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China’s central bank surprises markets with modest rate cut - Industry roundup: 21 August

China’s central bank cuts key interest rate as calls grow to stimulate economy

China’s central bank,  the People’s Bank of China (PBOC) cut its one-year loan prime rate on Monday to ramp up efforts to stimulate credit demand, but surprised markets by keeping the five-year lending prime rate (LPR) unchanged.

The PBOC trimmed the one-year lending prime rate, a benchmark for corporate loans, by 10 basis points from 3.55% to 3.45%, but held the five-year LPR, which serves as the mortgage reference rate, steady at 4.2 percent.

While the cut to the one-year rate was widely expected, but leaving the five-year LPR unchanged surprised markets amid broader concerns about a rapidly weakening currency, as reported by Reuters.

Nearly all the economists polled by Reuters had predicted a 15 basis points cut due to giant real estate developers risk defaults festering liquidity woes in the China’s real estate sector. After major property developer Evergrande filed last week for bankruptcy protection in a US court, another real estate giant Country Garden is likely to default on its debt, which has raised concerns about a potential financial contagion in China’s financial system and beyond.

Besides a crisis in the real estate sector, China is battling deflation, record youth unemployment, weak consumer spending, and falling exports, adding to the case for PBOC to take bolder measures to stimulate the economy by embracing much larger rate cuts required to revive credit demand.

‘’The small injection of stimulus by China’s central bank in the ailing economy has proved largely underwhelming given the scale of the challenges erupting across sectors, but it has given investors hope there could be more to come”, said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

Some analysts believe that China’s limited rate cut is because the authorities are concerned about the downward pressure on the yuan. China’s yuan is around 6.9 per cent weaker against the US dollar than it was a year ago, sparking growing capital outflow fears amid a weakening economy.

“There is still some expectation that Chinese authorities will step in with a more generous boost, but it appears the weakness of the yen appears to be stemming more immediate action. China is far from the stabilizing force hoped for, as Western economies grapple with stubborn inflation, high interest rates and slowing economies. Instead, it’s feared problems will keep piling up, as weakness intensifies in the property sector, foreign investment falls and unemployment rises”, observed Streeter.

 

Dutch payments processor Adyen’s sales miss wipes $20 billion of market value

Dutch payment processing company, Adyen NV’s shares plummeted by a third late last week, erasing US$20 billion off its market value, after the company’s first half earnings missed expectations, as sales growth slowed and hiring costs squeezed margins.

Adyen, which provides payment services to the likes of Netflix, Meta, Microsoft, and Spotify, acknowledged that revenue growth had decelerated in North America and that its margins were impacted by hiring costs.

According to Refinitiv data, the company’s earnings before interest, tax, depreciation, and amortisation (EBITDA) amounted to 320 million euros ($348 million), marking a 10% decline compared to the previous year and falling below analysts’ forecasts of 386 million euros.

The combination of weaker sales and higher costs led to an EBITDA margin of 43% during the first half of 2023, down from 59% in the same period of last year and worse than what analysts had expected.

Despite these challenges, Adyen maintained its medium-term targets for revenue growth above 25% and an improving EBITDA margin, which it expects to reach 65% in the long term. Notably, Adyen's rivals in the US include Stripe, Braintree, Fiserv, and PayPal.

 

Bitcoin hits a two-month low causing crypto liquidations of more than $1 billion

The decentralised digital currency, Bitcoin slipped to a two-month low late last week.

After the Wall Street Journal reported that SpaceX had written down the value of Bitcoin it held by a total of $373 million last year and in 2021, and then sold all of its cryptocurrency holdings, the news stoked investor fears and sparked a panic reaction in the crypto market, leading to a domino effect of massive sell off, resulting in over $1 billion worth of crypto liquidations.

On Thursday, bitcoin fell 7.2% in its biggest one-day drop since November 2022 when top exchange FTX collapsed. Bitcoin then slipped to a two-month low of $26,172 during Asian trading hours on Friday, its lowest since June 1, as reported by the New York Post.

In recent months, the US Securities and Exchange Commission (SEC) has filed lawsuits against cryptocurrency exchanges Binance and Coinbase.

The outcome of the SEC's lawsuits could have enormous consequences for the crypto industry. This could mean that virtual currencies and other digital assets could be subject to comprehensive regulation similar to that applied to stocks.

 

Singapore workers lead in fastest adoption of AI skills globally

According to LinkedIn's latest Future of Work report, workers in Singapore are the world's fastest when it comes to adopting artificial intelligence (AI) skills.

The report that gathered data from 25 countries, revealed that Singapore “has the highest diffusion rate” - the share of people adding AI skills to their profiles. Singapore’s diffusion rate grew 20 times from January 2016, the report noted. That’s significantly higher than the global average of eight times, LinkedIn told CNBC Make It.

Finland follows (16x) in second place. Ireland secured the third spot (15x), while India (14x) and Canada (13x) held the fourth and fifth places respectively.

Pooja Chhabria, career expert and Asia-Pacific head of editorial at LinkedIn, said that Singapore has long been a "fertile ground" for AI disruption.

That's thanks to the country's "Robust digital infrastructure, a strong framework for the protection of intellectual property, and a thriving ecosystem of venture capital firms, angel investors … that provide capital," she added.

 

Innovate Finance responds to HM Treasury advocating UK fintech innovation

Innovate Finance, the independent industry body that represents and advances the UK fintech community, has responded to His Majesty’s Treasury (HM Treasury) call for proposals aimed at enhancing the competitive landscape of the nation's financial services sector by emphasising the need to support innovation in fintechs as a means to ensure competitiveness.

In line with this vision, Innovate Finance has put forward a comprehensive set of metrics and actions, poised to evaluate and reinforce its unwavering commitment to innovation.

With the introduction of the new Financial Services and Markets Act (FSMA), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are required to promote the competitiveness of the UK's financial services. FSMA gives the Treasury the power to set performance metrics to measure competitive success.

As a part of its proposals, Innovate Finance has called for: 

  • A new ‘RegTech test’ to be undertaken when the FCA or PRA introduce any new regulations to assess how technology can best enable regulatory compliance, unleashing the UK’s growing RegTech sector and helping firms of all sizes.

 

  • A move away from a ‘one size fits all’ approach to regulation where the smallest firms have to meet the same requirements as the largest firms. Proportionate regimes should be introduced to support growth and should include the introduction of a start-up and scale-up test as part of a cost-benefit analysis of new regulations, to assess the impact on small and growing innovators.

 

  • Better resources and expertise in the regulator to understand and support innovation. These shall include: dedicated account managers for FinTechs after they graduate from sandbox and growth programmes, providing them with the same ‘named contact’ supervisors that large incumbent institutions enjoy; more interchange between industry and the regulators (eg. secondments, joint training programmes and external hires); and faster authorisations to reduce delays in appointing key personnel and regulatory market approvals for FinTechs.

 

In a press release on the news, Janine Hirt, CEO at Innovate Finance, commented: “Over the last decade the UK has been the leading hub for FinTech globally, supported by regulators who have embraced innovation. However, as other countries are catching up, we risk falling behind unless our regulators continue to innovate. The UK is one of the best places in the world to start and scale a FinTech, driving talent, capital and international business into the UK economy. This is also determined by a dynamic and proportionate regulatory environment that can position the UK as the global epicentre for FinTech.

“As technology, and the FinTechs who enable it, become central to financial services we need to see new regulatory approaches that support innovation. We also welcome new policies that can create more agile regulators that can protect both consumers and market competitiveness and enable innovation in financial services”, Hirt stated.

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