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“Fab 4” discuss semiconductor global supply chain resilience – Industry roundup: 28 February

“Chip 4” hold talks on semiconductor global supply chain

The US and three Asian partners with major semiconductor industries confirmed that a meeting among their senior officials was held earlier this month to discuss the global chip supply chain.

Taiwan’s Foreign Ministry said the “US-East Asia Semiconductor Supply Chain Resilience Working Group”, aka the “Chip 4” or “Fab 4”, held the first video meeting of senior officials from its working group on 16 February following months of coordination. The “Fab” in the name refers to a shorthand of an industry term for the fabrication plants where chips are made and used for items from fridges to fighter jets.

The video conference followed on last September’s first meeting convened by the United States of a working group to discuss how the US, together with South Korea, Japan and Taiwan could strengthen the semiconductor supply chain after a two-year global chip shortage that prompted car manufacturers to halt production and exposed the larger supply chain issues.

The 16 February conversation centred around maintaining the resilience of the semiconductor supply chain and an early warning system to ensure a steady chip supply, said a Taiwanese official, who did not reveal which officials attended the video conference.

The countries members of this group in the Indo-Pacific region are home to some of the world’s largest contract chip makers, including Taiwan Semiconductor Manufacturing, South Korean memory chip giants Samsung Electronics, and SK Hynix, with Japan being the supplier of materials and equipment required to make the semiconductors.

In a statement, the Taiwanese foreign ministry said: “The focus of the discussions of the participating quartet at the meeting was mainly on how to maintain the resilience of the semiconductor supply chain and explore the possible future cooperation directions of all parties.

“As an important member of the Indo-Pacific region, our country also plays a key role in the global semiconductor industry and has deep economic and trade relations with countries in the region.” This comes as the four countries have moved to boost cooperation and collaboration after growing threats from China.

Inflation accelerates in France and Spain

Inflation rates in France and Spain unexpectedly accelerated this month, increasing pressure on the European Central Bank (ECB) to deliver more interest-rate hikes and raising political risks for the two countries’ leaders.

Consumer prices in France jumped by a record 7.2% from February 2022 as food and services costs increased. Spain saw a 6.1% advance. Analysts had expected price gains to remain unchanged at 7% in France and to slow in Spain.

The stronger readings from the euro zone’s second- and fourth-biggest economies will cement the half-point rate move the ECB is planning for March and bolster those officials who say more big moves are needed beyond that to get inflation under control.

French monthly inflation rose from 0.4% to 0.9%, while analysts had forecast prices to rise at a steady rate. Food prices rose by 14.5% on the year, official statistics showed, up from 13.3% in January.

Last week, French Finance Minister Bruno Le Maire met retailers to discuss ways to prevent food prices from rising much further, setting a 15vMarch 15 deadline for a plan.

Elsewhere, UK grocery inflation rose to 17.1% over the one month period to 19 February according to a survey by consultancy Kantar. One in four Britons surveyed said they were struggling financially, up from one in five a year ago. A shortage of salad vegetables, which has resulted in some UK supermarkets limiting the number of items each customer can buy, has added to the upward pressure.

In more downbeat economic news, Switzerland’s economy was at a standstill in the fourth quarter of 2022 as a “challenging international environment” pressured manufacturing and exports.

Zero growth in Q4 was down from a 0.2% expansion in Q3. Manufacturing contracted by 0.3% in the fourth quarter, with exports 0.9% weaker. Initial figures show the overall Swiss gross domestic product expanded by 2.1% last year, adjusted for seasonal and calendar effects and sporting events — compared to 3.9% in 2021.

“While economic performance in 2022 was boosted by the recovery from the pandemic, at the same time it was held back by the tense energy situation in Europe and a gloomy international environment,” the government said.

JPMorgan proposes new Asia credit index with lower China weighting

JPMorgan plans a new Asia credit index with reduced China weighting in parallel to its existing Asia credit index (JACI), amid growing geopolitical tensions and dimming appetite for Chinese property bonds, reports Reuters citing two insiders as sources.

JACI is a premier Asia credit index, tracked by fund managers controlling more than US$85 billion worth of assets. For the new index, JPMorgan proposes cutting the weighting of China closer to 30%, against the level of around 43% in its existing JACI, which has China as its largest component.

The proposal comes as tensions between Washington and Beijing intensify over issues ranging from the Russia-Ukraine war and alleged Chinese spy balloons to tit-for-tat trade friction and technology rivalry. The tensions that have unsettled investors, triggering a move out of Chinese assets by some large global money managers, despite the nation’s post- zero Covid stock market rally.

JPMorgan initially proposed expanding the existing JACI while cutting the weighting of China to 29.86% from 43.14%. However, the Asia credit market would have been impacted if the proposed reshuffle to the existing index had gone through, with passive and active fund managers dumping China debt to stay aligned with the weighting change.

Some fund managers reportedly pushed JP Morgan to cut JACI’s China debt exposure as its poor performance has dented the popularity of passive products that track the index. Investors are also increasingly requesting emerging markets or Asia products that have no exposure to China, after they took a hit from regulatory crackdowns and the country’s property sector liquidity crisis.

The new index, named JACI Asia Pacific, is described by JPMorgan as an “enhanced” version of JACI, with additional exposure to markets such as Japan, Australia, New Zealand, and Papua New Guinea. According to sources, Chinese issuers’ debt will remain the largest chunk of the new index, followed by Japan at 20% and Australia at approximately 10%.

Jane Cai, a fixed income portfolio manager at China Asset Management (Hong Kong), told a media briefing this month that JPMorgan was also internally discussing an ex-China Asia credit index. She said the move was in response to some overseas investors’ requests that a non-China index be compiled.

Marco Polo trade finance network declared insolvent

The holding company of the Marco Polo trade finance network – formerly TradeIX – has entered insolvency in Ireland.

The latest filed accounts – for 2021 – showed a loss of almost US$29 million and cumulative losses of US$85 million. Marco Polo’s largest external shareholder is investment company Kistefos, followed by State Bano of India (SBI) Japan, ING, SMBC and BNP Paribas. The company’s liabilities exceed its assets by US$2.6 million and total debts amounted to US$5.5 million.

At its peak, the blockchain network had more than 30 bank members, including Commerzbank, BNY Mellon and SMBC, and its backers included ING Ventures and BNP Paribas. Recently a potential US$12 million deal with the Bank of America fell through, and the company failed to find replacement investors.

As part of the BoA deal, Marco Polo’s technology would have been integrated with the bank’s internal systems, according to reports.

This is the second failed blockchain trade finance network after bank-backed we. Trade became insolvent in June 2022. Additionally, at the end of last year, IBM and Maersk pulled the plug on their TradeLens blockchain platform.

Two other blockchain trade finance companies, Contour and komgo, focus on specialist markets with komgo initially targeting commodities and Contour focusing on Letters of Credit. Komgo acquired Canada’s GlobalTrade Corporation at the start of December, bringing 120 multi-national customers onto the platform.

Earlier this month, the digital trade sector was boosted when all the major container shippers committed to adopting electronic bills of lading (eBLs). Half of all bills of lading will be electronic within five years and 100% after 10 years, which will boost Contour and other blockchain trade networks such GSBN and TradeWaltz.

Marco Polo ranks as the sixth high profile enterprise blockchain failure in the past year, each of which started around 2016 and 2017. In most cases, the issue was a failure to achieve market fit and scale before the money ran out rather than any particular blockchain technology.

Marco Polo and insurance network B3i both used R3’s Corda. and TradeLens were based on Hyperledger Fabric, while the ASX CHESS project used DAML and VMWare Blockchain and Symbiont had its own proprietary technology.

Yellen supports Banga for new World Bank chief

US Treasury Secretary Janet Yellen has said that she believes the strong qualifications of the US nominee to lead the World Bank, ex-Mastercard CEO Ajay Banga, will overcome any criticism of the selection process.

President Biden last week nominated Banga to be the World Bank’s new president to succeed David Malpass, a former Trump official who is leaving the role early amid controversy about his views on the causes of climate change.

Banga is a US citizen who was born in India and spent 10 years as Mastercard CEO before stepping down in early 2021 for a brief stint as executive chairman at the group. Yellen says that Banga’s “efforts have helped bring 500 million unbanked people into the digital economy” while a White House statement noted that he led Mastercard “through a strategic, technological and cultural transformation”.

President Biden added Banga has “critical experience mobilising public-private resources to tackle the most urgent challenges of our time, including climate change”.

Meanwhile, the World Bank recently announced US$2.5 billion in additional grant financing for Ukraine and will “provide as much concessionality to the debt treatment” for distressed economies as possible, its outgoing president told a meeting with the International Monetary Fund, India, China, and other creditor nations at the weekend.

“The World Bank is committed to providing net positive flows in a way that maximizes concessionality in the restructuring process,” said David Malpass at the Global Sovereign Debt Roundtable in India’s Bengaluru city on the sidelines of the G20 financial leaders' meet.

"We will provide as much concessionality to the debt treatment as possible."

Malpass also said that he noted “constructive remarks” by a deputy China central bank governor at a G20 meeting last Friday that “gave room to move forward” on settlement of debt issues.

The remarks come amid calls by China, the world’s largest bilateral creditor, that global lenders should take haircuts on loans extended to developing nations hurt by the impact of the Russia-Ukraine war and the Covid-19 pandemic. The United States, meanwhile, has repeatedly criticised China over its “foot-dragging” on debt relief for dozens of low-and middle-income countries.

Reuters reported earlier this month that India, the current president of the G20 bloc, is drafting a proposal for member countries to help debtor nations by asking lenders to take a large haircut on loans.

Global bond rally fizzles out

A record-breaking global bond market rally in the early weeks of 2023 has fizzled out as mounting signs of persistent inflation force investors to reverse their views on the likely future path of interest rate rises, reports the Financial Times.

Investors rushed into fixed income markets at the start of this year on expectations that the US Federal Reserve and other major central banks would soon end their aggressive campaign of monetary policy tightening.

A Bloomberg index tracking high-grade government and corporate bonds rose as much as 4% January, its best ever start to the year.

The gain disappeared after data at the start of this month showed the US economy added more than 500,000 jobs in January. The report kicked off a run of better than expected economic data on both sides of the Atlantic, upending expectations that the Fed and the European Central Bank were close to winning their battle with inflation.

The resulting rise in bond yields has also upset a rally in the stock market, with the S&P 500 losing 2.7% last week.

“We’ve had a reality check,” said Michael Metcalfe, head of macro strategy at State Street, told the FT adding that the easing of monetary policy expected by markets until recently “looked a little fanciful”.

Futures markets, which had previously reflected bets that the US central bank would reduce interest rates twice later this year, now predict that rates will rise to 5.4% by July, with no more than a single cut before the end of the year.

Some major investors say the recent sell-off is a sign that it is too soon to pile into bonds andthat moment is likely to come later in the year.

“Of course the Fed will at some point cut rates, but the market was trying to pre-empt that . . . and it was so, so premature,” said Sonal Desai, chief investment officer of Franklin Templeton. “I still think it is a very good year for fixed income. I just don’t think we’re there yet.”

Banks crack down on employees’ use of ChatGPT

Wall Street is clamping down on employees using ChatGPT, the popular tech tool that's fuelled investor interest in artificial intelligence (AI), as a slew of global investment banks impose restrictions on the fast-growing technology that generates text in response to a short prompt.

Bank of America, Citigroup, Deutsche Bank,Goldman Sachs and Wells Fargo are among lenders that have recently banned usage of the new tool, with Bank of America telling employees that ChatGPT and openAI are prohibited from business use, insider sources told Bloomberg.

Citigroup has blocked access to the chatbot as part of automatic restrictions imposed around third-party software,Bloomberg reported, while traders at Goldman Sachs were similarly restricted. JPMorgan has also limited use of ChatGPT among traders on concerns about regulatory action stemming from sensitive financial information being shared with the chatbot. Sources told Bloomberg that ChatGPT’s restriction at JPMorgan was part of standard procedures involving third-party software.

ChatGPT has been become an internet sensation as it displays a human-like ability to perform a variety of tasks ranging writing stock stories to layoff emails. ChatGPT is also at the centre of a battle around AI between Microsoft and Google's parent Alphabet and Apple, according to Wedbush Securities.

South Africa recommits to anti- money laundering battle

South Africa’s central bank has reaffirmed its fight against money laundering, and terrorism and proliferation financing following the recent greylisting of the country.

On 24 February, South Africa joined a list of jurisdictions lacking in sufficient regulation preventing money laundering and terrorism financing.

The listing followed the government’s failure to implement all 11 recommendations by the Financial Action Task Force (FATF), a global financial watchdog, within the 12-month observation period.

Being greylisted is detrimental to the country’s reputation within international markets, makes doing business with South Africa more time-consuming and has led to a decrease in the value of the rand (ZAR).

According to the South African Reserve Bank (SARB) going forward, it will strengthen its supervision and further enhance the “dissuasiveness and proportionality of administrative sanctions issued,” – meaning tighter controls and bigger penalties for offenders.

The SARB stressed that it has a zero-tolerance approach when addressing the abuse of the financial system by money launderers or terrorist financiers.

In response to South Africa being added to the FATF’s grey list, the SARB said it plans to monitor its financial jurisdiction with a more risk-based approach – implying more mitigation measures and acknowledgement of the possibility of financial crime occurring.

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