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China uses digital currency for gold cross-border payment – Industry roundup: 22 December

China uses digital yuan for gold cross border payments

Chinese media report that the Bank of China’s Shanghai branch successfully transferred a digital yuan (e-CNY) 100 million (US$14 million) central bank digital currency (CBDC) settlement received overseas for gold via the Shanghai Financial Exchange International Board.

“The account will contribute financial strength to support Shanghai’s in-depth implementation of the free trade pilot zone promotion strategy and promote the quality and upgrading of the international trade centre,” a spokesperson for the BoC wrote. 

The transaction spanned Shanghai and Hong Kong, with BoC Hong Kong also involved. BoC is the country’s second largest bank and one of the big four state-owned banks. Recently the bank also participated in a cross border transaction for importing iron ore using the CBDC, which involved Hong Kong and China’s Baowu, the state-owned iron and steel company.

China’s first cross border digital yuan usage for a commodities payment came in October when PetroChina used the CBDC.

BoC Shanghai is currently one of the lead supporters of e-CNY pilot testing and also partners with foreign institutions, such as France’s BNP Paribas, to develop the digital yuan.

China’s President Xi Jinping acknowledged the importance of CBDCs in cross-border trade during an address to the July 2023 Shanghai Cooperation Organisation Summit.

Since then, several foreign banks have joined China’s ongoing CBDC trials, while Singapore announced that it would allow Chinese tourists to spend e-CNY inside the city state during their trips. On 1 December China signed a US$400 million memorandum on CBDC cooperation with the United Arab Emirates.

Earlier this week, the latest update for the official digital yuan app was released. The version allows users to create an e-CNY wallet using their phone number, disable their wallet in case their phone is lost, and reset their password and private keys. Users can also bind their personal bank accounts and debit cards to purchase e-CNY in-wallet.


UK agrees banking deal with Switzerland

UK chancellor Jeremy Hunt has agreed a post-Brexit banking deal with Switzerland aimed at easing UK finance firms’ access to the country’s market in a reciprocal arrangement.

The chancellor signed the agreement with his Swiss counterpart based on "mutual recognition of each other's financial laws and regulations."

The UK Treasury hopes for a major boost to the City of London's financial district from the deal with Switzerland, which is not a member of either the European Union (EU) or the European Economic Area (EEA), but is part of the single market.

Hunt claimed that the UK’s decision in 2016 to exit the EU allowed it to strike new deals with major finance hubs, despite the country losing access to the EU’s single market.

The chancellor claimed the pact “builds on the UK and Switzerland’s strengths as two of the world’s largest financial centres”. He said it would serve “as a blueprint for future agreements with other key trading partners” after Brexit.

When the UK left the bloc it risked losing the benefits of its former trading arrangements with Switzerland, which were based on EU rules despite it not being a member state.

But the Treasury said the Bern Financial Services Agreement was “only possible due to new freedoms granted to the UK following its exit from the EU”. It added that the two nations had a “shared belief in the value of open and resilient financial markets”.

Prime minister’Rishi Sunak's government is also currently negotiating an enhanced, post-Brexit free trade agreement with Switzerland aimed at boosting economic ties. Business secretary Kemi Badenoch said the finance deal would help British banks “access this lucrative market and grow UK-Swiss trade in services”.

She added: “This deal complements the work we’re doing with Switzerland to agree a new, modernised free trade agreement and will help the UK reach our goal to export £1 trillion of goods and services a year by 2030.”


Turkey raises rates to 42.5% in seventh increase

Turkey’s central bank delivered its seventh straight interest-rate hike as part of efforts to curb inflation that is expected to move back up to 70% in the coming months.

The Central Bank of the Republic of Turkey’s monetary policy committee (MPC), under Governor Hafize Gaye Erkan, lifted the benchmark as expected by market analysts.

The 250 basis points (bps) increase marked a slowing of the bank’s aggressive tightening, which has lifted Turkey’s policy rate from 8.5% since President Recep Tayyip Erdogan was re-elected in May. At each of its previous four meetings, the MPC had hiked by at least 500 bps.

The tightening cycle will finish “as soon as possible,” the MPC said.

Erkan and Finance Minister Mehmet Simsek, both appointed in June, have sought to reverse years of loose monetary and fiscal policies that has deterred investment in Turkey, driven down the lira and triggered a cost-of-living crisis.

Turkey’s real rates remain deeply negative, with year-on-year inflation at 62% in November and not expected to peak until next May. But Erkan has urged fixed income investors to focus on projected inflation of 36% at the end of 2024 and achieved a degree of success. Foreign holdings of lira bonds have more than doubled since last month, while Turkey’s dollar-bond and credit-default swap spreads have fallen sharply.

The MPC said higher rates will be complemented by quantitative tightening to rein in lira liquidity. Shortly after the decision, the central bank announced a slew of such measures.

It will restart so-called lira “deposit-purchase auctions” for the first time in years. These are designed to help make the benchmark rate more effective at reining in lira liquidity.

