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China moves to support post- zero Covid recovery – Industry roundup: 16 February

PBOC acts to support China’s economic recovery

China’s central bank has pumped more cash into the financial system to meet a rapid, post-Covid Zero rebound in loan demand, while keeping its key policy rate on hold to further support economic recovery.

The People’s Bank of China (PBOC) injected a net 199 billion yuan (CNY) – about US$29.15 billion – this month reports Bloomberg, with its one-year medium-term lending facility (MLF) broadly in line with the CNY200 billion median forecast of economists that it surveyed. The MLF borrowing rate was left unchanged at 2.75%, as most had predicted.

China’s sudden removal of Covid restrictions has tightened liquidity as consumption recovers. Overnight money market rates spiked to the highest level in two years last week, indicating a cash squeeze in the still-fragile economy.

While China’s authorities have so far refrained from cutting policy rates this year, economists expect that to change over the months ahead as the property sector is still struggling, exports have weakened and the strength of the consumption rebound is uncertain. The PBOC has pledged to implement “targeted and forceful” monetary policy this year, with a focus on boosting domestic demand.

“The PBOC hold on its one-year rate shows it is taking its time but we think it’s still inclined to ease further,” said Bloomberg Economic’s David Qu. “We expect a 10-basis-point cut in the coming month or two. The reason is straightforward: the economy needs the extra support.”

The Bank’s Deputy Governor Xuan Changneng said last month that the authorities would maintain “reasonably sufficient” liquidity for the economy, adding that they would avoid flooding the economy with massive stimulus.

CFOs expect inflation and rising costs to crimp growth into 2024

Chief financial officers (CFOs) view inflation and cost of capital as the top two risks facing their businesses as they prepare for slower growth over the next 18 months, according to findings from a new survey conducted by the Office of the CFO Solutions practice at FTI Consulting in collaboration with the finance publication CFO Dive.

The report, On the Horizon: FTI Consulting Global CFO Survey Report 2023, is based on survey responses last August of senior finance executives in North America, Asia, Europe, Australia, and the Middle East/Africa. A total of 303 completed responses were collected, with 101 from North America, 100 from EMEA, and 102 from APAC.

“This year’s survey results echo what we’re hearing from our CFO clients,” said Gina Gutzeit, Global Leader of the Office of the CFO Solutions practice at FTI Consulting. “By most accounts, the global economy is heading for a slowdown in 2023. Rising inflation, high interest rates, escalating international conflict and lingering Covid-19 effects are just some of the factors that continue to put downward pressure on global economic growth.”

The survey identified six additional key insights about CFO priorities:

1.       Protecting Margin: For many companies, now bracing and planning for an expected global recession, CFOs will be expected to actively manage both revenue pipeline and enterprise costs, with focus on productivity and automation.

2.       Profitability Analytics: Real-time transparency into current and forecasted profitability using analytics is a rising priority for CFOs looking to make sound decisions for their businesses in times of heightened competition and economic instability.

3.       Scenario Modelling and Forecasting: Overwhelmingly, respondents indicated improving forecast accuracy and automation deploying driver-based rolling forecast capabilities will be critical to manage through the volatility. Greater focus is being placed on optimizing working capital, cash flow and liquidity, often due to recent increases in borrowing costs.

4.       Workforce Productivity: Talent continues to be a high focus area for CFOs as they manage hybrid working models, solve talent shortages and address increasing work/life balance expectations from younger employees. Across the globe, 69% of companies had employees who worked fully or partially remotely, with only 21% of companies indicating that they were fully back in the office.

5.       Enhanced Reporting Expectations for Environmental, Social and Governance (ESG): Investor demands and pending regulatory changes are two of many critical factors driving CFOs to evaluate reporting needs. More than half of all respondents indicated that they would be spending more time on ESG reporting and controls over the next 18 months.

6.       Growing Investments in Finance Technology: Finance technology has maintained its status as a top priority for CFOs. More than half (51%) of finance leaders said their role required more focus on technology implementation in 2022, resulting from proven solutions from cloud-based enterprise resource planning (ERP) and enterprise performance management (EPM) technologies.

“With the economy headed for decline in real GPD, it will be essential for CFOs to manage through the economic volatility by deploying driver-based scenario modelling, managing cash and liquidity runway, providing profitability analytics, and improving productivity with automation technologies,” said David White a Senior Managing Director in the Office of the CFO Solutions practice at FTI Consulting.

“Now is the time for CFOs to have these value-creating activities in place with an economic downturn looming.”

Avaya files for bankruptcy a second time

Avaya Holdings Corp has announced that it and all of its US subsidiaries have filed for bankruptcy, a little more than five years after emerging from its previous bankruptcy.

The business communication company said that following protracted negotiations with creditors, it had entered a financial restructuring agreement to reduce its debt by more than 75%, from US$3.4 billion to about US$800 million. The restructuring will also substantially increase Avaya’s cash and strengthen its liquidity position, resulting in an expected emergence balance sheet with less than 1x net leverage.

The restructuring support agreement has been signed by more than 90% of the company's secured lenders, enabling  implementation to go swiftly. Avaya is expected to emerge as a private company within the next 60 to 90 days.

The company said it has secured about US$780 million in new financing that will allow it to operate its business as usual. This includes commitments for an aggregate US$628 million in debtor-in-possession (DIP) financing, the majority comprising a new US$500 million term loan facility from secured creditors led by Apollo Global Management and Brigade Capital Management.

In addition, several secured creditors have agreed to backstop a US$150 million rights offering at exit while a bank syndicate led by Citigroup will provide a new US$128 million asset-based lending (ABL) facility.

However, strategic partner and cloud communications RingCentral will take a major hit as US$125 million in convertible preferred shares are getting cancelled in bankruptcy, although the company said it was extending and extending its partnership with Avaya. Common equity holders “will be wiped out” said one analyst and Avaya’s stock, which was halted pending the news, has fallen by 82,5% over the past three months.

The company lpreviously emerged from bankruptcy in December 2017, about 12 months after filing.

World Bank chief David Malpass to step down

World Bank president David Malpass said he would leave his post by the end of June, more than four years into a five-year term. He offered no specific reason for the move, saying in a statement, “after a good deal of thought, I’ve decided to pursue new challenges”.

Malpass took up the position in April 2019 after serving as the top official for international affairs at US treasury in the Trump administration.

US Treasury secretary Janet Yellen thanked Malpass for his service, saying: “The world has benefited from his strong support for Ukraine in the face of Russia’s illegal and unprovoked invasion, his vital work to assist the Afghan people, and his commitment to helping low-income countries achieve debt sustainability through debt reduction.”

Yellen said the US would soon nominate a replacement for Malpass and looked forward to the bank’s board undertaking a “transparent, merit-based and swift nomination process for the next World Bank president”.

In a long-standing tradition, the US government selects the head of the World Bank, while European leaders choose the leader of its larger partner, the International Monetary Fund (IMF).

Pressure to shake up the leadership of the World Bank has built over the past two years from the United Nations, other world leaders and environmental groups, to pave the way for a new president who would reform the bank to more aggressively respond to climate change.

In November 2021, special adviser to the UN secretary-general on climate change Selwin Hart criticised the World Bank for “fiddling while the developing world burns” and said that the institution has been an “ongoing underperformer” on climate action.

Malpass was again under pressure last September for failing to confirm whether he accepts the scientific consensus on global warming, which drew condemnation from the White House.

In November, special envoy on climate change John Kerry said he wants to work with Germany to devise a strategy by the next World Bank Group meetings this April to “enlarge the capacity of the bank” to put more money into circulation and help countries deal with climate change. Meanwhile Yellen is keen to reform the way the World Bank operates to ensure broader lending to combat climate change and other global challenges.

In 2022, the World Bank committed more than US$104 billion to projects worldwide, according to the bank’s annual report.

Markets “riding US$1 trillion liquidity wave”

Strong demand for risk assets this year may largely be explained by “eye-popping liquidity” from the world’s central banks, writes Reuters columnist Jamie McGeever.

In an opinion piece he notes that aggregate liquidity from the official sector has surged in recent months, driven largely by the Bank of Japan (BoJ) hoovering up domestic government bonds to keep its 'yield curve control' policy intact, and stimulus from the People’s Bank of China (PBOC),

McGeever references Apollo Global Management’s chief economist Torsten Slok, who reckons the BOJ bought US$291 billion of bonds in January - a monthly record which contributed to G4 central banks’ first net injection of liquidity into the global financial system since April 2022.

Citi global strategist Matt King estimates that around US$1 trillion has been pumped into the global system in recent months, “a vast sum in its own right but an especially large one given where central banks are in the policy cycle.”

Led by the US Federal Reserve, they are battling against inflation: raising interest rates, draining liquidity via 'quantitative tightening', and talking tough by promising to raise rates further if needed.

Yet the aggregate flow has been positive for world markets. Risky assets like equities have begun 2023 strongly despite the spike in short yields and implied rates, financial conditions have eased, and volatility has stayed low.

What happens next may depend on the BOJ’s policy under new Governor Kazuo Ueda, who succeeds Haruhiko Kuroda in early April. “We have this very unique situation where central banks around the world are trying to cool inflation, but the BOJ is holding onto yield curve control (YCC),” says Slok. “Japanese investors are suddenly sitting with a lot of cash in their hands. If this continues, liquidity from Japan will continue to support global markets.”

King says the BOJ has not been acting alone. Operations from the European Central Bank (ECB) and, most notably, the PBOC, have helped pour around US$1 trillion of liquidity into the global financial system in recent months. This swing in central bank liquidity is enough to push global equities up or down roughly 10%, add or subtract 50 basis points to investment grade credit and 200 basis points to high-yield spreads.

The US$1 trillion total comprises US$200 billion from the BOJ; €300 billion from the ECB since August drawing down government deposits (akin to the US Treasury General Account at the Fed); and more than US$400 billion in December alone from the PBOC's boosting of bank reserves via liquidity operations.

AIIB launches US$130 million sustainable infrastructure VC programme

The Asian Infrastructure Investment Bank (AIIB) has launched a venture capital (VC) investment programme for green and technology-enabled infrastructure.

The three-year programme will utilise US$130 million in funds, with an additional US$30 million as a co-investment sleeve, the development bank said. Its initial target portfolio will comprise 12 to 15 VC funds

Through small-scale VC funds, AIIB aims to support early-stage companies across its members in adopting new technologies, or creating new business models that help promote sustainable infrastructure.

“This is the first time since our founding that AIIB is entering the Asian venture capital market,” said Lee Dongik, AIIB’s director general of its Region 1 banking department.

The programme will help AIIB build strategic partnerships and diversify its equity portfolio by partnering reputable and seasoned VC fund managers, he added.

AIIB began operations in Beijing in January 2016, and over seven years has grown to 106 approved members worldwide. It is capitalised at US$100 billion and rated Triple A by major international credit rating agencies. In May 2019 it raised US$2.5 billion via the issue of its first global bond.

Anger in Nigeria at naira notes shortage

Nigeria’s citizens have resorted to sleeping outside banks to ensure they are first in the queue to get notes from the cash machine once it is loaded up in the morning, reports the BBC.

A scarcity of newly designed naira (NGN) notes has triggered a cash shortage and a growing sense of anxiety among those desperate to get hold of their money in a country where 40% of the population is still unbanked. Nigeria’s Supreme Court has even become involved and ordered that the deadline to hand in old notes be extended, but to little effect.

Periodic bouts of fuel shortages regularly lead to long queues at the country’s petrol stations and these are now joined by long lines of angry people outside banks as the country builds up to a presidential election on 25 February. While some Nigerians have embraced digital payments, many are still reliant on cash.

Nigerians were told in October that the old naira notes were being replaced with new notes and they were encouraged to deposit any cash savings in the bank. The Central Bank of Nigeria (CBN) said it redesigned the higher denomination notes – NGN 200, 500 and 1,000 - to replace the dirty cash in circulation, tackle inflation, curb counterfeiting and promote a cashless society.

It hoped the redesign would bring some of the money being hoarded by individuals and companies back into the financial system. The reform has created something like a cashless society - but not in the way the CBN had planned.

Nigerians have been finding it difficult to make online payments and transfers. Analysts say the infrastructure to support a digital system is not robust enough. The problem was compounded in December when the CBN sharply reduced the daily withdrawal limit from automatic teller machines (ATMs) in a bid to boost digital payments.

epay Australia partners Alipay+ for cross-border payments

Payment solutions provider epay, part of Euronet Worldwide, has partnered with China’s online payments platform Alipay+ to provide cross-border mobile payment and marketing solutions to merchants in Australia.

A release stated that Alipay+ is set to be activated in 8,000 epay retailers, including the Australian luxury department store David Jones.

Epay’s Australian retailers are set to be enabled with access to the Alipay+ e-wallet partners such as AlipayHK (Hong Kong), GCash (The Philippines), Kakao Pay (South Korea), TrueMoney (Thailand) and Touch ‘n Go eWallet (Malaysia) in Q1 2023.

The Alipay+ marketing solution will “offer merchants the ability to create promotions and distribute digital coupons and discount offers in a direct manner to the e-wallet super apps users in their respective markets, all done concomitantly so as to achieve increasingly efficient and scalable marketing.”

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