China establishes US$47.5 billion third fund to boost semiconductor sector

China has set up its third planned state-backed investment fund to boost its semiconductor industry, with a registered capital of US$47.5 billion, a filing with a government-run companies registry shows.

The third phase of the China Integrated Circuit Industry Investment Fund – aka the National Integrated Circuit Industry Investment Fund or the ‘Big Fund’ – was officially established on 24 May and registered under the Beijing Municipal Administration for Market Regulation, according to the National Enterprise Credit Information Publicity System, a government-run credit information agency. The third phase will be the largest of the three funds launched by the China Integrated Circuit Industry Investment Fund.

China's finance ministry is the biggest shareholder with a 17% stake and paid-in capital of yuan (CNY) 60 billion, according to Tianyancha, a Chinese companies information database company. China Development Bank (CDB) Capital is the second-largest shareholder with a 10.5% stake.

Seventeen other entities are listed as investors, including five major Chinese banks: Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China, Bank of China and Bank of Communications, with each contributing around 6% of the total capital.

With its Made in China 2025 initiative, Beijing has set a target for China to become a global leader in a wide range of industries, including artificial intelligence (AI), 5G wireless, and quantum computing.

The first phase of the fund was established in 2014 with a registered capital of CNY138.7 billion, and the second phase followed in 2019 with CNY204 billion.

The Big Fund has provided financing to China's two biggest chip foundries, Semiconductor Manufacturing International Corporation, and Hua Hong Semiconductor, as well as to Yangtze Memory Technologies, a maker of flash memory and various smaller companies and funds.

One of the major areas the third phase of the fund will focus on is equipment for chip manufacturing, Reuters reported in September. Also, the Big Fund is considering hiring at least two institutions to invest the capital from the third phase.

The latest move could be regarded as a riposte to the US, which has imposed a series of export control measures over the last couple of years, citing fears Beijing could use advanced chips to boost its military capabilities.

US aims for critical domestic rare earths supply chain by 2027

The United States is on track to meet its goal to have by 2027 a domestic supply chain of rare earth elements (REE) for its defence needs, according to a senior official at the Department of Defence (DoD).

The US aims to reduce its reliance on Chinese rare earth materials and has classified close allies Australia, Canada, and the UK as a ‘domestic’ source of critical mineral supply.

“We are on track to meet our goal of a sustainable mine to magnet supply chain capable of supporting US defence requirements by 2027,” said Laura Taylor-Kale, US Assistant Secretary of Defence for Industrial Base Policy.

The US has already backed several Australian miners to set up projects to mine rare earth minerals and establish supply chains. In March , Australian Strategic Materials received a non-binding and conditional Letter of Interest (LoI) from the Export-Import Bank of the United States (US EXIM) to provide a debt funding package of up to US$600 million for the construction and execution phase of the rare earths and critical minerals Dubbo Project in New South Wales.

EXIM is also supporting Australia-listed Meteoric Resources for its Caldeira Rare Earth Ionic Clay Project in Brazil.

Separately, the US DoD is providing funding the construction of a rare earths processing facility in Texas of Australia’s Lynas Rare Earths. In March, DoD said that it “has in recent months advanced its goal of developing domestic supply chains to ensure continued access to the rare earth materials needed to manufacture the permanent magnets used in important US military weapons systems.”

Rare earth permanent magnets are essential components in a range of defence capabilities, including the F-35 Lightning II aircraft, Virginia and Columbia class submarines, and unmanned aerial vehicles. They are also a critical part of commercial applications in the US.

China is forecast to hold 77% of rare earths elements refining in 2030, the International Energy Agency (IEA) said in a report this month, classifying the geopolitical risk in the supply of REE as ‘high’ due to the concentration of refining in one single country.

 

Boeing’s cash flow situation worse than expected, says S&P analyst

Boeing’s cash flow situation is incrementally worse than their expectations, a Standard & Poor’s (S&P) Global Ratings analyst said, after the company said it would be cash-flow negative in 2024.

