|Bid||2.850 x 0|
|Ask||2.860 x 0|
|Day's Range||2.820 - 2.880|
|52 Week Range||2.710 - 3.390|
|Beta (5Y Monthly)||0.86|
|PE Ratio (TTM)||4.18|
|Forward Dividend & Yield||0.21 (7.34%)|
|Ex-Dividend Date||Jul 07, 2020|
|1y Target Est||4.49|
As Beijing moved ahead with a national security law for Hong Kong, some of the hundreds of thousands of professionals working at the local units of Chinese financial firms could find themselves stuck in the crosshairs. Staff at BOC Hong Kong, the local arm of Bank of China, CEB International, a unit of China Everbright Bank, and a local unit of China Construction Bank said they had been asked by managers in the last few days to put in signatures in support of the law.
(Bloomberg Opinion) -- The deterioration of U.S.-China relations is fast and furious, with Washington throwing out accusations of unfair trade practices, unlawful technology transfer and an early cover-up of the coronavirus outbreak, which has claimed over 100,000 American lives. The Chinese yuan, this year’s beacon of stability, is now is now at risk of tumbling like other emerging markets currencies.On Wednesday, the offshore yuan, which trades freely, flirted with its weakest level on record, dropping as much as 0.7% to 7.1965. While Thursday morning’s yuan fix came in stronger than expected, the overall sentiment is downbeat.It’s tempting to theorize that a weaker yuan could become a powerful weapon in the new Cold War, yet there’s little evidence of foul play from the People’s Bank of China. Since mid-2017, the central bank has based its fixing on the previous day’s close, dollar movement overnight against a currency basket, and what it calls the “countercyclical factor," a catch-all metric that grants wiggle room to deviate from market fundamentals. The yuan can move in a 2% trading range around the PBOC’s daily target.Take a look at Goldman Sachs Group Inc.'s estimate of the countercyclical factor. Over the last year, the PBOC has been consistently guiding its yuan stronger, not weaker, to artificially track the dollar. For all the theatrics of getting labeled a currency manipulator, Beijing wasn’t making its exports any cheaper.What’s new this year is the PBOC’s Zen-like attitude. Rather than playing the heroic fireman, handling one crisis after another, the central bank has been largely hands-off. It has used the countercyclical factor in a meaningful way only twice since January, on Feb. 4 when China emerged from the Lunar New Year holiday to face a national lockdown, and at the end of March when the outbreak was shaking up global markets.And why should the PBOC adhere to the dollar anyway? The coronavirus downturn has only showcased America’s exceptionalism — it prints the world’s reserve currency. Haven demand for the dollar has surged, evidenced by soaring currency swap rates from the euro zone to South Korea, and the Federal Reserve’s scramble to re-establish swap lines with other central banks. Looking back to 2008, the greenback only started to weaken two months after demand for “emergency dollars” peaked, data provided by Deutsche Bank AG show.So it makes sense for China to adopt a more enlightened approach, allowing the yuan to weaken during periods of dollar strength, and catch up when global tensions recede. From the PBOC’s view, the trade-weighted yuan is certainly stronger now than it was last fall, when the central bank was in fire-fighting mode. China doesn’t want to spend another $1 trillion of its foreign reserves defending its currency. The rapid drawdown in 2015 and 2016 traumatized the Chinese for good.To be sure, the pressure of capital outflows is still there. Just look at the consistent negative value of the “net error and omissions” figures in China’s balance of payment data. However, here’s the beauty of the virus: The Chinese can’t go anywhere. They can’t come to Hong Kong to buy insurance products, and unless you’re ultra-rich (with private bankers around the world apartment-hunting for you), Manhattan real estate is off-limits. The PBOC has less to worry about than before.So now the market can test the true value of the yuan. It could easily drop below 7.30 if the phase one trade deal breaks down and the Trump administration imposes some of the tariffs it had previously threatened, estimates HSBC Holdings Plc.Long-time China bear Kyle Bass abandoned his yuan short in early 2019 for the greenback-pegged Hong Kong dollar. He didn’t profit from his yuan trade because the PBOC established powerful tools, such as selling yuan-denominated bills in the offshore market, to kill anyone betting against the currency. Now that their interests are becoming aligned, it’s time for the bears to wake up.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Billionaire Jack Ma’s Ant Financial Services Group saw a surge in Chinese banks seeking out its digital technology to keep business flowing after the coronavirus outbreak shuttered branches across the world’s most populous nation.The number of customers paying for Ant to help them build mobile apps and provide cloud computing power jumped by 175% in the two months through April, and it’s now working with more than 200 lenders, according to the company. Inquiries to collaborate with the tech giant increased by 400% over the period.Ant entered the banking arena as a disruptor, raising alarm bells for many of the nation’s 4,500 lenders. But about two years ago, it also expanded its strategy to sell services to banks. While that had so far met a tepid response, the virus outbreak is now providing Ant momentum, at least among the nation’s smaller, regional lenders.“The bigger banks might want to build their own private cloud, but we’re targeting the smaller lenders who might not have the budget to build their entire online infrastructure from scratch,” Liu Xin, who oversees Ant Group’s cloud unit, said in an interview.For Ant, the open banking push is crucial. Besides selling technology to banks, it includes a consumer lending platform and also backs MYbank, an online lender that has embarked on a spree to dole out 2 trillion yuan ($280 billion) in loans this year. Ant is on track to generate 65% of its revenue from these services by 2021, up from about 35% in 2017, according to a person familiar with the matter.The virus outbreak came as a shock for China’s beleaguered smaller banks, who were already struggling with rising loan losses over the past years. More than 800 bank branches have been permanently shuttered as of May 4 this year, according to China’s banking watchdog.One lender turning to Ant’s help this year is Shenzhen Rural Commercial Bank Co. Working with Ant, the bank was able to cut the loading time on its app by four, to less than half a second, at a time when its 15 million retail customers flooded online to transfer funds, check on their investments and buy wealth products. Close to all of its transactions were done online during the height of the outbreak, according to the bank.“While we’ve always prioritized mobile development, the growing demands from our customers made us realize our existing infrastructure wasn’t enough,” said Zhan Bin, head of the Network Finance Department at the lender, based in China’s tech hub of Shenzhen.The community lender still has most of its data on its own private cloud, but it uses Ant’s public cloud to facilitate express payments. It’s also planning to incorporate the mini program infrastructure of Ant’s Alipay, which allows users to access entertainment, dining, movie tickets and traveling services without leaving the app. In return, the bank’s users can win discounts and accumulate reward points.The lender pays a one-time license fee to Ant for its cloud products such as mPaaS and SOFAStack and also an annual fee for software support and maintenance. Shenzhen Rural declined to disclose how much it is paying to Ant“The key to convincing more banks to use our technology is to prove that we can help them solve their problems,” said Liu.Ant Financial has made inroads with bigger banks as well. It convinced China’s largest lender, Industrial & Commercial Bank of China Ltd. to agree on working together on developing fintech services in December.Alibaba, which owns a 33% stake in Ant Financial, is expected to report earnings next week.(Adds ICBC in next to last paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- For clues on likely swings in emerging-market currencies, keep a close eye on U.S. public attitudes toward China.The logic works like this. The more inclined American voters are to engage in China-bashing, the more likely it is that President Donald Trump will slap fresh tariffs on Chinese goods. That in turn may provoke the People’s Bank of China into weakening the yuan at its daily fixings, triggering another bout of currency volatility.Increased turmoil in foreign-exchange markets is the last thing developing markets need right now as bellwethers such as the Turkish lira and Brazilian real trade at or near all-time lows. Currency swings haven’t eased as much for the emerging markets as they have for the leading economies since they climbed to the highest since 2011 in March. And for David Dollar, a senior fellow at Brookings Institution, the prospect of another spike in volatility is very real.“There’s a greater than 50% chance that we will see additional tariffs against China before the Presidential election,” Dollar, an expert on U.S.-China economic relations, said in an interview from Washington.Until now, the Chinese authorities haven’t been provoked by Trump’s saber-rattling. One key signal for the currency came with the central bank’s daily fixing on May 6, which was slightly stronger than expected, suggesting China’s willingness to limit volatility. The offshore yuan peaked at 7.1561 on May 4 during this month’s holiday, while the onshore fixing rate peaked at 7.0931 on May 7.If Dollar is right, there would be a significant sell-off in the yuan to offset the cost of the tariffs. And there are real reasons for concern. A recent Pew Research Center poll found that 66% of Americans hold unfavorable views on China, and with the U.S. economy struggling from the pandemic, President Trump may look to exploit that to win votes. Washington could point to Beijing’s failure to get close to the run-rate for purchases called for under the trade agreement, however unreasonable that could seem under the circumstances of Covid-19.In this respect, China probably reasons that allowing the yuan to depreciate would simply stoke tensions with the U.S., especially ahead of its highest-profile annual political meeting scheduled for May 22. It could also create domestic capital-outflow risk.From the U.S. side too, there’s the risk of inflicting a further shock on the economy. President Trump has shown before that a sizable adverse U.S. stock market reaction can push him to alter course. Furthermore, foreign affairs and trade are rarely important election issues. The economy, health care, immigration, all tend to feature more prominently.The Chinese yuan gained 0.1% to 7.0999 per dollar as of 12:45 p.m. in New York on Tuesday, rebounding from its weakest level in a week. Most emerging-market currencies also strengthened as the dollar retreated against its major global peers, with the Turkish lira leading the advance.Note: Simon Flint is an emerging-market strategist at Bloomberg News. The observation he makes are his own and not intended as investment advice.(Updates market moves in final paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
