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China’s super SIM card for digital yuan – Industry roundup: 13 July

Bank of China tests offline payments for digital yuan via SIM cards

The state-owned Bank of China is carrying out trials for a new offline payment system that connects to SIM cards. The payment method is designed specifically for China’s central bank digital currency (CBDC), the digital yuan or e-CNY.

The bank announced its partnership with telecommunication operators China Telecom and China Unicom on July 10 and said that it intended to commence testing the following day.

Bank of China plans to enable users to make phone payments by integrating its e-CNY app with specialised “super SIM cards” with near-field communication (NFC) capabilities. Users simply need to bring their mobile phones near the point of sale (PoS) terminals for payment, eliminating the need to turn the phone on.

The integration enables transactions to be processed even when the phone is powered off. However, the bank stated that these SIM card payment functions will only be accessible on specific Android phones in a few test regions of China. In January 2022, the People’s Bank of China (PBOC), the country’s central bank, launched a trial version of the e-CNY app.

It follows China’s recent initiative to expand the use cases for its CBDC as part of its Belt and Road Initiative (BRI) and cross-border trades, with plans to extend e-CNY usage to pay taxes and utility services in the country.

In the Chinese city of Guanzhou, citizens can now pay for bus rides using the e-CNY on 10 transit routes. Passengers need only download the e-CNY app, deposit funds and scan the QR code in the bus payment section to pay for their ride.

Hong Kong launched a pilot programme for the digital Hong Kong dollar (HKD) in May after the Hong Kong Monetary Authority (HKMA) released a white paper in October 2021 on a potential retail CBDC. The HKMA said last September in a consultation paper that it would explore the possibility of cross-border payments linking digital yuan and the e-HKD.


Gap narrows between developed and emerging market borrowing costs

The gap in government borrowing costs between emerging and developed markets has fallen to the lowest level since 2007, as investors price in imminent interest rate cuts in several major emerging economies and further tightening in the west.

The Financial Times reports that the spread this week fell to less than 2.9 percentage points, the narrowest in 16 years, down from 4.8 points a year ago, based on data from Allianz Global Investors.

“There has been a massive divergence between local currency emerging market debt and developed markets this year,” said Richard House, chief investment officer for emerging market debt at Allianz Global Investors told the paper.

“Investors are recognising the narrowing of the credibility gap between policymakers . Emerging markets have done a good job at navigating this inflation shock and I’m not sure you could say the same about some of the western central banks”.

Central banks in Latin America and eastern Europe, two regions that house the best performing bond markets in the world this year acted more quickly to raise rates in response to inflationary pressures when economies reopened after coronavirus pandemic restrictions were eased.

JPMorgan’s respected benchmark of emerging market local currency government bonds has delivered a 7.5% total return year to date, boosted by the Latin American sub-index, which has risen 21%, and by central and eastern Europe, which has gained 11%.

 In contrast, US government bonds have delivered total returns of just 1.6% this year, as measured by an ICE Bank of America Index of government bonds, while German bonds — the de facto benchmark for the eurozone — have delivered total returns of 1.2%.

Given the still high real yields on offer in emerging market debt, declining inflation and the prospect of rate cuts that should boost bond prices, many investors are positioning for further gains.

“Local currency rates and bonds present a very attractive opportunity over the next six months and beyond,” Liam Spillane, head of emerging markets debt at Aviva Investors, told the FT. He singled out Mexico, Peru, South Africa, Czech Republic and Poland where he thinks markets have underestimated the potential for rate cuts.


India’s central bank urges more lenders to offer digital rupee

The Reserve Bank of India (RBI) wants a wider set of lenders to participate in pilot programmes using the central bank digital currency (CBDC) as it tries to increase transactions, reports Reuters which cited three bankers.

More than 20 central banks across emerging and advanced economies are expected to have digital currencies in circulation by the end of the decade, the Bank for International Settlements (BIS) found in a survey, published this week.

Last year, the RBI began trials using CBDCs, termed e-rupees, in both the wholesale and retail markets.

Currently, large state-owned and private lenders, including State Bank of India, Bank of Baroda, ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Yes Bank, are among those participating in the pilot project.

“The RBI has asked smaller banks to either tie up with fintech players or develop their systems to start CBDC pilots this year,” said the technology head of a state-owned bank, who attended Tuesday’s meeting with RBI officials.

“We will now have to float tenders to get interested fintech partners on board and evaluate the costs involved. This process is expected to take about four-five months.”

The RBI aims to reach a target of one million CBDC transactions per day by the end of 2023, RBI deputy governor T Rabi Sankar said at the meeting. As of last month there were 1.3 million customers and 300,000 merchants who used the CBDC, he added.