The global aerospace group currently has a BBB- rating from S&P, one level above “junk” status, with a negative credit rating outlook. The rating agency changed that outlook in April to “negative” from “stable” due to the increased chance that it will take more time for cash flow to recover.

Boeing Chief Financial Officer Brian West recently admitted that full-year cash flow would be negative for 2024, rather than modestly positive as it forecast in March.

“It’s certainly not good news. We were already expecting this year would be below our financial expectations for the rating and this is incrementally worse,” Ben Tsocanos, airlines director at S&P Global Ratings, told Reuters. “We’re focused on the company’s progress towards a healthy level of aircraft production going into next year.”

Boeing said it would burn billions of dollars more than expected in the coming months and is unlikely to generate cash for the full year, signalling the jet maker is struggling to contain the financial fallout from cascading production and supply-chain issues.

Earlier this year, the group was also given 90 days to present regulators with an action plan to address quality-control issues at its 737 factory and Is expected to submit its proposals this week.

 

German economy edges back into growth

The German economy grew by 0.2% in the first three months of 2024, the statistics office recently reported. It marked an improvement from the previous quarter’s -0.5% contraction and was in line with analyst estimates. Year-on-year gross domestic product (GDP) came in at -0.2% in Q1 2024, which was the same as the previous quarter, as well as in line with market expectations.

”After GDP declined at the end of 2023, the German economy started 2024 with positive growth," said Ruth Brand, president of the Federal Statistical Office (Destatis).

Despite declining inflation, household consumption did not recover in the first quarter, falling 0.4% on the fourth quarter of 2023. Government expenditure was also 0.4% lower than in the previous quarter, the data showed.

This increase was mainly due to a jump in gross fixed capital formation, which rose to 1.2% in the first quarter of the year, from -2.1% in Q4 2023, primarily driven by advances in construction investment. Following a weak second half of 2023, investment in construction rose sharply by 2.7% on the quarter, although investment in machinery and equipment fell by 0.2%.

Positive contributions also came from foreign trade. In the first quarter, exports of goods and services were up 1.1% compared with the previous quarter. Exports grew 1.1% in Q1 2024, up from -0.9% in the previous quarter, and imports advancing 0.6%, a rise from the -1.6% seen in Q4 2023.

Inflation came in at 2.2% in April, which was the same number as March, and down from February’s 2.5%. This could be an encouraging sign for Europe’s biggest economy, as inflation is gradually returning to the European Central Bank (ECB)’s 2% target.

“The rate of inflation has been below 3% since the start of the year,” said Brand. “Energy and food prices in particular, have had a dampening effect on the inflation rate since January 2024.

“However, core inflation- measured as the change in the consumer price index excluding food and energy- has been higher than overall inflation since the beginning of the year.”

Despite inflation inching down, consumer spending has rallied less than expected, with private consumption and government spending both dropping 0.4%. This is likely to be due to most consumers still being cautious about the lingering effects of higher interest rates and economic uncertainty, which have plagued Germany for several months.

In recent months, the German economy has faced several challenges such a worsening property crisis, airline strikes and a lacklustre economy. However, this latest GDP report may signal a turning point. 

According to KPMG, “The German government’s assessment of the economic outlook for Germany is slightly better than at the beginning of the year. The forecast for economic growth this year was raised by 0.1% to 0.3% in the spring projection.

“Falling energy prices, lower inflation rates, monetary easing and a recovering global economy, from which the export-oriented German economy is benefiting, should ensure a recovery for both private households and industry. Private consumption in particular, which is driven by rising real wages and a stable labour market, is expected to provide important impetus for growth.

“Despite the positive signals, the structural problems remain. The German government must continue to work on strengthening Germany as a business location in order to achieve higher growth again in the medium and long term.”

 

South Africa’s ‘Big Four’ banks look to China for growth

South Africa’s ‘Big Four’ banks – Absa, Nedbank, FirstRand and Standard Bank – want to increase their market share in China and capture the value from increasing trade and financial flows between the Asian economy and Africa. 

Nedbank recently reaffirmed the expansion of its corporate and investment banking partnership with the Bank of China (BOC) to facilitate increased business flows between China and Africa. 

Nedbank first signed a cooperation agreement with the Chinese bank in 2013 and wants to increase its exposure to the world’s second-largest economy.

The initial agreement in 2013 aimed to assist BoC’s clients by granting them access to an African bank, while Nedbank clients seeking expansion into China and other Asian markets would benefit from the Chinese bank’s expertise.

The latest move follows Absa opening a non-banking subsidiary in China earlier this month, enabling it to provide general advisory services to clients. 

The lender will also be able to distribute research about the macroeconomic environment and securities reports to some institutional clients in China.

“Our decision to establish a presence in China was driven by our ambition to better connect trade, investment flows, and clients into Africa,” Absa’s CEO Arrie Rautenbach said.

China has historically been the largest investor on the continent, and trade between the two countries has grown significantly over the past two decades. Chinese companies have invested in Africa’s vast natural resources and infrastructure projects, creating huge commercial opportunities for both regions.

With its latest move, Absa joins rivals FirstRand and Nedbank in deepening their foray into China. Standard Bank also has a subsidiary in the market.

Similar to Nedbank, Standard Bank has had a long-standing partnership with the world’s biggest bank, the Industrial and Commercial Bank of China (ICBC). Standard Advisory (China), the bank’s subsidiary in China, provides general business liaison and marketing support to other entities within the Standard Bank Group. 

Africa’s largest bank by assets has had a presence in major financial hubs for well over a decade, with offices in New York, London, and Sao Paulo.This is part of its strategy to be the dominant player in facilitating trade between African states and their global counterparts. 

FirstRand offers services to Chinese companies doing business in Africa through FNB and RMB and also has a presence in New York and London.

 

Citi sees opportunity in growing Asia-LatAm trade corridor

Citi is seeking to capitalise on its local presence in Latin America as Korean and Chinese firms intensify their nearshoring efforts, according to Euromoney.

Larissa Ku reports that the move results from the ongoing US-China trade war, with US president Joe Biden announcing plans for unprecedented tariffs on Chinese imports, including a possible 100% on electric vehicles and 50% on solar cells – two of China’s top export items.

To counter protectionist policies by the US, Chinese companies began moving final assembly steps to southeast Asian countries, enabling products to be labelled as made in Vietnam or Indonesia. Now, there is increasing focus on Latin America. As Mexico capitalises on this strategic role in global supply-chain restructuring, fuelled by the US government's drive to reduce dependence on Chinese goods, it is those Chinese companies themselves that are setting up factories in the country.

“The China-to-ASEAN corridor, particularly into Vietnam, Indonesia, and to some extent Malaysia, has shown tangible and visible growth,” commented Citi Commercial Bank Asia Pacific Head, Gunjan Kalra. “Now, we're witnessing a similar trend unfolding between China and Latin America”

“We have observed high double-digit annual growth in the Asia-Latin America corridor over the past year, particularly from China and Korea. We attribute this to supply-chain reactions after COVID-19, geopolitical tensions, tariff considerations, cost factors and the ‘China plus one’ strategy of diversifying international investment.”

Last September, a group of Brazilian farmers and officials arrived in the Peruvian fishing town of Chancay. The draw: a new Chinese mega port rising on the Pacific coast, promising to turbo charge South America's trade ties with China.

The US$3.5 billion deep water port, set to start operations late this year, will provide China with a direct gateway to the resource-rich region. Over the past 10 years, Beijing has overtaken the US as the largest trade partner for South America through demand for its soy, corn and copper.

The port, majority-owned by Chinese state-owned firm Cosco Shipping will be the first controlled by China in South America. It will have capacity to accommodate the largest cargo ships, which can head directly to Asia, cutting the journey time by two weeks for some exporters.