China's commercial banks have sold financial derivatives packaged as wealth management products that slipped through regulatory cracks, giving individual investors access to risky foreign commodity futures contracts, according to several bank officials familiar with the matter.One such product is Bank of China's Crude Oil Treasure product that burned a 7 billion yuan (US$987 million) financial hole through the bank's books and among customers. Other banks too offer similar products but their clients have avoided the fate of Bank of China customers because of earlier redemption dates or rollover before crude prices crashed into negative territory.Several bank officials with China Construction Bank, Bank of Communications, Shanghai Pudong Development and Industrial and Commercial Bank of China, all of whom spoke on condition of anonymity, said the Crude Oil Treasure product, allowed customers to build up positions based on the West Texas Intermediate (WTI) or Brent International contracts and effectively overstepping regulations that bar the country's lenders from operating as commodities futures brokerages.Crude Oil Treasure was catapulted into national limelight on April 21 when May WTI contracts crashed to minus US$40.32 a barrel, causing mainland investors losses to the tune of about 7 billion yuan, according to media reports. Those clients who built buy positions on that day lost all their margins and owed Bank of China a massive amount of money.Bank of China's Crude Oil Treasure product has burned a 7 billion yuan financial hole through the bank's books and among customers. Photo: EPA-EFELawyers have cast doubts on the legality of the product as they help investors seek compensation from Bank of China for their losses.Yang Zhaoquan, a partner at Beijing Weinuo Law Firm, who says he is representing more than 100 investors against Bank of China, said the wealth management obscured its role as a brokerage service offered to the clients, which is barred on the mainland. Bank of China's US$1 billion hole from plunging oil"By buying the product derived from commodity futures, investors are indeed making investment in futures contracts," said Yang. "The service has gone beyond the banks' business scope."Huang Lei, an independent futures market analyst, said the product was akin to a brokerage service as it paved the way for individuals to directly trade on overseas futures markets.No mainland institution is allowed to offer brokerage services for individual investors in China to trade futures abroad.Under the Crude Oil Treasure scheme, banks act as market maker on a virtual trading platform to trade against the clients when they build either long or short positions in oil contracts. The banks then build up a position on the global market based on the clients' bets. By doing this, banks actually close their own position on the trading platform while taking no risks arising from the price volatility. It is the individual investors who are exposed to the risks of fluctuating oil prices that will generate either returns or cause losses to them.Huang Mengqi, a lawyer and co-executive director at Beijing DHH (Shanghai) Law Firm, who claims to represent more than 600 investors with a combined loss of 100 million yuan in a class-action lawsuit against Bank of China, said the lender was never entitled to do commodity futures businesses or offer financial derivatives based on futures contracts.A China Construction Bank official said that commercial lenders were confident that the derivative, after being designed as a wealth management product, had fully complied with the banking regulator's rules. Customers were actually chasing the swings in global crude oil prices on the virtual trading platform, and they were not buying or selling contracts on the overseas exchanges, he added.The product was endorsed by the China Banking and Insurance Regulatory Commission (CBIRC). The CBIRC did not respond to queries about the product's legality. The regulator said in a statement last weekend that it had requested Bank of China to iron out the problem by negotiating with the victims in a caring and prompt manner.Screenshot of a short message sent by Bank of China on April 16, 2020, warning customers of its Crude Oil Treasure financial product of the impending expiry of WTI futures contracts. Photo: HandoutBank of China said in a statement on Tuesday evening that it has studied and responded to clients' demands. If the clients do not resolve the dispute through its proposal, then it would have to resort to the legal process.Several investors told the Post they have received proposals from the bank that it would compensate 20 per cent of their original investments and shoulder all losses in negative territory.Zhao Changyi, a leading financial risk management expert in China, said the crisis showed that risk control remains the weakest link in China's banking and insurance sectors after three decades of rapid development."China's banks still lack risk awareness and risk control capabilities to avert sharp losses when they grapple with black swan events," said Zhao, head of China's training programme for financial risk professionals at the State Administration of Foreign Experts Affairs. "There is a bunch of loopholes in China's financial system that need to be mended by qualified and talented risk management professionals."China's individual investors however have access to global crude oil contracts. There are currently a handful of exchange traded funds on both Shanghai and Shenzhen stock exchanges which track indices linked to the WTI futures contracts. These funds are sold under the qualified domestic institutional investor scheme, which allows asset managers to invest in offshore securities.The sun sets behind a crude oil pump in Loving County, Texas. Crude prices have been battered in recent weeks. Photo: ReutersWith assets totalling 3.8 billion yuan, some ETF fund managers had in early April warned investors in public disclosures about potential losses from volatility of the WTI futures and their capital invested.There are always options for a manager of these products to either sell the futures contracts on the secondary market, or roll the front month contracts to those of the following months well ahead of the settlement date, said Patrick Heusser, senior trader at Crypto Broker based in Zurich."If you are a risk averse and experienced commodity trader you will definitely take that approach. There is no need to hold a futures contract till settlement," said Heusser.In the case of Bank of China, the product was not designed to roll over the futures contracts earlier than the settlement date. According to the bank's disclosure on its website, it would only roll the contracts or close out the positions in the global market on the settlement date.This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved. Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
(Bloomberg) -- Bank of China Ltd. told clients it’s willing to shoulder part of the $1 billion loss suffered by thousands of retail investors after a product linked to the price of oil collapsed last month.China’s fourth-largest bank by market value dropped a claim to seek additional payments from clients to cover losses from its settlement of an investment product at a price below zero, mirroring a collapse in an oil futures contract, according to four retail investors who received phone calls from the lender this week. The bank will also return 20% of the initial investment to some clients, they said.The proposal came after Chinese regulators pressured the lender to absorb some of the losses amid a public uproar and as other banks halted sales of similar commodity-linked investment products. The turmoil even reached the highest level of government, with Vice Premier Liu He on Monday issuing a statement calling on banks to strengthen controls over such products and protect investors.Bank of China’s “Crude Oil Treasure” product had attracted thousands of retail investors seeking to speculate on West Texas Intermediate crude futures. The product collapsed on April 20, when the price of the May futures contract plummeted to a record minus $37.63 a barrel, not only wiping out bullish bets but also leaving some clients owing the bank money.Bank of China declined to comment when reached on a public holiday in China. The Chinese retail investors interviewed by Bloomberg asked not to be identified because the matter is private and sensitive.The Beijing-based lender said on April 24 that about 46% of the investors had liquidated their positions on April 20, while the remaining chose to either roll over their positions or settle at the expiration, including both long and short positions. The bank also said it will fully review its product design, risk control and related procedures and take responsibilities within the legal framework and make the best effort to safeguard clients’ interests.The turmoil is drawing further attention to China’s $3 trillion industry for bank wealth products, which invest in everything from bonds and stocks to foreign exchange and commodities. They have become key building blocks of a shadow-banking system that exists largely off banks’ balance sheets.The possible partial bailout also underscores the challenge to regulators, who have been trying to do away with the implicit guarantees often offered by banks and to instill more risk awareness among millions of retail investors. When wealth products struggle to meet their return targets in China, lenders that distribute them often make up the shortfall to protect their reputation and maintain social stability.Bank of China hasn’t disclosed the size or performance of “Crude Oil Treasure” since launching the product in January 2018.The investment vehicle had offered investors access to WTI oil futures without opening an offshore account and was pegged to the flat price of the front-month contract and settled in Chinese yuan. It required 100% margin and didn’t allow any leverage.Industrial & Commercial Bank of China Ltd. also temporarily halted opening of new positions in products linked not only to oil, but also to natural gas, and soybeans from April 28. China Construction Bank Corp. and Bank of Communications Co. are among lenders that have also suspended opening of new positions on their WTI-linked products for individuals.The oil price shock hammered retail investors also beyond China. In South Korea, mom-and-pop investors exposed to about 1.45 trillion won ($1.2 billion) worth of structured notes tied to Brent or WTI futures faced losses. In India at least three brokerages have petitioned the courts to challenge the settlement of contracts after their clients faced millions of dollars in losses from the negative prices.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Every day since April 15, David Wang's smartphone would buzz with a message from Bank of China. May contracts for Crude Oil Treasure, a structured financial product that gives the layperson an easy entry into the complex world of oil trading, was expiring in a week, and investors must close or roll over their positions, said the automated message.Wang dismissed the warnings, and kept going long with 400,000 yuan (US$56,500) of his money at stake, believing that record-low oil prices offered him the chance of a lifetime to get into the market on the cheap.On April 21, May contracts of West Texas Intermediate futures " the US benchmark for crude oil " plunged to an unprecedented minus US$40.32, as desperate traders jostled to unload their positions to avoid a rarely used, and little-noticed detail: anyone holding the contracts after their expiry on April 22 could be forced to take delivery of the crude oil in Cushing, Oklahoma. For Wang, living half a world away in central China, the chaos in Chicago's oil market was a rude shock when he awoke, with the value of his investment " tied to WTI futures " plummeting 280 per cent to minus 266.12 yuan per contract, from 147.47 yuan at the end of March."This is utterly disheartening and beyond any normal person's comprehension," Wang said in the Shaanxi provincial capital of Xi'an by telephone, rueing a 1.4 million yuan loss from just two weeks of holding the investment, plus margin credit from the bank.Screenshot of a short message sent by Bank of China on Thursday, April 16, 2020, warning investors of its Crude Oil Treasure financial product of the impending expiry in futures contracts of the West Texas Intermediate. SCMP Pictures (UNDATED HANDOUT) alt=Screenshot of a short message sent by Bank of China on Thursday, April 16, 2020, warning investors of its Crude Oil Treasure financial product of the impending expiry in futures contracts of the West Texas Intermediate. SCMP Pictures (UNDATED HANDOUT)Crude Oil Treasure would ultimately burn holes in the pockets of Bank of China's customers, estimated to total 7 billion yuan (US$1 billion), according to Bloomberg, citing people familiar with the matter. That would make China's oldest bank the biggest known victim of April's melee in the global oil market, surpassing the collapse of Singapore's Hin Leong oil-trading empire.The brutal loss has far-reaching repercussions across China's banking industry, as several of the country's biggest state-owned lenders " Industrial and Commercial Bank of China, China Construction Bank, Communication Bank of China, Shanghai Pudong Development Bank " have