Alibaba to divide into six separate divisions

Chinese e-commerce conglomerate Alibaba Group Holding today hosted an early morning investor conference call to outline its plan for splitting into six units and explore fundraisings or listings for most of them.

“We believe this will allow all of our businesses to become more agile, enhance their business decision-making, and respond faster to market changes,” CEO Daniel Zhang told investors.

Under the restructure each unit will have its own CEO under a single holding capital and be able to seek outside capital or go public independently. They include Cloud Intelligence; Taobao (commerce platform) Small Business; Local Services; Global Digital Business; Cainiao Smart Logistics Network; and Digital Media and Entertainment.

While Alibaba maintains that the Chinese government did not order the restructuring, it is well known that President Xi Jinping believes the group has become too rich and powerful. The group is following the lead of its main rivals, Tencent and JD.com, which announced similar plans in December 2021 that were seen as a bid to appease Xi.

The move, first announced Tuesday, swiftly lifted shares of Alibaba and other leading Chinese tech firms as investors greeted an unprecedented revamp of entrepreneur Jack Ma’s group as heralding the beginning of the end to Beijing’s crackdown on the sector.

“The expectation is that other big Chinese tech giants could make similar moves, helping to potentially unlock more value, and aligning with authorities’ demands for greater competition as it ramps up its anti-trust drive,” commented Susannah Streeter, head of money and markets at UK financial services group Hargreaves Lansdown.

Analysts believe that Alibaba’s major overhaul will return the spotlight to Ant Group, whose record-breaking US$34.5 billion (£28 billion) planned initial public offering (IPO) on the Hong Kong and Shanghai exchanges in November 2020 were unexpectedly suspended. Alibaba has a 33% stake in Ant, which operates AliPay, one of China’s two dominant mobile pay apps.

At the time of the suspended IPO, Ma was Ant Group’s controller and he, together with executive chairman Eric Jing and CEO Simon Hu were summoned and interviewed by China’s regulators. The Shanghai Stock Exchange said Ant Group had reported “significant issues” and indicated that it did not meet the conditions for listing or “information disclosure requirements.”

However, in January this year it was announced that Ma was giving up control of Ant after shareholders agreed to reshape its shareholding structure to make it “more transparent and diversified” and his voting rights would reduce to just 6.2%.

Ant has also recently secured approval from the China Banking and Insurance Regulatory Commission (CBIRRC) earlier this year to expand its consumer finance business, indicating that the group could be moving one step closer to resolving regulators’ concerns.

“I truly believe Alibaba is aiming for a bigger target,” Kingston Securities Executive Director Dickie Wong told CNBC. “In terms of the bigger picture, obviously would be Ant Group [being] re-introduced into the equity market.

“This is probably the biggest goal for Alibaba Group itself,” Wong said of Alibaba’s revamp plans, adding that the expected listing in Hong Kong will not happen anytime soon “but there’s big hope” for a sooner-than-later deal.

Coinciding with the announcement, reports earlier this week suggested that Alibaba’s founder, who has rarely been seen in public in the past three years, had resurfaced to give a talk at a school in Hangzhou. Ma has maintained a low profile since criticising China's financial regulators in 2020 and was the country’s most high-profile billionaire to have disappeared amid a crackdown on tech entrepreneurs. He recently returned to China after more than a year overseas, according to the South China Morning Post.

Ma told his school audience about the potential challenges of artificial intelligence (AI) to education, according to the school’s social media page. “ChatGPT and similar technologies are just the beginning of the AI era. We should use artificial intelligence to solve problems instead of being controlled by it,” he said.

Shares in SoftBank Group Corp rose sharply on Wednesday after Alibaba announced its restructuring plan. The Japanese technology investor has a 13.7 % stake in the group.

 

Bank of England toughens stance on LDI funds

The UK’s banking sector is resilient to rising interest rates, the Bank of England has asserted.

The central bank's financial policy committee said that Britain’s banks had the capacity to support lending to businesses and households even if interest rates climb higher than anticipated.

Europe’s central bankers have sought to quell any fears that the banking sector is coming under severe strain after several recent  high-profile bank failures in the US triggered a loss of confidence in Credit Suisse.

