving authorisation from the CSRC to begin operations in Beijing, he adds.

At the moment, foreign financial institutions can only acquire up to 49% of a JV on the mainland. However, under proposed regulations by the Closer Economic Partnership Arrangement, foreign firms could own over 50% of a JV, allowing them to take a controlling stake.

If passed, this could have a significant impact for firms such as AMP. The firm declined to elaborate on potentially increasing stakes in the future.

“It’s been talked about for some time across many industries but I haven’t seen an update on it,” says Fasso. “We’re happy with the stake we have with the right partner.”

This JV marks the first time a foreign fund house will have partnered a Chinese insurance firm, and follows a new law coming into effect in June allowing mainland insurers to run and sell mutual funds.

Meanwhile, it offer AMP Capital a different means of distribution from the typical channels offered by Chinese banks.

Foreign fund houses seeking to set up an office on the mainland previously partnered with Chinese banks, securities firms or trust companies. The funds are dispensed through the banks’ platforms, which are becoming increasingly crowded.

The big four – Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China and China Construction Bank – account for 70% of fund sales on the mainland.

Insurers, which have large sales forces with both retail and institutional investors, long-term relationships with their clients and extensive data, are an appealing alternative.

“Our mutual funds are primarily aimed at retail investors, so historically they’ve been sold via bank channels,” Fasso says, adding that China Life, with one of the largest distribution platforms in the world, will “open up a broader geographic footprint” for AMP Capital.

“[Chinese insurers] have never sold mutual funds before, so it’s going to take time [before it takes off],” he notes. “But this is a very exciting platform to be involved in.

“Chinese investors are still becoming used to investing in mutual funds. There’s still low penetration. But as they become more sophisticated, they are looking for more choice, particularly around fixed income, equities and multi-asset funds,” Fasso says.

AMP and China Life executives are now working on staffing up the firm’s office in Beijing with executives in sales and marketing, client services, registry and record-keeping, compliance, risk management, finance, operations and regulatory issues.

Once the office is set up with staff later this year, CSRC will do an inspection and then award full authorisation.

Boost for private capital in banking industry

Rules remove capital adequacy ratio requirements, limits of equity investment for financial institutions
The Chinese government is loosening its reins on private capital’s entry into the banking industry to encourage more lending to small businesses, according to a draft of new rules released by the China Banking Regulatory Commission.
In a statement dated Aug 9, the commission said it has revised rules regarding administrative licenses for Chinese lenders and is seeking feedback from the public until Sept 9.

According to the rules, it has removed the capital adequacy ratio requirements and upper limits of equity investment for domestic financial institutions that will initiate the establishment of a commercial bank.

Instead, it added a requirement that the initiator must possess a good social reputation, have no record of illegal behavior and have no big issues regarding improper internal management.

Zhou Dewen, the chairman of the Wenzhou Small and Medium-sized Enterprises Development Association, said the new rules will further open the door for private capital to enter the financial field because it lowers the threshold for private companies.

He said a large proportion of private capital is in the hands of individuals instead of with an organization that has registered at an administration for industry and commerce, therefore the removal of the previous requirements would facilitate such capital to enter the banking business.

“We noticed the new rules have also added some restrictions, such as private players only using their own capital to hold banking shares, instead of purchasing shares on behalf of others. This is necessary for containing the risks of private banks,” Zhou said.

The new rules also loosened the requirements for banks wanting to set up branches in China and overseas by removing the standards for banks’ allocated capital for their branch operations during the application.

Lower thresholds to establish a bank in China would encourage some large financial institutions to extend their footprint in small, medium-sized and regional banking services and thus promote financial support for small businesses, said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

He said the commission has also increased the capital adequacy requirements for banks’ overseas institutions, to prevent overseas risks from spreading to domestic sectors.

On Monday, the State Council, China’s cabinet, vowed to improve financial support to small businesses, in a statement released on its website, while the economy continues to falter and the government is curbing over-rapid credit expansion.
The development of small financial institutions will be further encouraged to improve financial services to small businesses – and the threshold at which small companies can raise funds directly on the capital markets will be lowered, it said.

“We would encourage large and medium-sized banks to develop special institutions and outlets for lending to small businesses at a faster pace and improve the scale and standardization of such lending,” said the State Council.

The commission figures show that only 45 percent of the total shares of joint-stock commercial banks were in private hands at the end of 2012.

China is stepping up its efforts to get private enterprises into more businesses, said Standard & Poor’s Ratings Services in a report published on Monday.

“For the third time since the Asian financial crisis, the country is in the midst of another major push to get private enterprises into more businesses,” said Standard & Poor’s credit analyst KimEng Tan. “If the reformers prove to be third-time lucky then strong economic growth could continue to be a key sovereign-rating support for the foreseeable future.”