“By getting more banks to participate in the pilots, the RBI wants to see if there are any glitches in implementation and conduct pilots on a large user base,” said another banker with a state-owned bank. “We are in the advanced stage of submitting a CBDC pilot request to the RBI. We expect the approval to come in the next one-two months."

The central bank has also asked smaller banks to seek feedback from those currently conducting the pilots, the bankers said.


Canada hikes rates as New Zealand holds

The Bank of Canada (BoC) raised interest rates for a second straight meeting, keeping the door open for more hikes as it pushed back inflation’s return to its 2% target.

Policymakers led by Governor Tiff Macklem increased the overnight lending rate on Wednesday by 25 basis points to 5%, the highest in 22 years. The move was expected by most economists in a Bloomberg survey, and markets had put the odds at around three quarters.

Economists at JP Morgan and Goldman Sachs said they now expect the BoC to deliver one last 25-basis point rate hike in October and lifted their terminal rate forecast to 5.25%. Goldman Sachs added that the final rate hike “could be pulled forward to September if upcoming activity and inflation data surprise to the upside.”

Meanwhile, New Zealand’s central bank opted to hold its cash rate steady at 5.5% as it reiterated that its previous rate hikes are constraining spending and reducing inflation pressure as anticipated.

The decision was in line with expectations from 25 economists in a Reuters poll who had forecast the Reserve Bank of New Zealand (RBNZ) would leave the cash rate unchanged after a 20-month hiking cycle.

“The Committee agreed that the overnight cash rate (OCR) will need to remain at a restrictive level for the foreseeable future,” a statement by the RBNZ confirmed.

US inflation falls back to 3%

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), declined to 3% on a yearly basis in June from 4% in May, the US Bureau of Labor Statistics (BLS) has reported. The reading beat already upbeat forecasts that the figure would be 3.1%.

Core CPI inflation, which excludes volatile food and energy prices, dropped to 4.8% from 5.3%. On a monthly basis, the CPI and the Core CPI both rose 0.2% and these figures fell short of analysts' estimates.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70% of the increase, with the index for motor vehicle insurance also contributing," the BLS noted in its press release. “The food index increased 0.1% in June after increasing 0.2% the previous month.”

Two-year Treasury yield fell sharply after the data was released and economists at Commerzbank commented that the pressure on the US Federal Reserve for additional rate hikes had eased noticeably. Many analysts had previously predicted that the Fed would apply two further quarter point rate hikes before the end of this year.

“In the US, there are increasing signs that inflationary pressure is easing,” said the Commerzbank team. “In June, consumer prices rose by only 0.2% compared with the previous month. The core rate (which excludes energy and food), which is important as a measure of the underlying trend, was also only 0.2%, the smallest increase since February 2021.

“While the Federal Reserve is still likely to raise interest rates again at the end of the month, the data support our view that this should be the last hike.”

Ryan Brandham, Head of Global Capital Markets, North America at Validus Risk Management said: “US CPI has been moderating for several months now as the cumulative rate hikes take effect. This release shows inflation slowed even more than expected, which will please the Fed. There is still a high probability priced in for a hike in July as the Federal Open Market Committee (FOMC) nears the end of the hiking cycle. For today's session, this release should lead to a dovish stance on US rates and a bearish outlook for the USD, while favouring a bullish sentiment towards risk assets.”


Monzo ready for merger deal with Nordic rival Lunar

UK fintech Monzo is preparing a bid to merge with its Nordic rival Lunar as it prepares for European expansion and considers other potential acquisitions.

The London-based mobile bank is holding discussions with Denmark-based Lunar over the terms of the deal, according to a report by Bloomberg. Lunar, a digital bank with over 650,000 users across Denmark, Sweden and Norway, hit a valuation of US$2.2 billion after a fresh funding round last year, while Monzo’s valuation reached U$4.5 billion in 2021.

The plans make Monzo the latest London fintech to be eyeing European expansion after The Bank of London announced that it is hiring 300 staff and has formally applied to the European Union (EU) for a banking licence.

The bank said it would set up a base in Luxembourg as part of a €200 million (£170 million) investment that would see it build a workforce of 300 in the country over five years. “By choosing Luxembourg as its EU headquarters, there is an exciting opportunity to offer Luxembourg and the broader EU market a new global digital clearing ecosystem for financial institutions and corporate commercial clients,” it added.

Bank of London founder Anthony Watson said: “Luxembourg is the logical choice for us to build out our offering across the EU. It marks the latest step in our international growth strategy and follows the successful rollout of our banking solutions across the UK.”