However, the BoE is clamping down on the leveraged funds that were at the heart of last September’s pension crisis in the UK and issued a warning on the risks posed by the opaque private credit markets to the country’s financial stability.

The Bank will, for the first time, set minimum buffers that liability-driven investment (LDI) funds should hold to be able to withstand shocks in the UK government bond market.

The move comes after UK defined benefit pension schemes, which use LDI funds to manage risks, were thrown into turmoil when last autumn’s mini-budget introduced by former prime minister Liz Truss’s short-lived administration triggered a sell-off in gilts. This caused a jump in cash calls by LDI funds and led to a spiral of gilt selling, forcing the Bank to step in and spend £19.3 billion (US$23.8 billion) to stabilise the bond market.

The BoE’s financial policy committee set out the new rules for LDI funds and also expressed concerns about the potential threat posed by riskier corporate credit markets, a section of the financial system that includes leveraged loans used for private equity buyouts, high-yield bonds and private credit.

The committee said these markets had almost doubled in the past decade and warned that a “prolonged period of negative growth amidst persistently high rates could lead to a material increase in expected default rates in these markets and sharp falls in prices”.

Regulators’ ability to assess the risks this poses is hampered by a lack of data. The committee said it would monitor developments closely and would carry out work to better understand the scale of these markets.

It came as the committee also:

• Announced a tightening up of rules on money market funds to withstand the risk of sudden investor withdrawals;
• Urged financial firms to be improve their “operational resilience” following last year’s stress test for cyberattack threats;
• Decided to keep a rainy day buffer that banks are required to hold at 2%. This so-called countercyclical capital buffer can be lowered in times of stress to help banks absorb losses.

The new rules for LDI funds stipulate that these vehicles must be able to withstand at minimum a jump in gilt yields of 250 basis points (bps), which compares with the 160 bp shock that unsettled the LDI industry last autumn.

 

Acquisition of Credit Suisse benefits rivals

The largest of Switzerland's state-owned cantonal banks expects a boost in growth from the planned merger of UBS and Credit Suisse.

Zuercher Kantonalbank, known locally as ZKB, is already winning customers looking for a safe haven, its chief executive, Urs Baumann told Reuters. The bank had “received inflows from various sources” though he declined to provide detailed figures. “You can presume that cantonal banks are being seen as ...safe havens,” he added.

The Reuters interview contrasts with one that Baumann gave last December to local newspaper Neue Zuercher Zeitung, when he dismissed suggestions that ZKB was trying to poach clients away from Credit Suisse.

ZKB recently announced record full-year results, posting a profit of more than Swiss francs (CHF) 1 billion (US$1.09 billion) for the first time, and a 31% jump in net new assets with the bank disclosing strong inflows of client money.

Baumann, who succeeded Martin Scholl as CEO last September and formerly headed Blue Earth Capital, said he expected to attract customers who may have held accounts at both UBS and Credit Suisse and are reluctant to hold all their money in one bank.

“You can assume ...we will see clients who want to diversify their assets or their loans across other banks,” he said. “There is a chance that the situation might accelerate our existing plans.

“We want to grow, and we have stated that we are open to looking at external growth as well, regardless of the situation of Credit Suisse.

Andreas Venditti, analyst at private banking and investment management group Vontobel, said ZKB “is likely to be one of the main beneficiaries in Switzerland, when viewed across all businesses,” noting it has the broadest offering of any of the cantonal banks, including investment banking.

Tobias Straumann, professor of economic history at the University of Zurich, agreed that ZKB is the obvious candidate to take Switzerland's newly opened No. 2 spot. “It is the only universal bank left,” he said.

 

US regulator blames “terrible risk management” for Silicon Valley Bank failure

A top US regulator has told a Senate panel that the collapse of Silicon Valley Bank (SVB) earlier this month was due to the “terrible” job it did in managing risk, fending off criticisms from lawmakers who accused bank watchdogs of missing the warning signs.

In the first congressional hearing into the sudden collapse of regional lenders SVB and Signature Bank and the resulting market volatility, both Democratic and Republican lawmakers pressed the Federal Reserve’s top banking regulator on whether the central bank should have adopted more stringent oversight of SVB.

“It looks like regulators knew the problem, but no-one dropped the hammer, said Senator Jon Tester, a Democrat.

Michael Barr, the Fed’s vice chairman for supervision, criticised SVB for going months with no chief risk officer and its policy for modelling interest rate risk, which he said “was not at all aligned with reality.” Fed supervisors had flagged such issues with bank management, but they went unaddressed, he added.

“The risks were there, the regulators were pointing them out and the bank didn’t take action,” he said.

The failures of SVB and Signature triggered a broader loss of investor confidence in the banking sector that drove stocks lower and stoked fears of a full-blown financial crisis. A subsequent deal to rescue Switzerland’s Credit Suisse and the sale of SVB’s assets to First Citizens Bancshares has helped restore some calm to markets, but investors remain wary.

Senior members of the Senate Banking Committee agree with Barr that both banks were mismanaged and former executives should be held responsible, but also queried how regulators could have allowed them to collapse so quickly.

Barr responded that he first became aware of the interest rate risk issues at SVB in mid-February, while Fed supervisors had been raising issues with the bank directly in preceding months.

“The failure of Silicon Valley Bank, Signature Bank and the general turmoil in the banking sector are the direct result of the failure of regulators, including the agencies we have before us today,” said Senator Steve Daines, a Republican.

 

China settles first LNG trade in yuan

China has just completed its first trade of liquefied natural gas (LNG) settled in yuan (CNY), the Shanghai Petroleum and Natural Gas Exchange announced on Tuesday.

Chinese state oil and gas giant Chinese National Offshore Oil Corporation, aka CNOOC and France’s TotalEnergies completed the first LNG trade on the exchange with settlement in the Chinese currency, the exchange said in a statement carried by Reuters.

The trade involved around 65,000 tons of LNG imported from the United Arab Emirates (UAE), the Exchange added.

The French supermajor, one of the world’s top LNG traders, confirmed that the trade involved LNG imported from the United Arab Emirates (UAE), but declined to comment further on the deal. 

China has sought for years to establish more trade deals in CNY to increase the relevance of its currency on the global markets and challenge the US dollar’s dominance in international trade, including in energy trade.

During a landmark visit to Riyadh in December, Chinese President Xi Jinping said that China and the Arab Gulf nations should use the Exchange as a platform to carry out yuan settlement of oil and gas trades.

“China will continue to import large quantities of crude oil from Gulf Cooperation Council (GCC) countries, expand imports of LNG, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,” Xi said at the time.

While the Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market, compared to the US dollar’s share of 41%. 

Since last February’s invasion of Ukraine, Russia has turned to trade in CNY in the wake of the Western sanctions on its exports, imports, and energy trade, as the Chinese currency has become Putin’s only alternative to reduce exposure to the US dollar and the euro.

 

UK set to sign Indo-Pacific trade deal

Reports suggest that the UK will shortly join the trade group known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which some are describing as a “major Brexit victory”.

Britain has been in talks to join forces with 11 other countries with the aim of gaining access to a US$10 trillion (£8.1 trillion) market. Members of the CPTPP, which was formed in 2018, are expected to announce the deal formally soon.

The UK said negotiations with the Partnership had been “progressing well”. The government is expected to shortly announce that Britain has become the first non-founding member, joining Australia, Canada, Japan, Mexico, New Zealand, Singapore, Brunei, Chile, Malaysia, Peru and Vietnam.

Prime minister Rishi Sunak's spokesperson told Reuters that ministers were due to discuss CPTPP with their counterparts later this week and there would be an update at the “earliest possible opportunity”.

The CPTPP currently constitutes 11 countries that have combined to make a group that enjoys a free trade agreement. The Partnership covers virtually all sectors and aspects of trade, with its sole aim to reduce red tape, remove trade barriers, and facilitate trade business between the member countries.

Between them, the club’s constituents are home to around 500 million people and generate more than 13% of the world’s income.

The UK government is keen to conclude a trade deal now Britain is outside the European Union (EU). Joining the CPTPP would add even “more economic clout to this exciting and dynamic trade alliance” and allow the country to grow financially while strengthening “our bilateral trade relationships with Vietnam, Malaysia and Singapore — which total £32 billion”.

 

Allianz applies to establish fund management unit in China

Germany’s Allianz Global Investors (AllianzGI) has become the latest foreign asset manager to seek Beijing's approval to expand in the world's second-largest economy.

The application, submitted last Friday to the Chinese authority, requests authorisation for setting up a new fund management unit in the country. if approved will mark AllianzGI’s foray into China’s US$3.95 trillion fund management industry.

The move comes six months after a Reuters report stated that AllianzGI was in talks with Chinese banks to create a majority-owned asset management joint venture (JV) in China. The firm reportedly held discussions with Industrial Bank and China CITIC Bank among others.

An AllianzGI spokesperson said that the application “further demonstrates the firm’s commitment in China and its dedication to develop the onshore fund management business in this important market.”

If approved, the proposed fund management unit will help AllianzGI to launch a greenfield fund unit and strengthen its footprint in China’s mutual fund industry. It will be in addition to a Sino-foreign JV founded in 2003 by AllianzGI’s parent company, the Allianz insurance group which owns a 49% stake in the JV.

Several global asset managers including BlackRock, Fidelity Intenational and Schroders are looking to enter China’s onshore financial market by setting up local fully-owned fund units.

 

UK Infrastructure Bank invests in sustainable electricity funds

UK Infrastructure Bank, set up in June 2021, is to invest up to £200 million (US$246 million) across two investment funds to accelerate the development and deployment of crucial storage technologies, “helping to drive the country’s transition to a cleaner, greener and more resilient electricity network.”

The proposed investment will support the development of new energy storage, following the Bank’s expression of interest to find innovative ways to fund and increase the nation’s storage capacity.   

The Bank will invest £75 million on a match funding basis into the Gresham House Secure Income Renewable Energy & Storage LP (SIRES) alongside a £65 million investment from UK utility Centrica, owner of British Gas.

UK infrastructure Bank has committed to invest £125 million on a match-funding basis into Equitix UK Electricity Storage Fund.

The deals, which represent the Bank’s first investments in the electricity storage sector, could facilitate around 1300 jobs and will unlock at least a further £200 million in match-funded private sector capital, acting as a catalyst for the sector and helping to build confidence among private investors.

Securing enough storage capacity for the UK electricity network is vital to ensure the transition away from fossil fuels is affordable, secure and delivers the emissions reductions required to achieve net zero across the UK by 2050. Ramping up the scale and the rate of investment into electricity storage is crucial as homes and businesses across the UK increasingly rely on energy from intermittent renewable sources.   

Currently National Grid forecasts show that up to 29 gigawatts (GW) of total storage could be needed by 2030 and up to 51 GW by 2050. This is a huge increase on the 5 GW currently available and means there is a clear need to accelerate deployment of capital and investment in new storage projects.

 

Digital Euro Association and Ripple issue CBDC/digital assets whitepaper

A whitepaper describing aspects of central bank digital currencies (CBDCs), privacy and their interaction has been presented to the public by a working group of the Digital Euro Association (DEA). US crypto solutions group Ripple, an official DEA partner, was also involved in the development of the report.

Ripple’s head of digital currency products and solutions, Anthony Ralph, presented his views and expertise for the study. Commenting on the whitepaper, he said that CBDC and blockchain, as the technology on which “state cryptocurrencies” are built, can – and do – offer enhanced security and access control to ensure privacy in various usage scenarios.

In response to concerns about government oversight of CBDC and digital assets, the whitepaper seeks to answer questions about the reasons for the need for privacy, the role of technology in ensuring it and how existing regulatory assets will affect “state cryptocurrencies”.

The paper’s main conclusion is that there is a need for minimum standards to be adhered to globally, even if each central bank will have different views and values regarding privacy in the matter of CBDCs and digital assets. It is possible that in the future, “state cryptocurrencies” could increase global inter-jurisdictional data flows, despite different use cases and implementations, the authors of the text suggest.