all hit the pause button on variations of the same structured financial product for their retail customers. The episode exposes the deficiencies in China's 22.2 trillion yuan wealth management products offered by banks, where regulations and investor protection measures fail to keep up with an industry whose rapid growth had been amplified by technology."The incident has exposed the shortcomings of risk disclosures to retail clients and potentially insufficient or improper risk tolerance and products suitability assessments among Chinese banks," said Lance Yau Tat-cheung, a dealing department manager of China Xin Yongan Futures.For China's banking industry, the fracas with oil futures is also its latest brush with risk in the nation's journey toward market liberalisation and financial reforms.Two decades since becoming a World Trade Organisation member, Chinese households " with US$10 trillion in total savings " are still limited by a dearth of investible options, forcing many adventurous investors to pursue high-yielding speculations often without proper appreciation of the associated risks. Over the years, these have veered from real estate to fine art and Bordeaux wine, to speculations in such exotic products as Pu'er tea and even the hoarding of garlic.As part of China's banking reforms, commercial lenders had been prodded and pushed to wean themselves off the fat margins between state-controlled lending and deposit rates that had sustained their growth and prosperity for decades.A consequence of that reform was for banks to earn more income from fees and financial products. Over the past five years, China's banks have launched, and cancelled, futures and options on precious metals and rare metals, high-yield wealth management products disguised as insurance, and even flirted with bitcoin and cryptocurrencies before the People's Bank of China banned financial institutions from dealing in them.Police vehicles outside the China Banking Regulatory Commission (CBRC), the industry's watchdog agency on the Financial Street in Beijing's Fuchengmeng district on 6 August 2018. Speculators who lost money through peer-to-peer schemes were staging protests outside the regulator's office. Photo: Simon Song alt=Police vehicles outside the China Banking Regulatory Commission (CBRC), the industry's watchdog agency on the Financial Street in Beijing's Fuchengmeng district on 6 August 2018. Speculators who lost money through peer-to-peer schemes were staging protests outside the regulator's office. Photo: Simon SongThe implosion of Crude Oil Treasure and products like it may even become a potential source of social unrest, as investors caught in get-rich-quick scams such as peer-to-peer lending platforms and Ponzi schemes around rare metal trading have tended to stage noisy petitions around bank and regulatory offices. More than 60,000 customers are estimated to have invested in Crude Oil Treasure alone, Caixin reported.For China's government, the potential public grievance comes at a time when the nation is just emerging from three months of quarantines and work-at-home orders to contain the coronavirus outbreak. China's legislature is scheduled to commence its annual meetings on May 22, after postponing the proceedings in March. The Great Hall of the People at Tiananmen Square, where the pomp and splendour of the meetings typically go on full display, is a mere subway stop away from Bank of China's headquarters in Xidan.Concerned about the public backlash, the Chinese bank regulator ordered Bank of China to negotiate with customers and respond to their concerns, strengthen its risk control and product management, according to a report by state news agency Xinhua. The China Banking and Insurance Regulatory Commission (CBIRC) would strengthen its scrutiny over such products, Xinhua said.Bank of China's head office in Xidan in the Chinese capital on 14 August 2005. Photo: SCMP alt=Bank of China's head office in Xidan in the Chinese capital on 14 August 2005. Photo: SCMPLaunched in January 2018, Crude Oil Treasure allowed customers to hold either long or short positions in oil contracts denominated in US dollars or yuan, where they can bet that the prices of WTI or Brent International would go up or down, all through a simple savings account at the Bank of China.To make investments more accessible, the product subdivided the 1,000 barrels of oil associated with every WTI futures contract into units of barrels.Investors must close their open positions before their contracts expire by buying or selling the same amount of contracts they sold or bought earlier. Alternatively, they can roll their positions to the next month by letting the trading system conduct the rollover based on the month's settlement price.The bank acts as the market maker, responsible for managing risks and generating prices based on factors including global oil prices, the renminbi's exchange rate and market liquidity, it said in a product introduction on its website.The product is for individuals with "a certain understanding" of the oil market, and have a "commensurate" level of risk tolerance, Bank of China said. It warned investors that they should understand the volatility in oil prices, as well as risks arising from various political and economic factors and global events.Employees closing a valve at a PetroChina refinery in Lanzhou in Gansu province on January 7, 2011. Photo: Reuters alt=Employees closing a valve at a PetroChina refinery in Lanzhou in Gansu province on January 7, 2011. Photo: ReutersStill, the warnings and disclaimers were insufficient, Wang said in Xi'an, calling Crude Oil Treasure a "flawed product" with extremely high risks that was mislabelled as a medium-risk investment. Bank of China failed to notify investors that prices could turn negative, even after the Chicago Mercantile Exchange (CME), where the WTI contracts are traded, warned on April 15 that energy futures contracts could trade at negative or zero, he said.Bank of China is "deeply disturbed" by its customers' investment losses, according to an April 24 statement. Warnings about volatility and the impending expiry of contracts were sent every day since April 15 via text messages, phone calls, social media posts on WeChat and Weibo, the bank said.SCMP Graphics alt=SCMP GraphicsThe bank is reviewing the design of its financial products as well as its risk management process, and will shoulder its due responsibilities under Chinese law to protect clients' lawful interests the best it could, Bank of China said. The bank has barred customers from taking new positions on all financial products related to the price of crude oil, including those linked to Brent International " the benchmark used in the UK " from April 22."Had Bank of China acted faster, like one or two days before the WTI contract's expiry, the losses would not have ballooned to this magnitude," said Lin Boqiang, director of Xiamen University's Centre for China Energy Economics Research. "Other banks have not had the same degree of problem as they have forced settlement of the products earlier.""Through products packaging and marketing, the futures nature of the underlying product has been downplayed," said Yau of China Xin Yongan.Different from standard investment products where investors entrust their money with a professional manager to invest, the Crude Oil Treasure is actually a platform on which investors can make buy and sell orders on their own, said Yang Zhaoquan, partner of Beijing Weinuo Lawfirm, retained by nearly 100 customers of Crude Oil Treasure with 40 million yuan in combined losses to sue on their behalf."It's against the law for the Bank of China to issue a product like Crude Oil Treasure," said Yang, who has yet to file their suit.Crude Oil Treasure is in fact a futures product even if it is being marketed as a tool for wealth management. Bank of China, despite being China's largest global bank, is not licensed to provide futures products, he said.SCMP Graphics alt=SCMP GraphicsAnt Financial Services, the affiliate of this newspaper's owner Alibaba Group Holding, distributes a financial product on its Alipay platform by Southern Asset Management that tracks the price of crude oil and exchange-traded funds.Customers applying to trade futures products at equity or futures brokerages would be subjected to more rigorous risk assessment questionnaires, and higher entry barriers, before they are allowed anywhere near their first transactions, said Yau of China Xin Yongan, the Hong Kong unit of mainland brokerage Yongan Futures.May futures contracts settled on April 21 at negative US$37.63, the result of lower demand for fuel amid the economic recessions wrought by the global coronavirus pandemic, as well as a break down in talks between the world's largest oil producers to stem the industry's glut.Wang has allied himself with a dozen investors in representing about 200 Crude Oil Treasure customers in Shaanxi province to seek compensation from Bank of China.They have visited the provincial offices of the bank, as well as the banking regulator, to demand for a revaluation of their holdings based on the April 15 settlement price, when they believe the bank should have informed them about the potential risks. Bank of China said it "handled the May futures contracts according to previous agreements," in its statement.Workers cleaning the logo of Bank of China in Beijing. Photo: AP alt=Workers cleaning the logo of Bank of China in Beijing. Photo: AP"Given the nature of the market at the moment, it is clearly risky to leave it so close to the end, given some of the pretty well-flagged risk that storage capacities were approaching their limits globally," said Sanford Bernstein's senior oil and gas analyst Neil Beveridge. "Traders are squeezed when it approaches the contract's expiry date."Emily Liu, a 35-year-old mechanical design engineer in Hangzhou, is among the hundreds of investors in Zhejiang province who are petitioning the regulators to bail out their losses. With 160,000 yuan in losses, Liu joined six chat groups on WeChat, each with about 200 members, with as much as 7 million yuan in individual losses.For Wang, though, lessons have been learned the hard way."All hope is gone," Wang said. "I hadn't been able to sleep and I have no appetite to eat since this happened."This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved. Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
Bank of China, facing a public outcry and regulatory scrutiny over the collapse of an investment product linked to oil futures, may shoulder part of US$1 billion in losses suffered by its retail clients, according to people familiar with the matter.The nation's fourth-largest bank by market value is talking to regulators about not seeking recourse on losses in excess of investors' margins, said the people, who asked not to be identified discussing a private matter. Regulators are leaning toward having the bank take some losses, they said. The plan is not final and subject to change.Thousand of retail investors across China are facing combined losses topping 7 billion yuan (US$1 billion) after the bank's "Crude Oil Treasure" product was settled at prices far below zero, mirroring the collapse in West Texas Intermediate crude on April 20 to minus US$37.63 a barrel.Hundreds have taken to the internet to protest the lender's handling of the contract rollover and to demand it assume some of the shortfall.Investors who do not make good on losses that exceed their total investment should not have that reflected in the nation's credit scoring system, the people said. The central bank and the banking regulator did not immediately reply to requests seeking comments.Bank of China said in a statement late Wednesday that it is "actively" working on a solution to address clients' "reasonable" complaints and demands, and will try its best to protect their rights and take social responsibility.Meanwhile, the lender has sent CME Group an official request, urging the exchange to investigate reasons behind "abnormal" price volatility in crude futures seen on April 21, according to the statement.Jefferies Financial Group estimated that the bank's losses could end up being 4 billion yuan to 10 billion yuan, when also taking into account potential legal costs. That represents about 1.6 per cent to 4 per cent of the bank's pre-tax profit, analyst Chen Shujin wrote in a note on Tuesday.The turmoil is drawing further attention to China's