Q&A on China’s Monetary Policy and Financial Reform

The People’s Bank of China (PBOC) announced on March 16 that it had re-appointed Zhou Xiaochuan as the chief of China’s central bank, making Zhou the longest-serving central bank chief since the establishment of the People’s Republic of China. The re-appointment of Zhou, who has held the position since 2002, signals the country’s bid to ensure policy continuity amid current global uncertainties, while deepening the country’s on-going financial reform.

Before the reassignment, Zhou and three other deputy governors of the PBOC attended a press conference regarding China’s monetary policy and financial reform on March 13. Selected questions and answers from the press conference can be found below.

Q: What kind of monetary policy will China’s central bank adopt?

A: China’s monetary policy mainly seeks to accomplish the following four objectives:

* Keeping low inflation
* Facilitating economic growth
* Encouraging employment
* Balancing international payments
* Where the four objectives are unable to be accomplished simultaneously, the central bank needs to adopt a monetary policy that can draw a balance among the four purposes.

In the Government Work Report presented by Premier Wen Jiabao, he suggests the country set its 2013 GDP growth at 7.5 percent, and the target for inflation (as measured by the CPI) at 3.5 percent. Meanwhile, the broad money supply (M2), which covers cash in circulation and all deposits, is suggested to grow by 13 percent.

The proposed growth of M2 is lower than that of last year, indicating that the monetary policy will stay prudent and neutral, and meanwhile, the government will put more emphasis on keeping consumer prices stable.

Q: Will China’s M2 growth present an inflation risk?

A: Countries with high savings rates and a heavy reliance on indirect financing usually have high M2 growth, which is the case with China. However, the high M2 to GDP ratio will not necessarily create an inflation threat. Japan, for instance, has an even higher ratio than China, yet still suffers from deflation rather than inflation.

For the central bank, stabilizing consumer prices is its first priority, the M2 figures will not necessarily put consumer price stability in jeopardy. If the growth of M2 can be controlled at a reasonable level, it won’t lead to sudden price hikes.

Q: Will the central bank support Taiwan to become an offshore RMB market?

A: The People’s Bank of China and the currency administration institution of Taiwan signed the Cross-Straits Cooperation Memorandum in Currency Settlement on August 31 last year. According to the Memorandum, financial institutions on both sides could undertake currency settlement through a correspondent bank or a clearing bank. The two sides may also discuss a currency swap agreement if cross-Strait trade demands a higher level of financial cooperation.

However, whether Taiwan will become an offshore RMB center needs to be decided by the market. Some important financial centers might become offshore RMB trading markets in the future as a result of market demands and competition.

Q: Will the central government provide a better environment for the opening of capital accounts? Are there going to be any adjustments on the opening schedule?

A: The Global Financial Crisis has created a special opportunity for the rapid growth of the cross-border usage of RMB in trade and investment, which is mainly due to a confidence crisis with the world’s major currencies, and closer regional cooperation between China and other economic entities.

With the development of cross-border usage of RMB, there will be greater demand for the exchangeability of RMB under capital accounts. However, making the RMB convertible under capital accounts is quite complicated. China has been pursuing the free exchange of RMB since 1993. Currently, the RMB has become convertible under current accounts, and its convertibility under capital accounts will be promoted step by step.

It is also important to notice that the convertibility of RMB under capital accounts will not only help promote RMB internationalization, but will also boost the development of an open-market economy in the country and strengthen confidence of domestic and foreign investors in the Chinese currency.

Morgan Stanley to cut jobs, may signal more pain ahead

Morgan Stanley plans to slash 1,600 jobs in what may be just the beginning of a new round of layoffs at large investment banks, this time driven by a deeper reassessment of Wall Street businesses in the face of new regulations and capital standards.

Morgan Stanley, the sixth-largest US bank by assets, plans to begin letting go of the employees, many of whom work in its securities unit, starting this week, two people familiar with the matter said.

A third person who has been involved with plans to cut staff at Morgan Stanley and other large banks said that Morgan Stanley’s cuts had been in the works for months, and that more are expected in the future.

Large global investment banks have been cutting staff for the better part of five years, when the financial crisis pegged to the US housing market began to seize up markets.

Firms previously focused their job cuts on areas where activity had screeched to a halt, such as securitization of mortgages, or that were explicitly banned by new regulations, such as proprietary trading.

But banks are now making strategic decisions about businesses in grey areas where management teams do not see major profit potential, or realize that their individual banks are not competitive, the third source said.

“It’s hard to look at yourself in the mirror, and say: ’I’m not good at this,’” said the source. But now that management teams are coming to those realizations, he said, they are beginning to make strategic decisions to exit businesses and cut more staff.