Raiffeisen partners with ION to adopt ISO 20022 solution

Trading, analytics, treasury, and risk management solutions provider ION has partnered with Raiffeisen Bank International (RBI) to implement its ISO 20022 solution.

A corporate and investment bank activating in Austria and Central and Eastern Europe (CEE), RBI selected the solution to help it meet the new TARGET2 and SWIFT CBPR+ ISO 20022 initiatives.

As per the press release information, RBI has leveraged ION’s Wallstreet FX  (WSS FX) solution since 2003 for managing its FX and Money Market risk, as well as for front-to-back high STP processing. Additionally, since 2021, ION has cooperated with RBI on the latter’s ISO 20022 adoption strategy.

Led by central banks and SWIFT’s joint effort to standardise financial transactions, ISO 20022 has been working towards modernising cross-border payments. Enabling increasingly rich and structured granular data in payment messages, ISO 20022 helps banks process, screen, and validate more efficiently against sanctions lists to combat fraud in an effective manner. Additionally, the solution brings forth operational benefits of the likes of improved KYC analytics, less manual intervention, and decreased risks and costs.


India’s Adani sells 12.5 billion rupees bonds

Indian billionaire Gautam Adani’s flagship firm raised rupees (INR) 12.5 billion rupees (US$152 million) through notes this week, its first such local-currency bond sale since it was targeted by short seller Hindenburg Research in January, which accused the company of fraud.

Adani Enterprises raised the funds on Tuesday by privately placing the notes, the company revealed in an exchange filing. The three-year notes are unrated and carry a coupon of 10%, according to data compiled by Bloomberg.

The bond sale comes as Adani is reported to be considering a bid for a coal-fired power plant belonging to beleaguered Indian tycoon Anil Ambani that is currently being auctioned by Indian lenders, according to people familiar with the matter.

They added that Adani may face intense competition for Vidarbha Industries Power, which operates the 600-megawatt generation facility in central India.

Embedded finance platform Solaris closes funding round

Germany’s embedded finance platform Solaris has closed a €38 million Series F round to ‘strengthen governance and compliance’ marking the next stage of growth for the company. The funding round was led by existing investors. 

The Berlin-based start-up provides a range of financial services via 180 application programming interfaces (APIs) that others use to build end-user-facing products (including basic banking and card services, lending, payments, and know-your-customer (KYC) services) previously raised €190 million in a Series D in 2021 that valued the company at €1.4 billion (US$1.65 billion), when it announced the acquisition of Contis, one of its competitors in the space.

“Over the last few months, we have been working hard on our priorities, said Carsten Höltkemeyer, CEO of Solaris. “We invested in the resilience of our platform, we are consistently hitting our monthly targets, and we have now secured the planned capital increase. The strong commitment of our shareholders is a testament to our strategy and the dedication of our employees.”

Solaris is one of the earliest developers of embedded finance — the process by which some of the more complicated, but also commoditised, aspects of financial services are built and wrapped in an API for anyone else to implement in their own products for end users. The company has said that it aims to become Europe’s leading embedded finance platform.

“Despite the good progress we have made, we are still in the early stages of implementing our strategy,” said Höltkemeyer. “Our next milestone will be the integration of Contis in order to exploit the full potential of our technology and product platform. This will be accompanied by further reduction of complexities and focus on our core products. Solaris will become a highly efficient and performance-driven company with a sustainable run-rate profitability.”


MUFG Investor Services expands global payment and cash management services

MUFG Investor Services, a division of Mitsubishi UFJ Financial Group, has announced plans to expand its banking solutions to address global client demand for payment and cash management services. The company focuses on asset servicing, banking, and fund financing for the alternative investment management industry.

“In addition to bank accounts, liquidity solutions and escrow services, the expanded banking solutions will include foreign exchange payments, wire transfers and local automated clearing house (ACH) payments,” a release stated. “The services will support the facilitation of payments for financial institutions and their management companies, regional banks looking to expand their currency and payment reach for clients, treasury technology providers, fund administrators and other aggregators (e.g., corporate services firms).

“The expansion of our banking services is a testament to MUFG Investor Services’ commitment to creating synergistic opportunities to unlock exceptional value for our clients,” added John Sergides, Chief Executive Officer of MUFG Investor Services. “Especially today, as firms navigate turbulence in the banking sector, it’s critical for them to have stable, reliable, banking partners with strong credit positions to help mitigate risks.”

In addition, the company said that Adil Rehman has been appointed Managing Director, Global Head of Payments and Liquidity, to lead the development and growth of the new services.

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