US$3 trillion industry for bank wealth products, which invest in everything from bonds and stocks to foreign exchange and commodities. They have become key building blocks of a shadow-banking system that exists largely off banks' balance sheets. Asian banking system creaks under pressure of companies struggling to survive coronavirus pandemicThe partial bailout also underscores the challenge to regulators, who have been trying to do away with the implicit guarantees often offered by banks and to instil more risk awareness among millions of retail investors. When wealth products struggle to meet their return targets in China, lenders that distribute them often make up the shortfall to protect their reputation and maintain social stability.Bank of China has not disclosed the size or performance of "Crude Oil Treasure" since launching the product in January 2018.The unprecedented price slump below zero, however, wiped out many investors' margins and left them with further debt owed to the bank.The implosion has also forced other banks to suspend sales of similar products that allowed investors to speculate on swings in commodities.Industrial and Commercial Bank of China temporarily halted opening of new positions in products linked not only to oil, but also to natural gas, and soybeans from April 28. China Construction Bank and Bank of Communications are among lenders that have also suspended opening of new positions on their WTI-linked products for individuals.The oil price shock hammered retail investors beyond China. In South Korea, mom-and-pop investors exposed to about 1.45 trillion won (US$1.2 billion) worth of structured notes tied to Brent or WTI futures faced losses. In India, at least three brokerages have petitioned the courts to challenge the settlement of contracts after their clients faced millions of dollars in losses from the negative prices.This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved. Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
(Bloomberg) -- Bank of China Ltd., facing a public outcry and regulatory scrutiny over the collapse of an investment product linked to oil futures, may shoulder part of $1 billion in losses suffered by its retail clients, according to people familiar with the matter.China’s fourth-largest bank by market value is talking to regulators about not seeking recourse on losses in excess of investors’ margins, said the people, who asked not to be identified discussing a private matter. Regulators are leaning toward having the bank take some losses, they said. The plan isn’t final and subject to change.Thousand of retail investors across China are facing combined losses topping 7 billion yuan ($1 billion) after the bank’s “Crude Oil Treasure” product was settled at prices far below zero, mirroring the collapse in West Texas Intermediate crude on April 20 to minus $37.63 a barrel. Hundreds have taken to the internet to protest the lender’s handling of the contract rollover and to demand it assume some of the shortfall.Investors who don’t make good on losses that exceed their total investment shouldn’t have that reflected in the nation’s credit scoring system, the people said.The central bank and the banking regulator didn’t immediately reply to requests seeking comments.Reasonable ComplaintsBank of China said in a statement late Wednesday that it is “actively” working on a solution to address clients’ “reasonable” complaints and demands, and will try its best to protect their rights and take social responsibility. Meanwhile, the lender has sent CME Group Inc. an official request, urging the exchange to investigate reasons behind “abnormal” price volatility in crude futures seen on April 21, according to the statement.Jefferies Financial Group Inc. estimated that the bank’s losses could end up being 4 billion to 10 billion yuan, when also taking into account potential legal costs. That represents about 1.6% to 4% of the bank’s pretax profit, analyst Chen Shujin wrote in a note on Tuesday.The turmoil is drawing further attention to China’s $3 trillion industry for bank wealth products, which invest in everything from bonds and stocks to foreign exchange and commodities. They have become key building blocks of a shadow-banking system that exists largely off banks’ balance sheets.The partial bailout also underscores the challenge to regulators, who have been trying to do away with the implicit guarantees often offered by banks and to instill more risk awareness among millions of retail investors. When wealth products struggle to meet their return targets in China, lenders that distribute them often make up the shortfall to protect their reputation and maintain social stability.Bank of China hasn’t disclosed the size or performance of “Crude Oil Treasure” since launching the product in January 2018.The investment vehicle had offered Chinese retail investors access to WTI oil futures without opening an offshore account and was pegged to the flat price of the front-month contract and settled in Chinese yuan. It required 100% margin and didn’t allow any leverage. The unprecedented price slump below zero, however, wiped out many investors’ margins and left them with further debt owed to the bank.The implosion has also forced other banks to suspend sales of similar products that allowed investors to speculate on swings in commodities.Industrial & Commercial Bank of China Ltd. temporarily halted opening of new positions in products linked not only to oil, but also to natural gas, and soybeans from April 28. China Construction Bank Corp. and Bank of Communications Co. are among lenders that have also suspended opening of new positions on their WTI-linked products for individuals.The oil price shock hammered retail investors beyond China. In South Korea, mom-and-pop investors exposed to about 1.45 trillion won ($1.2 billion) worth of structured notes tied to Brent or WTI futures faced losses. In India at least three brokerages have petitioned the courts to challenge the settlement of contracts after their clients faced millions of dollars in losses from the negative prices.(Updates with BOC comment in the sixth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- With a quarter of its interest-bearing assets overseas, Bank of China Ltd. is by far the most international and outward-looking of China’s largest lenders. But have you tried banking with them lately? I have. In mid-January, I was eager to open an account in Shanghai. With China vowing to increase access to its financial services industry, this process has become a lot easier for people like me, overseas Chinese with a foreign passport — or so I heard. I also desperately needed a mainland account to top up mobile payments on AliPay and WeChat Pay. These apps have become so ubiquitous that the sorry few without them are practically walking down the streets of Shanghai naked. At first, I went to China Merchants Bank Co., because it boasts a strong retail franchise and has a well-designed app. But the process would take up to 10 business days. Only Bank of China has the regulatory clearance to do the paperwork within 24 hours, a friendly branch manager told me.Entering the Bank of China building in Shanghai’s financial hub of Lujiazui felt like going into a courthouse. It was grand, stern and silent. Forty minutes into the extensive know-your-customer paperwork, the teller informed me that I needed a local mobile number; it would cost the bank too much to send text messages to my Hong Kong line. Sensing a lot of legwork and stressed about meeting a deadline, I fled. This kind of bureaucratic inflexibility is costing the bank dearly, and not just my small pile of deposits. Retail investors have lost more than $1 billion from a synthetic WTI futures product that was enthusiastically sold in the spring. The lender sat on its hands until the last day to roll over its May futures and got caught selling at negative $37.63 a barrel, making it the world’s biggest (known) loser amid last week’s oil tumult. It’s not like this volatility came out of nowhere — there had been plenty of warnings. Even U.S. President Donald Trump knew the world was running out of oil storage, which is terrible news for WTI futures because they require physical delivery. Fearful of volatility, global banks from Citigroup Inc. to UBS Group AG in late March liquidated leveraged exchange-traded notes. On April 16, United States Oil Fund, the world’s largest oil ETF, said it would allocate about 20% of its portfolio to a longer-dated contract, from nil previously. Bank of China was either asleep at the switch during those weeks or too caught up in red tape to tweak its exposure.Since the bank is so keen on know-your-customer, let’s examine this practice a little more closely. How synthetic oil futures are a suitable investment for moms-and-pops is beyond my understanding. Each WTI contract consists of 1,000 barrels of oil for a reason — they’re intended for professionals. But to lure retail money, Bank of China diced these up, allowing investors to buy in units of barrels. More than 60,000 clients invested, Caixin reported. In a tone-deaf post last week, which was promptly deleted after a media firestorm, the lender disclosed how this product works in detail, with financial jargon ranging from rollover pricing to margin selling. What’s unexplained, however, is why Bank of China, with over $3 trillion in assets, bothered with this complex retail experiment at all. The answer is the banking system. The same factors that have long benefited China’s megabanks are now working against them. For years, the biggest lenders lived comfortably off household savings, paying deposit rates that were capped by the People’s Bank of China. Smaller regional banks, meanwhile, had to scramble for short-term, unstable and expensive interbank funding.Now the tide is turning. The PBOC is offering more liquidity, which has caused a sharp drop in money market rates. These days, funding costs can be even lower at less creditworthy regional banks. Meanwhile, a 30 basis point fall in the loan prime rate — the benchmark interest charged for banks’ best corporate clients — means that large lenders will see more compression in their loan books’ profit margins. Money has to be made somewhere, which is how we wound up with these enthusiastic sales of exotic futures products.Back in January, all the talk in Lujiazui was of the future of China’s wealth management industry. As part of Beijing’s financial reform, big banks are marching in and setting up separate asset management arms. Registered capital of these new subsidiaries often reaches more than $1 billion, surpassing the size of mutual funds many times over. Would these megabanks become the new BlackRocks of China? Not to worry. Bank of China’s spectacular tumble makes a fine example of these whales and their slow-moving money. In reality, such lenders have little incentive to be nimbler. From 2013 to 2018, state-owned banks sent more than 2 trillion yuan ($282.3 billion) in taxes and dividends to Beijing’s coffers, versus only 135 billion yuan from their non-financial counterparts, data provided by UBS show. Coddled state darlings don’t feel much pressure to study up and improve their trade. As for all the grand ambitions of cross-border portfolio diversification, some whales are ending up at the Chicago slaughterhouse to be butchered by savvy billionaire raiders like Carl Icahn. As for me, the next time I’m in Shanghai — whenever that is — I’ll have to hold my nose and try Bank of China again, because I have only 473 yuan left on my WeChat Pay account. Its building is just a stone’s throw from International Finance Center, where many global banks have their offices. But it feels so distant. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
The Chinese regulator has asked commercial banks to halt new sales of a wide range of wealth management products that might lead to unlimited losses for investors, two sources told Reuters. At the weekend, China Banking and Insurance Regulatory Commission (CBIRC) gave verbal instructions to banks to halt new sales of products that could trigger open-ended losses for investors, and requested reports on the outstanding size of related products, according to two direct sources who are familiar with the matter. CBIRC's move came nearly a week after heavy losses were recorded in a crude oil futures trading product sold by the country's fourth-largest lender, Bank of China (BoC).