Beijing and Lima hope Chancay will become a regional hub, both for copper exports from the Andean nation as well as soy from western Brazil, which currently travels through the Panama Canal or skirts the Atlantic before steaming to China.

However, the project has recently run into complications. In March, Peru's port authority claimed that an “administrative error” had given Cosco exclusivity at Chancay and asked a judge to annul the decision. Cosco has requested negotiations to reach an amicable resolution without resorting to international arbitration, local media reported

The Peruvian government also wants to avoid an international arbitration process, which could be filed by Cosco should a legal dispute develop over exclusivity rights to the new facility being built by the firm, an official said.

 

US Republicans slow progress of digital dollar

US lawmakers in the House of Representatives passed a bill on 23 May that would prohibit the Federal Reserve from issuing a central bank digital currency (CBDC) without explicit authorisation from Congress. Three Democrats joined all Republicans in voting for the bill.

The CBDC Anti-Surveillance State Act was led by House Majority Whip Tom Emmer and backed by Republican members of the House Financial Services Committee.

If passed in both chambers of Congress, the bill would be a significant step toward curbing the federal government’s ability to regulate cryptocurrency, although it is not clear if it will be taken up in the Democrat-controlled Senate.

”For more than two years, we have worked to educate, grow support, and pass this important legislation, which prevents unelected bureaucrats from issuing a financial surveillance tool to fundamentally undermine our American values,” Emmer told reporters.

“My legislation ensures that the United States’ digital currency policy remains in the hands of the American people, so that any development of digital money reflects our values of privacy, individual sovereignty and free market competitiveness. This is what the future global digital economy needs.”

Federal Reserve Chair Jerome Powell said the financial regulatory body was “nowhere near” a place to create a CBDC in remarks to Congress in March.

“If we were to ever do something like this, and we’re a very long way from even thinking about it, we would do this through the banking system, the last thing... the Federal Reserve would want would be to have individual accounts for all Americans,” Powell said.

Maxine Waters, the top Democrat on the House Financial Services Committee, argued Emmer's bill would halt digital asset innovation for government uses when lawmakers were debating advancing the legislation.

“By prohibiting all CBDCs, the bill threatens the very primacy of the US dollar and the power that affords our nation,” she said. “Today, the US dollar is the global reserve currency, with more than half of all international trade done in dollars. But the world is looking at how to speed up transactions and reduce costs, including by issuing their own central bank digital currencies.

“Currently, 13 nations are racing forward with CBDC development, including our G-7 peers, which are in far more advanced stages of CBDC development than the US. In fact, if this bill becomes law, we would be the only country in the world to ban a CBDC.”

 

Synapse bankruptcy hits US businesses and consumers

Tens of thousands of US businesses and consumers have had their bank accounts frozen, following the abrupt shutdown and bankruptcy of fintech Synapse, which acts as a middleman between financial technology companies and banks.

San Francisco-based Synapse filed for Chapter 11 bankruptcy protection in April and has shut down services to some of its fintech or bank partners, including Evolve Bank & Trust, triggering disruptions for customers of Synapse’s partners with accounts being frozen or showing funds as non-existent.

Synapse’s shutdown has “needlessly jeopardised end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law,” said Memphis-based Evolve in a statement last week. Because Evolve is a bank and is required to comply with banking laws, it has to make sure all customer deposits are accounted for to the penny, which may take time.

Evolve also stressed that, despite customers’ deposits being frozen, it is well capitalized. A source who is familiar with the size and scope of the number of accounts impacted at Evolve estimated the number of frozen accounts to be under 200,000. The person was not authorized to speak on the record.

Other banks or fintech companies that Synapse partnered with included Tennessee-based Lineage Bank and savings rewards company Yotta, a company that awards prizes to customers who save. Reddit message boards for Evolve, Synapse and Yotta filled with customers complaining about being unable to access their funds.