“As part of policies that prioritize Turkish lira deposits, steps supportive of Turkish lira deposits will continue to be taken,” the central bank said.

It also lowered the lira bond-purchase ratio for banks’ foreign-currency liabilities to 4% from 5%. Yields on five-year lira bonds rose afterwards by 67 basis points to 28.9%.


Brazil’s central bank downgrades 2024 economic growth forecast

Brazil’s central bank reduced its 2024 economic growth forecast as previously strong household consumption dwindles in the face of restrictive monetary policy.

The Banco Central do Brasil (BCB) now expects Brazil’s gross domestic product to expand 1.7% next year, down from September’s estimate of 1.8%. It sees activity growing 3% in 2023, above the 2.9% prior forecast, according to the quarterly inflation report.

“The prospective scenario includes an increased pace of growth throughout 2024, with moderation of household consumption, recovery of investments, and a still favourable external accounts balance,” central bankers wrote in the report. For the final months of 2023, they expect a record trade balance surplus that will help the country’s current account.

Latin America’s largest economy has lost steam in the final months of this year as the effect of high interest rates sets in, although most analysts agree that activity will have expanded by nearly 3% in 2023 after bumper crops and strong consumption boosted growth past forecasts. Demand proved resilient as household purchasing power grew on higher government spending, lower inflation and a firm labour market.

But indicators for October gave the latest signs that an economic downturn is taking hold. The central bank’s proxy for GDP fell for the third straight month, while retail sales unexpectedly dropped and industrial production barely grew. Most analysts expect 1.5% growth next year.

Central bankers led by the BCB’s president Roberto Campos Neto see a fall in agriculture while industrial production posts moderate growth and retail sales remain stable during the last quarter of the year. They also point to falling business and consumer confidence indexes.

For 2024, they see a moderation in agriculture and consumption, saying family income will take a hit as the twin boost of lower food prices and higher government spending loses force.

Those signs of slowing activity are “in line” with estimates, though policymakers have expressed concern about falling private investment.

Board members reiterated they are comfortable with a gradual monetary easing cycle, continuing with half-point rate cuts in a cycle that’s already lowered borrowing costs by two percentage points to 11.75%.

Going forward, Brazil’s economy could see a boost in private investment over coming years after President Luiz Inacio Lula da Silva’s economic team negotiated and secured approval of a long-awaited tax reform, prompting S&P Global Ratings to lift the country’s sovereign credit rating.


Royal Bank of Canada bid for HSBC unit approved

The Canadian government has given a go-ahead for the US$10.2 billion bid by the Royal Bank of Canada (RBC) for HSBC’s domestic unit, HSBC Canada.

The acquisition secured approval from Canada’s Minister of Finance, just over a year after it was first announced by HSBC.

In a trading update, both HSBC and RBC said they expect the deal to close in the first quarter of next year. The former said it is “committed to considering” a special dividend of US$0.21 per share from the proceeds generated by the sale, slated for H1 2024.

“HSBC has capabilities to transact in different currencies that, right now, we do not have and we will bring on as a result of the transaction. They had international money movement capabilities that we’re really looking forward to,” Personal & Commercial Banking Group Head Neil McLaughlin said in an interview. “It is very much part of where we see the opportunity.”

To secure the deal, RBC must establish a global banking hub in Vancouver, waive associated mortgage transfer fees from HSBC to RBC and safeguard HSBC Canada’s workforce.

The Canadian finance ministry confirmed the federal banking regulator has also waved through the acquisition.

Although the Competition Bureau sanctioned the deal in September, it raised concerns about a potential “loss of rivalry” in the market.

“While the deal isn’t new news, it does solidify HSBC’s portfolio reshuffle,” commented Sophie Lund-Yates, lead equity analyst at financial services group Hargreaves Lansdown. “The group’s keen to focus on higher growth areas, with the capital freed up by sales able to be returned to shareholders in the form of special dividends, as is the case with the RBC acquisition, as well as being ploughed into more exciting Asian regions.”


Blackstar to roll out US$1 billion government supply chain programme

Structured finance and working capital provider Blackstar Capital has secured US$1 billion in funding as part of an agreement aimed at boosting support for state contractors and subcontractors in the US, Europe and the Middle East.

Under the deal, Blackstar Capital will provide its data-driven receivables finance product to businesses in a range of government supply chains and is aiming for full capital deployment by mid-2025. Blackstar declined to name the backer of the programme, but says funding is being supplied by a global institutional investor.

The initiative will help service SME prime contractors and subcontractors that often struggle to tap bank working capital financing and are acutely feeling the effects of high inflation and raised interest rates, Blackstar says.

“The idea behind this new initiative is that while governments are typically very good credits, there are inefficiencies in terms of how and when they pay. For an SME business that can be an existential issue,” said Blackstar CEO, Mark Stephens. “It is all very good and well knowing they will be paid at some point, but they don’t know when.

“That’s not to say we wouldn’t extend finance to [large multinational companies], but there is a sweet spot that we’re aiming for in the market, where we think our offer resonates most.”

The group has already begun outreach with companies that are engaged in, or bidding for, contracts related to reconstruction efforts being carried out by the US government’s Federal Emergency Management Agency (FEMA) after a series of wildfires devastated parts of Hawaii in early August.


Standard Chartered and BA back initiative to scale up carbon removals market

Standard Chartered and British Airways have launched what is described a first-of-a-kind financing pilot to help scale up the carbon removals market.

The duo is partnering with CUR8, a UK-based company dedicated to building the global market for carbon removals and UNDO, a UK-founded, carbon dioxide removal project developer specialising in enhanced rock weathering.

A release announcing the launch stated: “Financial solutions of this kind are a crucial step in enabling the carbon removals market to reach the multi-billion-tonne scale required, according to the Intergovernmental Panel on Climate Change (IPCC), to limit global warming below 1.5 degrees.”

Carbon removal is the process of removing carbon dioxide from the atmosphere and storing it safely for multiple decades and ideally centuries. Removals come in a wide range of approaches ranging from storing carbon in trees and soils to capturing carbon dioxide directly from the air and durably storing it underground or through enhanced rock weathering.

As part of the initiative, British Airways is committing to purchase more than 4,000 tonnes of carbon removal credits delivered by UNDO through enhanced rock weathering, and Standard Chartered is looking to be the banking partner.

This pilot aims to create a blueprint to enable ambitious carbon removal suppliers to scale with more available capital in the form of debt financing, secured on future client demand via advanced purchase agreements. This way, suppliers can move away from relying on bespoke financing structures, meet their working capital needs, and establish a credit history in the process. CUR8 aims to build on this pilot to further develop scale-up financing products for the carbon removals industry.


Gunvor Group secures €400 million SACE-backed LNG loan

Gunvor Group, a multinational commodities global physical energy trading company registered in Cyprus and with its main trading office in Geneva, Switzerland, has finalised a five-year term loan valued at €400 million (US$440 million).

The loan, guaranteed by Servizi Assicurativi del Commercio Estero (SACE), the Italian export credit agency, was coordinated globally by UniCredit. The primary objective of this financial arrangement is to bolster the Italian industry, particularly by ensuring a steady supply of natural gas and liquefied natural gas (LNG). 

Jeff Webster, the Chief Financial Officer of Gunvor Group, said, “Gunvor is pleased to support SACE’s push strategy by helping secure energy supplies to the country and having the opportunity to further grow the business with Italian customers and suppliers.”

Ciro Aquino, Regional Manager Middle East – Head of Dubai Office at SACE, said: “In times of unprecedented complexity, the need for innovative business support mechanisms becomes crucial. We take pride in this operation, which, as part of our Push Strategy, aids Italian companies in exploring new markets while facilitating access to relevant energy supplies.”


Visa card payments boost for Vietnam travellers to China

Visa said that a partnership with Tencent and Alipay will enable Vietnam cardholders to link their Visa cards to digital wallets in China, including Weixin Pay (aka China’s local wallet of WeChat Pay) and Alipay, leading digital wallets in China, “and enjoy multiple payment methods including QR codes, presenting payment codes and in-app payments.

“International tourists can link their Visa cards to accounts in WeChat Pay and Alipay wallets to pay for purchases at millions of stores for dining, transportation, shopping, daily spending, and more in mainland China,” a release stated.

Consumers can enjoy multiple payment methods such as scanning QR codes, presenting payment codes, and in-app payments, enhancing the consumer payment experience of Vietnamese in China both online and offline. Furthermore, international Visa cards are now accepted at merchant locations in over 400 cities in Mainland China, and at China’s leading online merchants and on mobile apps, including Taobao, Ctrip, Didi, China Railway, 12306, etc.”


Layer2 Financial and Evita partner on B2B cross-border payments

Layer2 Financial, the Lithuania-based payments infrastructure, has partnered with Evita to streamline and optimise the processes around B2B cross-border payments.

A release announcing the partnership noted: “This collaboration brings together the capabilities of Layer2 Financial’s banking-as-a-service (BaaS) and payments infrastructure technology and Evita’s B2B cross-border payments solution.”

“Evita’s decision to partner with Layer2 was driven by their exceptional speed, agility and ability to navigate complex compliance layers,” said George Goognin, founder of Evita. “The partnership enables us to manage compliance efficiently and paves the way for ramping up US dollar operations.”

Evita specialises in large transactions, such as facilitating transactions related to luxury cars, Italian furniture and other high-value items, according to the press release.

The company also focuses on markets in which traditional financial institutions fall short, providing an alternative to major banks, according to the release, which added that Evita provides its clients with faster and more cost-effective payments by using its own liquidity.

With the new collaboration, the company will leverage Layer2 to open For Benefit Of (FBO) accounts for its clients, which will enhance Evita’s ability to operate with US dollars and enable clients to have individual US/Native accounts, according to the release.

*  Industry Roundup will next appear on Wednesday 27 December. Best wishes for the festive season to all CTMfile's readers

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