Total losses from a structured crude oil product marketed to retail investors by the Bank of China could be more than 9 billion yuan ($1.27 billion), the Caixin financial news outlet reported on Sunday, citing official sources. More than 60,000 individual investors involved in the scheme have lost deposits worth as much as 4.2 billion yuan, it said. The Bank of China's crude oil "bao" is sold to individual customers and is linked to domestic and foreign crude oil futures contracts, including West Texas Intermediate (WTI) and Brent.
China's retail investors take punts on everything from mainstream stocks to niche commodities and derivatives, and many were badly burned this week by exposure to U.S. oil contracts which collapsed below zero for the first time, wiping out several small accounts. Bank of China (BoC), one of the providers of retail-grade investment products tracking U.S. oil futures prices, was forced to settle its crude oil "bao" product at minus $37.63 a barrel following the market collapse, leading investors to cry foul. WHAT IS BoC's CRUDE OIL "BAO"?
As the dust settles from a record-breaking crude selloff, it’s turning out that retail investors in China may have been on the hook.
The main aim of stock picking is to find the market-beating stocks. But the main game is to find enough winners to...
(Bloomberg Opinion) -- China’s central bank is nipping and tucking across the financial system. It still looks ugly – and will only get worse.As Covid-19 and its aftershocks have rippled through the economy, the People’s Bank of China has tried to boost lending by easing various rates. On Monday, the bank cut the recently introduced de facto benchmark funding cost by 20 basis points, after lowering it earlier this year. It has also slashed the interest charged on excess reserves for the first time since 2008. While liquidity remains sufficient, all the trimming hasn’t substantially moved the needle given the severe hit from the pandemic.What the cuts are doing, however, is creating a differential between the near-term and long-term cost of money. That incentivizes behavior that clogged up China’s financial plumbing in the first place. Think of the peak of the shadow banking boom in 2016, when lesser rates in the overnight and short-term markets prompted institutions and companies to borrow and then invest the proceeds in corporate bonds and other assets over a longer period for leveraged returns.That’s started happening. In the last two months, one such investment — structured deposits — has shot up. Companies are borrowing in the short-term markets and redepositing the money in banks. About a fifth of corporate lending, around 1 trillion yuan to 1.5 trillion yuan ($141 billion to $212 billion), is in such financial arbitrage investments, according to the Rhodium Group. These products, typically priced as a spread over the underlying deposit rate, increased by 851 billion yuan last month, indicating a rise in speculation. Let’s turn to the institutions. Banks facilitate this activity to offer higher yields and to compete for customer deposits. They’re the main beneficiaries of the looser monetary policy: Short-term rates, in theory, allow banks that fund most of China’s financial system to reduce costs. But some are more dependent than others on these rate cuts. Big lenders are typically flush with liquidity from deposits. Their smaller and more regional counterparts are not. They rely on larger institutions to lend to them in the interbank market, or wholesale funding.With all the jitters over the past year around regional lenders that were seized by regulators, China’s Big Four(1) aren’t willing to lend to their lesser peers for long periods. The surge in trading volumes in the overnight interbank market suggests that short-term borrowing to fund leveraged asset growth is gathering pace. In the first quarter, small banks were the biggest issuers of structured deposits, and most of them were held by companies. So what now? For one, bad behavior typically ends up more widespread and twisted in China’s financial system than it starts. As money market rates fall and the economics on these trades work less well, banks will have to depend on third parties to help leverage returns. That means non-bank financial institutions get involved, creating another layer of complexity. Banks’ claims on such institutions have started rising. In the past, they acted as warehouses of bad risk and assets. All too familiar: This is precisely how China’s shadow banking adventure became a labyrinthine mess. Small banks face a deluge of bad loans as the Covid-19 impact shows up on balance sheets. They’re now going to end up with more expensive and flighty funding. Lending out more will be hard. Meanwhile, the picture for real credit demand is muddied. Companies may be borrowing short-term, but the cash isn’t all going to restart businesses. Some of it is sitting in banks. Credit isn’t ending up where it’s needed to revive China Inc., and every yuan pumped in by the central bank becomes less effective.One way out of the arbitrage hole is to cut the deposit rate, a long-discussed reform. But doing that in the current environment would surely lead to instability, because no one wants to lose out on returns.Don’t be surprised if China’s financial underbelly suddenly appears larger, despite all the surgery.(1) By assets; Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- By offering cheap loans to small businesses, governments reason, entrepreneurs will continue to pay their employees. That should halt the economic fallout from the coronavirus outbreak. But so far, this endeavor has been a public relations fiasco and a logistics nightmare.In the U.S., mom-and-pop businesses are having a tough time getting their hands on stimulus loans, which turn into grants if the money is spent on salaries. Meanwhile, bigger companies such as Shake Shack Inc. found administrative loopholes to receive millions (since returned), and even hedge funds and private equity firms want a slice of the $350 billion offered by the Small Business Administration, a pool that’s already run dry.In China, too, subsidized small business loans have also become a cornerstone of stimulus. The central bank established 1.8 trillion yuan ($254.1 billion) of re-lending facilities, offering cheap funds to commercial banks, which in turn lend that out to small companies.But much to Beijing’s dismay, instead of paying salaries or shoring up working capital, these enterprises seem to be using the proceeds to buy real estate. The People’s Bank of China on Monday asked commercial banks in Shenzhen to look into whether their borrowers used property-backed business loans for this purpose during the outbreak. In March, existing home prices in the tech hub rose 9.7% from a year earlier, the fastest pace in three years. This sudden frenzy makes little sense considering the local economy had ground to a halt, as venture capital funding dried out and tech workers lost their jobs.In the past month, anyone in Shenzhen with an entrepreneurial streak has gone apartment hunting, because rates are simply too low to resist. This set of borrowers only needs to pay up to 4.5%, according to Caixin, a financial news outlet. In addition, the Shenzhen government is offering to reimburse up to 70% of interest payments, as long as you’re a first-time borrower who runs a technology startup. All told, an entrepreneur could borrow a large chunk of her existing property’s market value at as little as 1.35%, well below the average mortgage rate of 3.25%.Meanwhile, knowing that small enterprises have become Beijing’s top policy directive, commercial banks and the Shenzhen municipal government are eager to oblige. The Big Four lenders are being asked to grow their small and medium business loan books by another 20% this year, after a 55% jump in 2019, so they are approving whatever that comes to their desks — especially since these loans are backed by property. As for the Shenzhen government's parameters, almost every company could be eligible for the generous subsidy so long as its research and development expenses exceed 4% of sales, and over 60% of revenue comes from the broad industry category of “high-tech innovative industries and services.”It’s worth asking why entrepreneurs are using the proceeds this way. An alternative could be to plow into the Shenzhen stock market, which is offering positive returns this year. Some business owners may well be doing so, but real estate always has a special space in China Inc.’s heart.Of over 3,800 listed non-financial companies in mainland China, more than 40% hold property as investments, even though their business operations have nothing to do with the sector, data compiled by Bloomberg show. This certainly isn’t the case in the U.S.In China, owning these assets is essential to survival. Even by the central bank’s own admission, its big lenders have become “pawn shops,” willing only to lend to large private businesses with sufficient physical collateral.So if you’re a technology startup facing a slowdown, but the bank is offering you some cheap cash, the best course of action may be to buy another apartment. This way, when the economic outlook brightens down the road, you can use that property to take out bank loans.As for the big banks, you can’t necessarily blame them for behaving this way. They don't make any money at the rates they’re being asked to charge. CLSA Ltd. has crunched the numbers: By the end of 2019, the average loan rate for small and medium-size enterprises was lowered to 4.75%, but once we account for banks’ own funding costs (1.77%), the money set aside to cover soured loans (2.3%) and operating expenses (0.8%), these financial institutions are barely breaking even. If they want to lend at all, they naturally prefer to have solid physical assets as collateral.Offering subsidized small business loans at the government’s directive is a tiresome job for commercial banks everywhere. In the U.S., the largest will prioritize their bigger corporate clients. In China, lenders just want to rubber stamp their decisions and make the tedious task disappear, without checking whether proceeds are being used for their intended purposes. A lot of heavy plumbing will have to be done on both sides of the Pacific for these programs to work.