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Hong Kong aims to revive status as financial hub – Industry roundup: 12 October

Hong Kong works to restore image as global business hub

Hong Kong, for decades a major global financial centre, is making efforts to rebuild its international image as China’s economic growth slows and Sino-US tensions escalate.

Anti-government protests in 2019, followed by Beijing’s swift imposition of a sweeping national security law in 2020 and three years of draconian anti-Covid lockdowns prompted an exodus of tens of thousands of people from the city, impacting on its traditional role as a bridge between the West and the mainland, according to diplomats and business leaders.

An event held last month at Hong Kong’s landmark M+ art museum for hundreds of executives, diplomats and foreign business chambers aimed to reinvigorate the city’s appeal as a premier financial hub.

However, reports suggest most of the attendees were from the mainland and Asia, and visa applicants were mainly from China. The city has also seen a shift in its demographic makeup, with mainlanders accounting for more than 90% of those approved to work under government talent schemes.

Executives and diplomats have stressed the need for diversity in the city to regain its international appeal. Inaki Amate, an Ernst & Young partner and chairman of the European Chamber in Hong Kong, emphasised the need to move beyond the current trend of relying heavily on mainland Chinese talent.

Hong Kong officials are actively working to restore the city’s reputation. Finance Secretary Paul Chan conducted a marketing tour in European cities last month, and the Hong Kong Monetary Authority (HKMA) will host a major banking conference in November to showcase its “vibrancy” and best features.

Despite these efforts, many outsiders still perceive Hong Kong negatively, with lingering concerns over the national security law, pandemic restrictions, and China’s economic challenges. These factors have been detrimental to its image and undermined the city’s ability to attract top talent.

In addition to concerns over the national security law, the legal sector has expressed concerns over judicial independence, and some businesses are relocating to rival financial centres like Singapore and Dubai.

A survey in September found that over half of Hong Kong professionals are considering or planning to leave the city. Several companies and professionals have already departed, impacting its real estate market and office occupancy.

Hong Kong’s initial public offering (IPO) market has also seen a decline during 2023, with significantly lower fundraising compared to previous years, largely attributed to China’s economic downturn and regulatory changes.

Despite these challenges, some investors believe that Hong Kong will adapt and thrive, with new inflows from the Middle East and the mainland replacing Western capital. Time magazine reports that while financial firms are flocking to Singapore, the city state “still has a long way to go before displacing Hong Kong as a trading centre and base for global banks looking for a gateway to China.”


Bank of Israel governor to extend term as war continues

Bank of Israel Governor Amir Yaron said that he would extend his term of office until at least the end of the current emergency period to help navigate the challenges to Israel's economy while the country is at war. His five-year term was slated to finish at the end of the year.

His confirmation came soon after a  former Israeli central bank governor urged her successor to remain in the post when his five-year term comes to an end in December, with the institution now at the forefront of efforts to stabilise markets following last Saturday’s attack by Hamas that put Israel on a war footing.

The Bank of Israel’s US$45 billion package of measures to smooth out volatility in the shekel has provided “a huge amount for the market,” Karnit Flug said in an interview with Bloomberg Television.

Before last Saturday’s attack, Yaron had urged Prime Minister Benjamin Netanyahu to advance proposed changes to the country’s judicial system only with broad public consensus as the two discussed a possible extension of the central bank head’s term.

During their meeting a month ago, Yaron had agreed with Netanyahu to decide whether he will continue with another five-year term at the end of the Jewish High Holidays around October 7. The agreement was in line with Yaron’s previous statements that he would announce his call about seeking another term close to the Jewish holidays, but the surprise onslaught disrupted that plan.

Yaron, who took up the post of governor in 2018, has been critical of the advancement of Israel’s judicial overhaul in its current format and warned about its economic costs. Opponents of Netanyahu claim that the reforms will both weaken the judicial system and undermine democracy and there have been widespread protests since the start of this year.

In July, the governor cautioned that the legal changes had led to an increase in the level of uncertainty in the economy, reflected in the “excess depreciation” of the shekel and the underperformance of the Israeli stock market against other markets.

Potential candidates who are cited as possible successors to Yaron should he decide against serving for a full second term are Professor Efraim Benmelech from the Kellogg School of Management at Illinois Northwestern University; Ori Heffetz, economics professor at the Hebrew University of Jerusalem; and Professor Michel Strawczynski, also an economics professor at the Hebrew University of Jerusalem, and formerly head of the Bank of Israel Research Department.

However, even before last weekend reports suggested that financial markets wanted continuity at the central bank helm and favoured Yaron staying on for a second term.


Growth uptick keeps UK economy from recession

The UK economy returned to growth in August, as activity picked up after a worse-than-expected contraction in July.

The Office for National Statistics (ONS), in its first estimate, reported that  GDP rose by 0.2% in August, reports, in line City expectations.

The services sector grew by 0.4% in August, the ONS reported, but there was a contraction in the production sector and in construction.

However, July’s GDP report was revised down to show a fall of 0.6%, worse than the 0.5% first estimated.

Commenting on the data, John Glencross, CEO and Co-Founder of venture capital and private equity firm Calculus Capital, said: “Today’s GDP data rebound signals a positive trajectory and inspires confidence in the UK economy for investors and SMEs alike. Though a challenging economic environment persists, we are encouraged by the recent and significant revision of historical growth which changes the picture of the immediate post-pandemic recovery, notably compared to our European neighbours. Indeed, there are signs of long-term and credible support for UK business, and it will be interesting to see how this develops in the final quarter of 2023.”

“As we see an upturn in the economy, the smaller end of the UK market continues to require attention to spur significant growth in Britain. The Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) continue to support this section of the market – igniting growth and championing innovative UK companies. Calculus launched the first approved EIS fund 23 years ago.”

However, City consultancy Capital Economics doubts that the uptick in August will prevent the UK entering recession in the second half of 2023. Capital’s deputy chief UK economist, Ruth Gregory, predicts that GDP will shrink in the July-September quarter, and again in October-December.

“The 0.2% m/m rise in real GDP in August, following July’s 0.6% month-on-month (m/m) contraction will raise hopes that the economy has escaped a recession,” she commented. “But some of the strength of GDP in August was due to temporary factors and the timelier survey measures of activity point to a drop in real GDP in September.

“So we are sticking to our below-consensus forecast that the economy will shrink by 0.2% quarter-on-quarter (q/q) in both Q3 and Q4.”


China strikes Sri Lanka debt deal

China said that it has reached a tentative debt agreement with Sri Lanka, front-running separate talks the International Monetary Fund (IMF)and other creditors are holding with the South Asian nation and catching them by surprise.

The deal between Export-Import (Exim) Bank of China and Sri Lanka was reached late last month, China’s Foreign Ministry, without providing details of the pact.

The IMF, Paris Club members including Japan, and other lenders like India are thought to be holding talks this week in Morocco on a debt restructuring plan. China, which is not part of that official group although it is one of Sri Lanka’s biggest creditors, has been pursuing bilateral negotiations with the South Asian nation instead.

Peter Breuer, senior mission chief for Sri Lanka at the IMF, said while it was aware discussions were taking place with creditors, “we have not yet been informed about any specific agreements.” The multilateral lender would need to “assess the entire package of agreements in its totality to assess consistency with IMF debt targets,” he said.

The preliminary pact is not expected to change efforts by the official creditor committee to try to reach a debt deal in Marrakech, which would include safeguards to prevent favourable payment terms to China, a source said.

An Indian official involved in the debt discussions said New Delhi has been pushing for equal and fair treatment in the restructuring plan and hopes that all creditors are transparent in their approach.

Sri Lanka owes about 40% of its bilateral debt to China and 16% to India, according to estimates from the IMF. Reaching a deal quickly with its creditors will allow Sri Lanka to keep tapping funds from its US$3 billion bailout program with the multilateral lender.

Sri Lanka’s central bank Governor Nandalal Weerasinghe and Junior Finance Minister Shehan Semasinghe are in Marrakech this week at the IMF and World Bank annual meetings. Semasinghe met with Robert Kaproth, deputy assistant secretary for the US Treasury, he said in a post on social media platform X, with the two discussing the IMF programme and the debt restructuring process.

The official creditors committee was aiming to sign a memorandum of understanding with Sri Lanka at the Marrakech meeting without the participation of China, Bloomberg News reported last month. While nothing has been finalized yet, an announcement on that deal during the meetings this week is looking increasingly unlikely, according to one source.

The Exim Bank deal comes a week before China hosts its third Belt and Road Forum in Beijing, President Xi Jinping’s flagship programme that has faced criticism for burdening developing nations like Sri Lanka with debt.

Central Bank of Nigeria defends the eNaira

Nigeria’s central bank issued a press release in response to news reports suggesting that its digital currency the eNaira threatens the country’s financial stability.

The Central Bank of Nigeria (CBN) had to publicly insist that its eNaira project, one of the world’s first operating central bank digital currencies (CBDC), does not present a risk.

However, the country’s currency crisis over recent months was precipitated by a shortage of cash currency (the naira) and an attempt by the Nigerian government to force citizens to use a newly created government-sponsored CBDC, which triggered extensive street protests last February.

The October 9 press release from the CBN came in response to “news items on some media platforms,” suggesting that the eNaira threatens Nigeria’s financial stability. Some news pieces, such as one published by the daily newspaper The Punch, point to the CBN’s recently released report titled, “Economics of Digital Currencies: A Book of Readings.”

In the report, CBN experts highlight the gradual rise of eNaira adoption, marked by a 0.2% share if compared with Nigerian banks’ liquidity. They also admit that funds held by citizens in the eNaira wallets can’t be used by commercial banks. The potential threat that could arise from this is the lack of liquidity suffered by the banks in the case of total adoption of eNaira. However, such concern is one of the fundemental theoretical aspects of the discussion about any CBDC.

In its release, the CBN does little to explain, limiting itself to a plain rejection of the claims in the media and referring to the “in-depth understanding of CBDCs” ingrained in its report:

“The eNaira structure continues to evolve and undergo modifications targeted at improving the user experience across all interfaces. We encourage Nigerians to embrace the technology for, amongst other things, greater financial inclusion.”

A recent global survey featuring respondents from 15 countries indicates that Nigeria has the most cryptocurrency-aware population in the world. According to a joint study by ConsenSys and YouGov, 99% of Nigerians are more knowledgeable about Web3 than people in major economies such as the US, the UK, