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China bank-backed dollar bond sales tumble – Industry roundup: 28 November

Default worries trigger slump in China bank-backed dollar bond sales

Cash-strapped Chinese borrowers are losing another funding avenue, as default jitters rock a market that relies on quasi guarantees from banks for repayment, reports Bloomberg.

Sales of China dollar notes carrying a so-called standby letter of credit (SBLC), effectively a lender’s pledge to repay if the issuer is unable to, have slumped by 90% to US$1.04 billion so far this year against the same period in 2022, according to Bloomberg-compiled data. This outpaced a 52% drop in China dollar bond sales to US$52.2 billion for the same period, the data showed.

With China’s property developers undergoing a fresh round of crises and even large builders defaulting, banks are reluctant to provide such pledges. Investors also have doubts over the structure, which falls short of being an explicit repayment guarantee. This has shaken a market that helped lower-rated companies, including local government financing vehicles, raise a record US$10.3 billion in 2022.

“At the end of the day, the question for the SBLC providers is: are they being compensated sufficiently to take on the risk of default of the issuer?” said Charles Chang, Greater China country lead for corporates at S&P Global Ratings.

The pledge to repay was tested in September, when Chinese developer Sino-Ocean Group Holding missed payment on its debt. While the company said it would suspend payments for all its offshore bonds, it made a US$3.8 million interest payment due 26 October for its 2025 dollar security backed by China Zheshang Bank Co.

The SBLC uses the company’s assets as collateral and the payment reflects solutions to the group’s debt “based on the different rights of different stakeholders,” Sino-Ocean said in a filing in October.

Two other high-profile tests occurred in 2019 —China Minsheng Investment Group and Tewoo Group —which were honoured by China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) respectively.

When evaluating the credit risks of such bonds, Moody’s Investors Service relies more on the creditworthiness of the banks providing the standby letters instead of the issuers, said Kan Leung, an analyst at the ratings firm.

Increasingly, regional banks are backing such debt, raising questions on the strength of recent guarantees. Zheshang Bank, located in the southeast part of China, which provided the SBLC for Sino-Ocean, also offered similar backing for a dollar bond sold by Chinese developer Greentown China Holdings last year. Out of the 122 SBLC-backed dollar bonds issued in 2022, Zheshang Bank provided standby letters for 18 of them, Bloomberg-compiled data shows.


Data shows Japan’s inflation edging higher

Japan's business-to-business service inflation moved higher in October as Japan’s tight jobs market lifted labour costs, underscoring a broadening of price pressures that could heighten the chance of a near-term end to the country’s recent ultraloose monetary policy.

The services producer price index, which measures the price companies charge each other for services, rose 2.3% lst month from a year earlier, up from a revised 2.0% gain in September, Bank of Japan (BOJ) data showed.

Information and communication, machinery repair and worker dispatching businesses saw fees increase from year-earlier levels due to higher labour costs, while a surge in inbound tourism drove up hotel fees by 49.9%.

The data suggests that Japan's economy is making progress toward achieving sustained rises in inflation accompanied by solid wage growth.

BOJ Governor Kazuo Ueda has said inflation has been driven mostly by cost-push factors and must shift to a more demand-driven rise in prices backed by higher wages for the bank to consider normalising its ultraloose monetary policy.

His remarks have heightened market attention to developments in services prices, which most vividly reflect wages pressures companies face in their businesses.

With inflation having held above the BOJ's 2% target for more than a year, companies have faced unprecedented pressure to compensate employees with improved pay awards to retain and lure talent.

Indications from businesses, unions and economists suggest the labour and cost pressures that had set the stage for this year's pay hikes — the largest in more than three decades — will persist heading into next year's key spring wage talks.

A Reuters poll in October showed nearly two-in three economists expect the BOJ to end its negative interest rate policy in 2024.


Metro Bank shareholders approve rescue deal

The UK’s Metro Bank has announced that its shareholders have backed a proposed rescue deal worth nearly £1 billion (US$1.26 billion).

Over 90% of shareholders have voted in support of all resolutions, the bank confirmed, enabling a deal to raise extra funds from investors and refinance debt can now go ahead.

"This is testament to their belief and confidence in the future of Metro Bank and proves there is a place in retail and business banking for our model of stores in major towns and cities, combined with online and mobile banking and great customer service," the bank said.

The total package, which was first announced seven weeks ago, consisted of a £325 million capital raise, including £150 million of new equity from shareholders, and £600 million of debt refinancing. At the time Metro's chief executive, Daniel Frumkin, said it marked “a new chapter” for the bank.

The equity raise will be led by Metro’s largest shareholder, the Colombian billionaire Jaime Gilinski Bacal’s Spaldy Investments, which will contribute £102million. His stake will now rise from 9% to 53%, making him the controlling shareholder.

Investors had been warned earlier this month that if the package was rejected, Metro Bank would probably be judged to be unviable and placed into the resolution process for failing banks.

At its launch in 2010 Metro was the first new bank to open in the UK for more than a century.

It positioned itself as a so-called “challenger” bank to the “Big Four” High Street names, and pledged to keep its branches open seven days a week.

The bank now has 2.7 million customers and holds about £15 billion worth of deposits in 76 branches. Metro has faced a number of challenges in recent years after an accounting scandal in 2019, which led to the departure of several top executives, including the bank's founder.


Invest America initiative gains support

US government-funded investment accounts for children, with the funding matched by corporate America, could become a reality if an initiative already attracting support gains traction.

Under the title 'Invest America' the campaign, still in its early stages, is spearheaded by tech investor Brad Gerstner, founder and chief executive of Altimeter Capital. Gerstner been working with lawmakers to promote a legislative programme known as Invest America that would create an investing account seeded with US$1,000 for each child born in the US.

He aims to have legislation passed before the next presidential election and is working with corporate America to encourage businesses to offer matching funds to help employees further their savings.

“The vision is simple —that corporations would include an Invest America match of $1,000 into the Invest America account of children of their employees,” says Gerstner. “We have talked with companies ranging from Zillow to Dell to Uber and, subject to details, the response has been overwhelmingly positive,” he said.

Historically, US corporates have done little to ensure the financial well-being of employees’ children. That attitude could now be changing, as companies step up efforts to attract and retain talent with benefits that support employees across multiple facets of their lives. 

About 96% of US companies that offered a 401(k) plan in 2022 made planned matching contributions to workers’ retirement savings, according to a survey by the Plan Sponsor Council of America, a trade group. “We expect that corporate matching to Invest America accounts would be very widespread,” Gerstner said.

Rich Barton, co-founder and chief executive of tech real estate marketplace Zillow said it’s a “no-brainer” for his company to fully support and match the type of program Gerstner is proposing. “A 401(k)-style investment account from birth seems like a great way to tackle the growing divide around financial literacy and wealth,” he comments. “It is a small investment to help parents achieve more peace of mind.”


CBA draws in Australia’s budding tycoons on business accounts

Australia’s young entrepreneurs accounted for the majority of new business account openings at Commonwealth Bank (CBA), one of the country’s Big Four, in FY23 at 63.3%, citing extra income and freedom over their careers as key motivators.

In the year ended 30 June 2023 the number of new CBA business transaction accounts increased by 10.4% year-on-year, with Millennials (born between 1981 and 1996) accounting for 48.5% of new openings while Generation Z (1997 to 2012) opened 14.8% of new accounts. The traction in new business account openings appears to have accelerated more recently though, with new account openings in the quarter to 30 September up by 26% y-o-y.

CBA's executive group manager for small business banking, Rebecca Warren, said that while it had been a challenging year for Australia’s small business owners, the significant growth in the number of people starting their own small business revealed a strong Aussie entrepreneurial spirit. 

She reported that more women were taking advantage of opportunities to start or run their own business or side business, with women opening up 43.2% of new business transaction accounts in the 2023 financial year.

“An increasing number of younger Australians and women are choosing to start a small business or side hustle to supplement their primary income or as an avenue to pursue new ideas to fill market gaps or build experience and skills in industry segments of interest such as photography or graphic design,” said Warren.

“In fact, the creative services were the third most common type of small business/side hustle that entrepreneurs have created in the last three years. Aussies are demonstrating great entrepreneurial flair, determination and drive, using fresh approaches to attract customers or target niche areas.”

She revealed that the research suggests that 51% of new business owners are looking for extra income, and 23% are looking for new opportunities that give them more control, freedom and independence over their careers.

“Women are more likely than men to have started their small business or side hustle because they needed some extra income (56% compared to 48%), while men are more likely to have done so because they saw a gap in the market (17% versus 8%),” Warren noted. “Many young people have decided they don’t want to work for anyone else and are looking for greater autonomy to pursue their career dreams and are keen to excel quickly. Starting their own business allows them to take control of their financial future and build a career on their own terms.

“Living in a fast paced, digital world has had a unique impact on Generation Z and the way they approach business and innovation. It’s no surprise that their most common type of small business or side hustle is an online one.”

Philippines and Malaysia introduce biometric banking options

One of the Philippine’s largest banks is introducing biometric verification through voice recognition in order to stem fraud.

UnionBank will become the country’s first to implement speech recognition, starting with its customer service, local news outlet PhilStar reports. UnionBank does not reveal the biometrics vendors it uses in its data privacy statement.

Announcing the news, UnionBank’s head of AI Adrienne Heinrich said that young digital nations such as the Philippines still lack awareness of financial fraud, while scammers are skilled at obtaining confidential information from victims through social engineering.

“We hope to implement it next year, and I hope it [the shift] will be super-fast,” Heinrich said, speaking on the sidelines of the Singapore Fintech Festival. Currently, banks in the Philippines offer facial recognition, fingerprints, and iris scans.

Separately, another local bank relying on biometric authentication, the Philippine National Bank (PNB), has announced a milestone as registered users of the PNB Digital App surpassed one million. The app uses the PNB Digital Key soft token with fingerprint and face biometrics.

In Malaysia, residents will finally be able to try out a fully digital banking experience by enrolling through electronic Know Your Customer (eKYC) verification.

GXBank, led by Singaporean ride-sharing giant Grab, launched its beta digital banking app for an initial customer group of 20,000 Malaysians. Customers will be able to sign up through KYC using a local identification card and a one-time password (OTP). In addition, users will be able to secure accounts with face biometrics. Existing Grab users can access GXBank directly within the former’s app, tech news website TechWireAsia reports.

GXBank was among the first batch of successful applicants for digital bank licenses in Malaysia. Four other banks were also approved.

Hong Kong digital wallet to combine currencies for cross-border payments

RD Wallet, a digital wallet for Hong Kong’s businesses and citizens issued by local fintech company RD Technologies, has been launched and aims to integrate banking and e-commerce applications that enable traditional cross-border payments to be made as well as crypto.

A release noted that digital wallets still have a fragmented place amongst Hong Kong’s cash-legacy economy much like the rest of the world excited about wallets but still fine-tuning their openness on standards and technical interoperability while even navigating the potential to intermix real and cryptocurrencies.

With nine in 10 consumers having used a digital wallet, China has been equallyreceptive to digital credentials but enwrapped in the necessary licensing requirements.

A taskforce was first assembled in 2014 to study a course of direction for the development of a Central Bank Digital Currency (CBDC) and Hong Kong’s readiness in issuing a CBDC to retail and e-commerce set the trend going across the world. The Hong Kong Monetary Authority in 2022 embarked on the e-HKD Pilot Programme, which called on participants for prototyping and testing of electronic versions of bank notes within the e-wallet entity to make any retail purchases.

Last month, the Hong Kong Monetary Authority (HKMA) formed the CBDC Expert Group for creating policies and nurturing technical cohesion of cryptocurrencies across wallets through partnership and knowledge exchange on CBDC research.

With no national wallet, bankers like the fintech founder, Norman Chan Tak-lam, or other firms focused on stablecoins or Web 3.0 could emerge in the near future, but China is looking to stabilise the emerging digital banking space at least by 2024.

According to the release: “The RD Wallet will see other fintechs pushed to innovate China’s economy further into a financial capital of the world, converting multiple dominant currencies: the Hong Kong dollar, the yuan, the US dollar, the yen and the euro.

A stored-value facility licence for the RD wallet came into effect in December, giving the final approval from the HKMA in April.


ScotPac and Ebury partner to support Australian SME’s global growth strategies

Australian and New Zealand business lender ScotPac and international payments specialist Ebury have announced a new working capital, FX and cross border payments partnership seeking to make trading in global markets faster and more accessible for all enterprises.

A release said that the collaboration will provide clients of both firms with ready access to ScotPac’s working capital solutions, and Ebury’s global expertise in FX and cross-border payments. The partnership will more closely align ScotPac’s working capital solutions with Ebury’s currency exchange and international payment services and offer significant advantage for any businesses involved in international trade.

ScotPac CEO, Jon Sutton, said the new partnership with Ebury provided a perfect fit for its clients as SME demand for global trade support was growing rapidly.

“We are delighted to partner with Ebury to round out a comprehensive, holistic and tech-enabled solution for our trade finance clients. For SMEs looking to expand globally, reliable and experienced foreign exchange and payment insights is critical.

“When combined with our flexible trade finance products, Ebury’s services will help our clients enter new markets, establish international operations, and conduct business on a global scale. It will also give them back precious time to focus on growing their businesses.”

Philippines launches maiden sukuk bonds issue

The Philippines, one of Asia's most active sovereign debt issuers, has launched its maiden sukuk bonds issue, according to a government announcement, mandating banks involved to arrange the sale.

The bonds would have 5.5-year tenors in the first such debt issue from the Philippines, which the government had earlier said would be launched this month. No target was given for how much the government hopes to raise.

In September Finance Secretary Benjamin Diokno said he hoped to generate US$1 billion from the maiden offer, with the government to target institutional funds in the Middle East which would be allowed to buy a mininum US$200,000 in sukuk bonds.

The Philippines plans to borrow around US$44 billion from debt markets, with about a quarter of that coming from foreign sources, to fund the government’s pesos (PHP) 5.77 trillion pesos (US$10 billion) budget for next year.

Banks involved in the issue had been mandated to arrange a series of fixed income investor calls in Asia, Europe, the Middle East and the United States starting this week, the government said.


Volkswagen chief warns on South Africa operations

Volkswagen’s global passenger car boss has expressed concern over the future viability of the German automotive group’s operations in South Africa.

Volkswagen Passenger Car CEO Thomas Schäfer said that factors such as South Africa’s competitive labour costs once put its Eastern Cape factory among the manufacturer’s best performers globally.

The VW Kariega plant has been assembling cars for over 70 years. It currently manufactures the highly popular Polo and Polo Vivo hatchbacks and employs over 3,500 people. VW Kariega has played a vital part in establishing Volkswagen’s popularity in South Africa, and it exports thousands of cars to international markets each year.

However, Schäfer said the cost of mitigating challenges South Africa’s regular power outages, rising labour costs, and delays in railway transport and the movement of goods through the country’s ports had eroded the plant’s advantages.

“Eventually, you have to ask, ‘Why are we building cars in a less competitive factory somewhere far away from the real market where the consumption is?'” Schaefer said. “I’m very worried about it … We’re not in the business of charity.”

Volkswagen has been cutting costs to improve its profitability and help it remain competitive in the global transition to electric vehicles (EVs). The company has struggled to compete in the growing segment in China, one of its biggest markets.

Its “ID.” EVs have also been met with largely mixed or negative reviews over recent years, with software issues plaguing both customers and critics..

Volkswagen is yet to offer any of these cars to consumers in South Africa, although it has run several fleet tests over the past few years — including a trial of the ID.4 in 2022. Schäfer said there were no plans to produce EVs locally because ttheir pricing put them beyond the budgets of most domestic consumers.

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