So far, the most prominent example of a bank making that kind of a tough decision is Swiss bank UBS, which said in October that it would exit bond trading altogether and eliminate 10,000 jobs.

Morgan Stanley has said it will not give up on the fixed income, currency and commodities trading business, known as ”FICC” in Wall Street circles. The firm has said it wants to boost market share in FICC by two percentage points.

But Morgan Stanley is aiming to exit more complex realms of bond trading that require more capital under new regulations.

The latest staff reductions will affect 6 percent of the institutional securities unit’s workforce, which includes the bank’s FICC business. The cuts will target salespeople, traders and investment bankers, the sources said. Support staff who work in areas such as technology will also be affected, the sources said.

Although all staff levels will be affected, the likely targets will be more senior employees who take in the biggest paychecks, and about half of the cuts will come from the United States, one of the sources said.

The cuts are also notable because, unlike its chief rival Goldman Sachs, which culls the bottom 5 per cent of its workforce each year to improve performance, Morgan Stanley does not have such a staff reduction program.

Some analysts have questioned Morgan Stanley’s plans to gain market share in the bond trading business.

JPMorgan analyst Kian Abouhossein – who earlier said that Morgan Stanley should give up that goal – expects Wall Street banks to report a 10 per cent decline in revenue for the fourth quarter, compared with the previous period.

Bernstein Research analyst Brad Hintz, a former Morgan Stanley treasurer, said in a report on Wednesday that layoffs are expected in capital-intensive areas of Morgan Stanley’s fixed-income trading business, such as asset-backed securitization, synthetic products, structured credit and correlation trading.

“Investors continue to wonder how Morgan Stanley’s fixed income business will be able to generate steady returns and beat its cost of capital without massive changes to its business model,” Hintz said.

Morgan Stanley chief executive James Gorman has pledged to cut costs, and said in July that he planned to reduce overall staff 7 per cent in 2012. The new job cuts are in addition to that plan, the sources said, and come just a week after Colm Kelleher took over as the sole president of the securities unit on January 1.

The cuts represent less than 3 per cent of Morgan Stanley’s entire estimated workforce at year-end, following other staff reductions in 2012.

“This continues the steady drumbeat of negative news from banks,” said Greg Cresci, a Wall Street recruiter with New York-based Odyssey Search Partners. “It’s hard to tell where the bottom is, given how many banks have made similar announcements.”

Altogether, US financial firms announced plans to reduce payrolls by 38,135 jobs last year, in addition to 63,624 job cuts that were detailed in 2011, according to employment consulting firm Challenger, Gray & Christmas.

“We are seeing a redrawing and restructuring of the industry,” said John Challenger, chief executive of the firm. “The map continues to be redrawn in terms of regulation, who the competitors are, and the resources banks are willing to commit to the investment banking business.”

In addition to earlier job cuts at Morgan Stanley and UBS, Goldman Sachs cut 700 jobs during the first nine months of 2012 as part of a plan to reduce annual expenses by US$1.9 billion.

Citigroup announced plans last month to cut 11,000 jobs, including some in investment banking and trading, to save US$1.1 billion in annual expenses. Credit Suisse Group is also cutting securities jobs to reach an annual cost-savings target of 1 billion Swiss francs (US$1.1 billion), while Bank of America is in the process of cutting 30,000 jobs across the firm in a plan unveiled in 2011 to save $5 billion in annual expenses.

Morgan Stanley shares fell 0.2 per cent to close at US$19.62 on Wednesday. Its shares are up 15 per cent over the past 52 weeks, part of a broad rally in financial stocks.

China Merchants Securities first layoff 5 pct staff

Insiders in China Merchants Securities (CMS) confirmed that the securities firm is carrying out a 5 percent elimination to the last, according to the Financial Weekly. Some investment bank employees have been transferred to other departments. And some investment bank staff who didn’t accept job transfers chose simply to leave. The timing of transfers and layoffs relates to many sponsor representatives and quasi-sponsor representatives.

This is the first time CMS has had to lay off personnel. A person working in the investment bank department of the securities firm said that mainly new staff have been fired, so there’s not so much obstruction towards the redundancy.

Different from other securities firms, the redundancy of CMS only focuses on the investment banking department. Currently, there are 300 people working in that department in CMS. With a 5 percent layoff ratio, it is estimated that around 15 people will be leaving.

Disclosed by the official website of the China Securities Regulatory Commission (CSRC), CMS has 82 sponsor representatives. But it has only seven IPOs, with three additional programs were completed this. If each sponsor representative signs one contract, which represents the lowest efficiency of the human resource use, a maximum of merely 20 sponsor representatives have been engaged in projects. The rest of the 62 sponsor representatives had no output, which may make it difficult to recoup their 100 million yuan annual salaries.