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- As the coronavirus pandemic continues, Bloomberg Opinion will be running a series considering the long-term consequences of the crisis. This column is part of a package on monetary policy. For more, see Ferdinando Giugliano on Europe’s last chance at reform and Mohamed El-Erian on creating a sustainable recovery.The economic fight against the pandemic has thrust Asia to the forefront of the global policy response. Officials there are breaking with precedent more radically than anywhere else. Developments in Asia, beginning with the shutdown of China’s economic engine in January, are reaching into every corner of the world. Central banking may never be the same.Yes, the Federal Reserve has the most firepower to deploy, thanks to the dollar’s role at the center of the global financial system. And deploy it the Fed has, moving forcefully to slash interest rates to zero, stabilize markets and shore up banks. But this is mostly evolution, not revolution. Chairman Jerome Powell’s steps built on foundations established during the global financial crisis.For truly dramatic stuff, look across the Pacific. Monetary policy in Asia has gone into territory not charted even in the depths of the Great Recession and the Asian financial meltdown of the late 1990s. In degree and kind, the steps taken by central banks in Asia have been unprecedented, and the influence of their monetary chieftains has never been greater. *****This shift presents itself in two key ways.One is easy to spot in the flood of announcements from Asian monetary authorities themselves. Officials have taken the axe to rates in countries recently seen as either living in economic nirvana or so enmeshed with China’s ascendancy that they had become euphemisms for growth. Borrowing costs are now microscopic, reaching territory once seen as the preserve of the old industrial powers. The idea that Asia central banks, outside Japan, would engage in a form of quantitative easing was until very recently laughed out of the room. It’s now happening. Policy makers are, appropriately, putting worries about a spike in prices to one side. Demand is collapsing in Asia, just as it is in the West. There’s no inflation in a graveyard. Moreover, disinflation was the dominant trend in the years preceding the coronavirus, a trend that looks entrenched in the absence of any worldwide inflation. Capital Economics, a research consultant, expects deflation in South Korea, Thailand and Taiwan.The second manifestation of Asia’s enhanced role in the monetary arena is subtler, but no less profound. Fed officials have come to the view that as the center of economic gravity shifts toward Asia, so must events in the region have a greater say over how the Fed thinks about policy. The implications are far reaching.Prior to the past decade, the Fed didn’t care much about the world beyond America's shores. Fair enough; its mandate from Congress is domestic, dedicated to price stability and maximum employment. But what if those two mandates are increasingly shaped by economies abroad — driven by China and the pull it exercises over an entire region and beyond? The speed with which Covid-19 swept the planet and forced the Fed to respond may, in retrospect, be seen as a Waterloo for policy based on purely national parameters.*****Within the Asian hemisphere, no country more epitomizes the global economy's fall from grace than Australia, a place once seen as possessing some elixir that enabled it to sail through almost three decades without a recession. In late 2018, as U.S. President Donald Trump prepared to ramp up his trade war against China, Jerome Powell was asked for his views on the business cycle at a luncheon at the Economic Club of New York. Australia was the only place where the business cycle was dead, he noted, with a tone that suggested the remark was only partly in jest.While Powell’s counterpart at the Reserve Bank of Australia, Philip Lowe, never spoke in such tones, there were plenty in the country who did: Some special new economic model was being hatched that married Asian-style growth with Western political institutions. In reality, the expansion was slowing at the time and the RBA was fretting that inflation was too low and rates would have to head south.Quantitative easing was floated last year, but scoffed at by those who saw it as an American or European disease. Yet there Australia went, and rapidly too, as the pandemic erupted. On March 19, the RBA cut rates to zero and launched a form of QE aimed at keeping three-year bond yields at 0.25%, an approach that echoes that adopted by the Bank of Japan. The virus may be the epitaph for Australia’s boom, and with it the idea that the country could run a conventional monetary policy. For sheer magnitude of breaks with the past, though, consider Indonesia, the Philippines and South Korea. The first has an unhappy record of dealing with deep recessions and financial upheaval; the Asian financial crisis toppled a regime and tipped the country into communal warfare. Jakarta is determined to prevent that this time. Bank Indonesia hasn’t cut to zero — its benchmark rate sits at 4.5% — but it has been given the authority to buy government debt in the primary market. The Philippines central bank is buying government debt in the secondary market. The idea in both countries is to give the government more fiscal power to deal with the virus and shore up local currencies; both have current-account deficits, which make them especially vulnerable to a loss of appetite from foreign investors. In Korea, a modern first-world industrial economy, officials undertook bond buying even before taking the benchmark rate to zero.“It’s not surprising to see some emerging market governments seeking to emulate the recourse the U.S., Europe and Japan have to central bank financing — monetization — of their debts,’’ Deutsche Bank AG economists wrote on April 6, in a review of Asian policy. “It is unusual, though, to see central banks accepting this mandate before they have exhausted conventional policies.’’*****The Fed, which had essentially exhausted conventional measures prior to the virus, subsequently embraced the role of central banker to the world. But that client — the world — has changed significantly in recent years. If this customer doesn’t own the bank, it has a pretty significant shareholding.China accounts for 40% of global economic growth and Asia overall accounts for 70%. China’s economy is eight times the size it was in 2003 when the SARS epidemic struck. This spectacular growth brought with it a realization that what happens in Asia doesn’t stay in Asia. It comes to the U.S. soon enough. Lael Brainard, a Fed governor steeped in international relations, laid out an expansive view of how the Fed should view the world in a series of speeches in 2016. They were contentious then, as my Bloomberg News colleague Craig Torres reported. “What China does matters to the U.S.,’’ Brainard said on Feb. 26 of that year, when challenged. Now, in the era of trade wars and Covid-19, it seems crazy that global perspectives would be anything other than center stage. For its part, China has refrained from reinventing the monetary wheel in response to the health crisis. The People’s Bank of China has continued to steadily steer rates lower, but is wary of the kind of debt buildup that resulted from its stimulus efforts in 2008. Beijing has reduced reserve requirements for lenders and leaned on banks to direct that extra cash to small and medium-sized businesses. Fiscal policy has been relaxed, though less significantly than in the U.S. and Japan. It’s not that the Fed was ignorant or neglectful of global linkages in the past. It stopped increasing rates during the Asian financial crisis and subsequently cut them after the emerging-market rout of that era morphed into a Russian default. But communications were opaque — this was before dot plots and forward guidance — and rarely mentioned the event directly. Now the virus is everywhere in Fed communications.Transcripts from Federal Open Market Committee meetings during the first half of 2003 show little attention to SARS. To the extent Asia figured much, it was Japanese deflation that occupied the attention of a governor named Ben S. Bernanke. We won’t know how much wattage Covid-19 truly consumed at recent FOMC proceedings until transcripts are released years from now. You can bet your sweet supply chain that it will be more than the 33 times SARS was mentioned in first half of 2003. The Fed may be the world’s financial policeman, but the beat comprises more than a city block.*****As irrevocable as these trends seem, the Fed and the broader college of monetary practitioners need to be wary of a backlash; central banks became a scapegoat for sluggish growth after the financial crisis. Congress, which Fed officials say is the real boss, is parochial by design. To ease fears of mission creep, the Fed could incorporate into its quarterly Summary of Economic Projections a sense of what pace of world growth is required to meet U.S. growth, employment and inflation estimates. A quantifiable guide to the world that so shapes domestic conditions would be extremely useful. It would also acknowledge an unfashionable reality: In an era where globalization is said to be defunct, transnational ties matter more when setting the price of money — not less. And what of Asia’s future? It’s hard to see how these extraordinary steps are unwound anytime soon. Once governments and bondholders get used to a backstop, it’s hard to take away. Policy makers in Indonesia and the Philippines might induce their own domestic “taper tantrums” should they try. At least some of the state subsidies and functions assumed to combat the virus will stay, which means budgets need to be financed. Now that Australia has undertaken QE, how does it withdraw? Does Japan ever withdraw? I’m hearing little or nothing about exit strategies. Central bank independence doesn’t have a long-established history in Asia. Emergency measures have a way of becoming entrenched as vested interests spring up around them. As for inflation, that has been on a pronounced journey down in Asia. In many instances, the pace of price increases is near the lower end of targets and conceivably will push beneath the goal line. Runaway prices, traditionally thought to follow periods of huge stimulus, is unlikely.That’s one lesson to take from the West’s recovery from the Great Recession. As much as the Fed takes Asia into account, in this regard at least, Asia looks like America. The region’s seat at the Fed’s high table comes not a moment too soon. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- China’s banks may be about to assume the mantle of the ultimate widows-and-orphans home for Hong Kong’s small investors.For decades, HSBC Holdings Plc has held that status — a reliable provider of investor income that even carried on paying dividends through the global financial crisis in 2008-2009. Hong Kong’s biggest bank hadn’t missed a payout in Bloomberg-compiled data going back to 1986. That changed Wednesday when London-headquartered HSBC scrapped its interim dividend in response to a request from the Bank of England. The lender’s stock plunged 9.5% in Hong Kong, the most in more than a decade.It’s difficult to overstate the importance of HSBC to individual investors in the city where it was founded more than 150 years ago. The stock is unusually widely held. Institutions own just 61.5% of the shares, compared with 94% for Standard Chartered Plc, HSBC’s London-based and Hong Kong-listed rival. Standard Chartered also cancelled its dividend along with other British banks after the BOE called on them to conserve cash amid the coronavirus pandemic.HSBC’s dependable payouts have also been a lure for institutional investors. Shenzhen-based Ping An Insurance Group Co., the bank’s second-largest shareholder, cited the dividend as an attraction for taking its 7% stake. Mainland Chinese investors will also be feeling the pain: As much as 8.2% of HSBC’s Hong Kong-listed stock sits with investors who bought via trading pipes that connect the city’s exchange with counterparts in Shanghai and Shenzhen. That’s risen from about 2% three years ago.HSBC said it would cancel an interim dividend slated to be paid this month and make no payouts or buybacks until at least the end of the year. That raises the question of where investors will turn in search of the stable income that they used to take for granted from HSBC. The answer may lie in the bank’s giant, state-controlled rivals across the border in mainland China.That might seem surprising. Shares of Industrial & Commercial Bank of China Ltd., and three fellow Chinese lenders that are members of Hong Kong’s benchmark Hang Seng Index, have languished over the past decade. Their poor performance reflects investor concerns that China’s post-financial-crisis buildup of debt will eventually lead to a surge in bad loans. ICBC’s Hong Kong-traded shares are 13% lower than they were a decade ago, and Bank of China Ltd. has slumped 27%. While China Construction Bank Corp. has lost only 1%, Bank of Communications Co. has fallen 44%.Yet all have been steady dividend payers. Including dividends, ICBC has returned 46% in the past decade, Construction Bank 65% and Bank of China 28%. Only Bocom has lost money for its investors. The four banks have typically traded at high dividend yields over that period. Yields for ICBC, Construction Bank and Bank of China have all averaged more than 5%, with peaks higher than 8%. Elevated yields often indicate that investors expect payouts to be cut or omitted altogether, but dividends have actually been rising at the Chinese banks in recent years.China’s opaque financial system and the state-owned banks’ status as policy tools of the government have helped to deter some investors. Yet with the coronavirus shutting down economies from the U.S. to Europe and pressuring financial systems, it’s debatable whether Chinese institutions should be seen as any more risky than their overseas counterparts. For one thing, having been first into the coronavirus outbreak, China’s economy is also the first to start getting back to normal. For another, the government has an incentive to ensure that the banks keep paying dividends because it relies on that income to fund social security spending. An unofficial rule has mandated the big state banks to pay at least 30% of their profits out as dividends, another reason to be sanguine that payouts will be sustained.In 2016, HSBC chose to keep its headquarters in London rather than move back to Hong Kong, a call that it may now be tempted to revisit. It would be ironic if a decision by its adopted jurisdiction helped send shareholders in the bank’s home city — and biggest market — scurrying into the hands of Chinese rivals. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- China needs banks to open the credit taps to get the economy back on its feet after the sudden stop caused by the coronavirus outbreak. The trouble is that they’re in far worse shape than in 2008, when a government-mandated lending boom helped revive growth. That’s why a cut in the deposit rate is long overdue.The People’s Bank of China is in discussions to lower the interest rate banks pay on deposits for the first time since 2015 and a decision could be announced within days, the Financial Times reported last week, citing people familiar with the deliberations. A reduction would shore up banks’ profitability, buying lenders breathing room as authorities lean on them to support companies that are struggling to stay afloat after a shutdown that affected two-thirds of the economy.It can’t come a moment too soon. The government is pushing banks to extend relief by rolling over debts, lowering loan rates and keeping credit lines open. It has allowed them to refrain from collecting interest from virus-affected companies until June 30 and has loosened the criteria for classifying loans as nonperforming. To encourage lending, regulators have also reduced the percentage of deposits that lenders must lodge with the central bank, known as the required reserve ratio.All these measures will increase pressure on a state-controlled banking system that is already undercapitalized and having its net interest margins squeezed. What will really help is a reduction in banks’ funding costs. While the rate on demand deposits is a puny 0.35%, the amount paid on time deposits is far higher — as much as 1.5% on sums locked up for one year.On Monday, the PBOC reduced the interest rate that it charges on loans to commercial banks by the most in five years. The seven-day reverse repurchase rate was cut to 2.2% from 2.4%. While that lowers funding costs, it also signals an impending reduction in lending rates. Analysts say a cut in the central bank’s medium-term lending facility rate, its main policy tool, isn’t far away. That in turn will influence the loan prime rate, set by 18 banks once a month.Smaller banks — outside the big four of Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. — will be the biggest beneficiaries of lower rates for time deposits. These account for a large portion of customer accounts at lenders such as Bank of Communications Co. and Ping An Bank Co., according to to CGS-CIMB Securities Ltd. analyst Michael Chang. Such banks have more small and medium-size enterprises among their loan clients and also lend out more of their deposits.Even the big four could do with some relief. While they’re better capitalized and more profitable than the rest, they bear the burden of being the government’s principal policy tool, requiring them to hand out low-interest loans and help out struggling smaller banks.The bigger question is how much difference even lower deposit rates will make given the scale of the challenge the economy faces. A prolonged health emergency will cause the nonperforming loan ratio to triple to 6.3%, S&P Global Inc. estimates.In 2008, China’s banks were still flush from recapitalizations and initial public offerings conducted earlier in the decade, and their shares were trading above book value. Now, most are at discounts: Bank of China’s Hong Kong-listed stock trades at a price-to-book ratio of less than half. At the same time, the financial system has ballooned in size and leverage has soared. The ratio of debt to gross domestic product jumped to 276% at the end of 2018 from 162% at the end of 2008, according to Bloomberg Economics.China’s banks “make just enough in profits to keep pace with growth and keep capital ratios stable so they can’t afford to do a lot more than they’re doing now,” said Grace Wu, Fitch Ratings head of Greater China bank ratings.Regulators could relax capital ratios at mid-size lenders such as China Minsheng Banking Corp. and China Guangfa Bank Co. Still, that would risk storing up bigger problems down the road. Consumer defaults are already piling up, with overdue credit-card debt swelling last month to 50% from a year earlier. Qudian Inc., a Beijing-based online lender, said its delinquency ratio jumped to 20% in February from 13% at the end of last year.Cutting deposit rates also punishes consumers, the very people the government needs to help get the economy back up and running. Lower rates could also compound banks’ challenges by encouraging depositors to pull out money, though a crackdown on shadow banking has reduced the range of alternatives.There are no easy answers. Whatever their limitations or unwanted side effects, the need to keep banks in some semblance of health suggests lower deposit rates are coming soon. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
BEIJING/SHANGHAI (Reuters) - Three of China's listed state-owned banks reported forecast-beating fourth-quarter results on Friday, as non-performing loan ratios held steady. China's largest banks have enjoyed some preferential policies from the government - such as state support to tackle bad loans. The Industrial and Commercial Bank of China (ICBC), reported a 4.2% rise in fourth-quarter net profit, beating expectations.
(Bloomberg Opinion) -- Pummeled by the coronavirus, China Inc. now faces another disruption: a global shortage of dollars. Chinese companies are looking at $120 billion of debt repayments this year on their U.S. dollar denominated debt. Real estate developers and industrial companies make up three-quarters of the outstanding $233 billion of junk-rated bonds. There’s another $563 billion of higher-rated debt. The question isn’t just whether they’ll be able to pay their debt. It’s worth wondering how they can access the needed dollars — and at what cost.Globally convulsing markets have put a strain on U.S. dollar funding. In China, signs of tightness in dollar liquidity are emerging, based on 3-month interbank overnight rates and other indicators. Banks are trying to beef up dollar cash positions. Meanwhile, yields on big chunks of Chinese debt have shot to over 15% as investors unload, increasing the cost of borrowing and refinancing. Hedge funds and other asset managers that bought up junk-rated Chinese dollar debt are unwinding those positions. In times like these, investors aren’t discriminating. The pain will persist: Credit markets don’t reprice risk as quickly as equity markets.Debtors need dollars now. These companies have typically resorted to raising more debt to refinance the old. They won’t be able to continue like this. Not only has it gotten prohibitively expensive, it’s hard to find buyers at this point. Take real estate developers. They make up around 60% of the outstanding bonds and primarily rely on onshore yuan revenue from advanced payments and deposits on purchases. With sales down sharply, that cash is waning and swapping it to dollars costs more. Further, regulations restrict raising debt for refinancing. This month, developers have around $4 billion coming due, with smaller repayments until November, when $6.7 billion must be repaid. That comes as companies across emerging markets are staring at $19 trillion in maturities of dollar and local currency loans and bonds over the course of 2020.Even with the People’s Bank of China willing to provide various lifelines, private enterprises’ funding costs remain elevated. Raising more debt in domestic capital markets to repay dollar obligations isn't easy or cheap. Onshore, state-backed borrowers are pushing out smaller ones and flooding the new issuance space.Defaults have been ticking up as Beijing goes into forbearance mode. Estimates from the Institute of International Finance suggest that companies with majority state ownership comprise over 35% of non-financial firms’ debt in China. Add in those with any government backing, and it’s more than 80%. Will Beijing step in for all? Unlikely, but it’s still on the hook for a significant chunk. While onshore investors are agreeing to extend payment terms and to exchange debt for equity, holders of foreign bonds are unlikely to be so forgiving.Tapping Chinese banks for funds isn’t straightforward. They don’t have dollars to hand out en masse. Of the $788 billion of total foreign currency deposits held by financial institutions, $377 billion are corporate deposits. That’s down from a peak two years ago. Banks have more than $800 billion of foreign currency loans on their books. Along with the lending for China’s Belt and Road Initiative, the virus-induced economic shock and rising bad debts mean banks will have to be selective. Investors usually find comfort in the PBOC’s war chest of $3.1 trillion in foreign exchange reserves. Sure, it could — and will — step in to ease the dollar-funding pressure on banks. But the moment the lender of last resort starts tapping reserves, sentiment will be hit, and then it's a question of resilience.In addition, these reserves are held in U.S. Treasuries, agency bonds and the like. Only about $18 billion, or 0.5%, are in cash deposits, mostly at commercial banks, according to HSBC Holdings Plc analysts. Selling those as the broader credit market tanks would only drive more market jitters. Unlike many central banks, China’s doesn’t have a swap line with the U.S. Federal Reserve. So how far will the central bank go?There are other pressure points. The dollar shortage will hit trade credit, crucial for China Inc.’s exports and underlying businesses. In periods of dollar strength and shortage, this leads to outflows as overseas financing to buy Chinese goods dries up. As Rhodium Group’s Logan Wright says, “In the 2008 crisis, this was very severe as trade-credit liabilities were paid down and credit lines were cut.” This time, he says, a dollar shortage in this type of credit would probably lead to “a sharper-than-expected decline in China’s exports” over the next few months. At some point, the credit risk becomes entrenched in balance sheets and coming back is hard. The longer these dislocations last, the worse they get. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Quantitative easing, fiscal stimulus. Despite the billions of dollars promised, it seems global financial markets can’t stop sliding. Meanwhile China, the epicenter of the coronavirus outbreak, has remained an ocean of relative calm. How has Beijing managed to pull this off?Christine Lagarde, for one, must be desperate to know. The European Central Bank president got a taste of traders’ impossible expectations Thursday, when they starting dumping stocks even before she spoke, disappointed that expected rate cuts hadn’t materialized. Lagarde failed to demonstrate the “whatever it takes” attitude of her predecessor that we all wanted to see.Compare that with China. Yes, the nation has given the world a big headache. Still, its sell-off has been fairly mild. Just look at the MSCI China Index, which is down 10% this year — peanuts next to the S&P 500’s 23% slide. The MSCI index is a better gauge of global investors’ attitudes about the mainland than the Shanghai benchmark, because most of its component stocks are traded offshore.More importantly, China’s bond market is still open, which lowers the chance of a credit crunch and any unpleasant feedback to stocks. Case in point: Junk-rated Yanzhou Coal Mining Co. just issued 5 billion yuan ($712 million) worth of bonds with coupon rates ranging between 2.99% and 4.29%. By comparison, China’s 1-year benchmark lending rate is 3.15%. This is quite an accomplishment considering an oil price war and the virus have practically shut down high-yield bond markets elsewhere, especially in the energy and mining sectors.Those less familiar with China might say it's easy to coordinate fiscal and monetary policy in a command economy. That’s certainly true. If you dig deeper, however, Beijing’s policy response has been quite mild. When financial markets are in a panic, it’s not the actual amount of stimulus but the frequency that matters. You’ve got to feed traders with small candies, preferably daily.Beijing appears to be throwing the kitchen sink at the problem, revising rules on the go and flashing media outlets with grand, empty promises on a regular basis. So far, traders have gobbled it up and are feeling assured that President Xi Jinping is on this.What has Beijing done, really? The 10 basis point cut to its benchmark rate is nothing compared to the Federal Reserve’s inter-meeting 50 basis point reduction last week. The People’s Bank of China has promised 800 billion yuan of re-lending facilities to support virus-hit enterprises as well as smaller businesses. It has a history of doing much more, such as the 3.5 trillion yuan it has plowed into shantytown developments since 2015.Now for the fiscal side of things. Beijing has allowed municipal governments to issue special-purpose bonds early — to the tune of 1.8 trillion yuan — and various localities have vowed to spend 3.5 trillion yuan on infrastructure. Those lofty numbers may well amount to absolutely nothing, as my colleague Anjani Trivedi and I have both written.This brings us to the problem the Federal Reserve will face next week. By selling off on Lagarde’s response Thursday, markets are just preparing Chairman Jerome Powell for the kind of treatment he may get. Futures traders are already betting the Fed will take its benchmark rate all the way to zero. Powell may have no choice but to follow the markets.How did the Fed allow futures markets to fester to such an extent? The central bank needs to learn what’s already painfully obvious in China: Traders are like children, prone to wild imaginations and tantrums. You’ve got to keep their sugar level steady, like Beijing has done, with frequent policy meetings and banker lunches.It may just be a matter of time before investors realize China’s lofty ambition lacks substance, and stocks will drift lower. Unlike the rest of the world, we’re not seeing 2008-style meltdowns on the mainland yet. But as the U.S. well knows, such drastic stock declines can trigger a fast deterioration of financial conditions that raises the risk of recession.To contact the author of this story: Shuli Ren at firstname.lastname@example.orgTo contact the editor responsible for this story: Rachel Rosenthal at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Hanoi is smudging coal’s prospects.Battered in green-minded Europe, thermal coal producers have been leaning instead on appetite from fast-expanding emerging economies, particularly in Southeast Asia. A change of direction in Vietnam suggests that support may be fading.An energy strategy for the decade through 2030, outlined last month, reduces the role of the dirtiest fossil fuel in favor of wind, solar and gas. That’s a huge step for a country of nearly 100 million that’s growing at 6% to 7% annually, and anticipating a power shortage starting 2021 — not to mention one that until recently had planned to roughly triple its fleet of coal-fired power plants. Vietnam forecasts power demand will more than double in the coming decade.The change of heart reflects a financing squeeze, cheap gas and U.S. pressure on Vietnam to reduce the trade surplus with its largest export market. Combine that with decreasing costs for renewable energy, and growing domestic concerns about air pollution. Then add in the fact that, in the short term, the urgency for extra power may cool as the country gets over the direct and indirect impact of the coronavirus on manufacturing investment. Coal’s sell-by date just moved a lot closer.It’s hard to overstate Asia’s role in coal. The region has, alone, kept the single-largest contributor to greenhouse gas emissions from falling off a cliff. Its extra consumption has helped global coal demand grow marginally in recent years, despite sharp drops in demand in the U.S. and Europe. The region now accounts for almost 80% of global coal power generation, and most of that boost has come from Southeast Asia, led by Vietnam and Indonesia. Vietnamese coal imports almost doubled in 2019.Hanoi isn’t turning away altogether from the fuel that provides about 40% of its electricity. Its national energy development plan backs large-capacity and high-efficiency units, plus so-called ultra-supercritical technology, which is less polluting. Yet it advises spending is targeted elsewhere, including on the grid, on gas and on renewable energy. The National Steering Committee for Power Development has recommended scaling down coal’s share in power generation to 37% by 2025 from half. That eliminates 15 gigawatts of planned projects — significant for a country with about 20 GW of installed coal capacity.The final update to the power development plan isn’t due for a few months, but these signals should already be ringing alarm bells for miners.Consider that it comes alongside increasing financial strain for the coal-fired power sector, under pressure even before recent market ructions. Even the likes of Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. are slowly edging away from the fuel, along with international peers. According to BloombergNEF, out of more than 41 GW of private-sector projects in Indonesia and Vietnam, roughly half had yet to achieve financial closure as of the end of last year. Some will probably fall by the wayside. Asia still has state backers such as Export-Import Bank of Korea — a heavyweight thanks to the outsize role South Korea plays in Vietnamese foreign direct investment — plus Chinese institutions like Export-Import Bank of China. That support may be cooling too, though, with Japan considering stepping away from its role financing coal-fired plants abroad.Meanwhile, Washington is pressuring Hanoi to close a trade gap that widened to $47 billion last year, according to Vietnamese data, by buying more cheap gas. Regional governments have been among those pressing for permission to swap out coal for gas. Absent a substantial increase in gas prices, that trend will accelerate.Besides other incentives to change, coal also threatens Vietnam’s energy security: The country has been a net importer since 2015, and could have to bring in 100 million metric tons a year to keep the lights on if it expands as planned through 2030.None of this spells an abrupt end for coal. Vietnam and Indonesia can still provide guarantees that reduce risk for investors, or long-term purchase deals. China and India may push green concerns to the back as they scramble to keep economies moving.Yet circumstances in this corner of Southeast Asia have swiftly conspired against a dying fuel. If even Politburo members can turn from tripling plants to considering carbon taxes, there’s no reason others won’t follow.To contact the author of this story: Clara Ferreira Marques at firstname.lastname@example.orgTo contact the editor responsible for this story: Matthew Brooker at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- We don’t know how fast the coronavirus will spread, or how soon it will hit our communities, but we’d sure feel better if our homes were well-stocked with toilet paper, hand sanitizer and canned food. The same logic applies to stock investing. No one really knows the full impact of the virus, what it will do to supply chains or how hard it will hit consumer demand. But we are starting to appreciate companies with healthy balance sheets. Cash is king once again. Pinched by the virus and an oil price war, fundraising in the U.S. junk bond market is getting harder, with spreads over Treasuries rising sharply. A renewed focus on credit quality is now spilling into stocks. During Monday’s sell-off, companies with lower leverage fared better. In an analysis of U.S.-listed companies, the least indebted — as measured by leverage ratio — outperformed the most indebted by 3.2 percentage points, according to data compiled by Bloomberg.(1)For now, balance sheet health doesn’t appear to be priced into equity valuations at all. And why would it? The Federal Reserve’s monetary policy has stayed loose since the collapse of Lehman Brothers Holdings Inc.In the last seven years, investors have favored growth stocks and those with share-price momentum — electric vehicle maker Tesla Inc., for instance — while value names got the kiss of death. Leverage, on the other hand, hasn’t featured much either way. As the virus spreads, however, credit quality will start to matter more in the U.S. During previous earnings recessions, investors held onto companies that offered good income in the form of share buyback yield, dividend yield or even free cash flow yield, analysis from Bernstein Research shows. But what’s the point of looking at historical free cash flow if the coronavirus disrupts the supply chain? No matter how profitable a business model, a company won’t be able to sell anything with entire regions on lockdown. When a black swan arrives, only those well-stocked with cold, hard cash can survive.To determine how leverage affects stocks, look no further than China, where the virus originated. In the past decade, the People’s Bank of China hasn’t been as generous as the Fed, alternating between opening and closing the money tap, and experimenting with all sorts of lending facilities to target liquidity to pockets of the economy. Starting in late 2017, officials declared war on shadow financing, an important funding channel for private enterprises.As a result, a company’s leverage ratio is what really matters. In the past year, the least indebted companies on the benchmark CSI 300 Index outperformed the most leveraged by a whopping 21 percentage points, according to data compiled by Bloomberg. To be sure, the Fed wants to keep liquidity flowing, having already cut 50 basis points this month, and is expected to slash its policy rate further at its next meeting. But as we’ve already witnessed this week, with credit spreads soaring, a lower benchmark rate doesn’t necessarily mean financial conditions will ease. In the fall of 2018, when Beijing was in the throes of its shadow-financing crackdown, real estate titans hoped they would merely get by. Investors took notice, treating stocks more as a call option on survival than a bet on earnings growth. While the U.S. is by no means at that level of distress, it’s time for investors to factor in leverage as well. As we all know, only the most diligent squirrels hoarding nuts will make it through a long, harsh winter.(1) For the factor analysis, we looked at the top and bottom quintile of companies by leverage ratio.To contact the author of this story: Shuli Ren at firstname.lastname@example.orgTo contact the editor responsible for this story: Rachel Rosenthal at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.