 

Alibaba issues record US$4.5 billion convertibles to fund buybacks

China’s-commerce giant Alibaba Group Holdings has sold around US$4.5 billion worth of convertible bonds, a record dollar-denominated sale by an Asian company, securing capital needed to buy back shares and invest in businesses including artificial intelligence (AI).

In one of the largest such offerings in recent years, the Hangzhou-based company priced the seven-year notes, due in 2031, with a coupon rate of 0.5% and a conversion premium of 30%. Part of the proceeds will be used to repurchase approximately 14.8 million of its American depositary shares (ADSs) and to fund future buybacks, the company said in a filing to the Hong Kong stock exchange.

The deal was about six times oversubscribed, with about 250 investors on the book, a banker involved in the transaction said, who requested anonymity.

Alibaba is taking advantage of cheap financing costs as well as a sharp rally in its shares to raise money, analysts said. The firm needs funds to invest in its core businesses and the cloud, both of which have lost market share during a crackdown on the sector by Chinese authorities and subsequent internal turmoil. At the same time, the sale signals its view that the stock is severely undervalued.

“The move is an opportunity to obtain cash offshore on favourable terms, at a 0.5% rate,” said John Choi, an analyst at Daiwa Capital Markets Hong Kong. “This way they can start executing a share buyback right away, which the company can say is more beneficial to shareholders as the buyback will be more than the dilution.”

Alibaba’s offering eclipses an issuance of US$2.9 billion in five-year notes by Singapore’s Sea Ltd. in September 2021.

The deal drew strong participation from US-based funds, the banker said, adding that the company has been in touch with banks for the convertible bonds sale for several months. Given the firm’s objective of repurchasing shares associated with this transaction, investors who wanted to buy the convertible debt and sell stock as a hedge against it were given priority, he added.

 

Ghana’s cocoa regulator seeks US$1.5 billion loan

Ghana Cocoa Board (COCOBOD), the nation’s cocoa regulator, is seeking a loan of up to US$1.5 billion to finance cocoa purchases for the 2024-25 season following lower-than-expected output in the current season that is forcing an adjustment to its borrowing strategy.

Usually, Ghana relies on an annual syndicated loan to buy cocoa beans directly from farmers. This loan is usually finalised at the start of the cocoa season in September. However, delays plagued the US $800 million loan planned for the current season due to significantly lower cocoa output.

An anonymous COCOBOD source told Reuters the country is “Falling short of our production forecasts. We have withdrawn $600 million from the $800 million loan and cancelled the remaining amount.”

This decision reflects the current season’s cocoa output falling nearly 40% below initial projections. Typically, Ghana is the world’s second-largest producer, but the country has experienced a slump in cocoa production. Recently, the body revealed the country’s harvest for 2023-24 was only 422,500 million metric ton (MMT) to 425.000 MT, half the country’s initial forecast and a 22-year low. This has been due to extreme weather and disease decimating the cocoa crop.

Despite the challenges, COCOBOD remains optimistic about the upcoming season. According to another source, a request for proposals has been sent to banks, indicating their intention to borrow up to US$1.5 billion. “We are working with the banks to determine the optimal loan amount,” the source revealed.

COCOBOD anticipates a rebound in cocoa production, aiming to reach 810,000 metric tons for the 2024-25 season. However, the road regulator estimates a loss of about 150,000 tons of cocoa beans in the 2022-23 season due to smuggling and illegal gold mining activities. Ecom Agroindustrial predicts a further decline in total production for 2023-24, reaching a low of 1.75 million metric tons, a drop of over 21% year-on-year.

The International Cocoa Organisation (ICCO) has further intensified concerns by projecting a significant global cocoa deficit for the 2023-24 season. ICCO estimates a shortfall of 374,000 metric tons, a stark increase from the previous year’s deficit of 74,000 tons. This projection stems from a predicted 11% decline in global cocoa production alongside a nearly 5% drop in cocoa grindings. ICCO’s forecast points towards the lowest stock-to-grindings ratio for cocoa in over four decades.

 

Singapore issues S$2.5 billion in green bonds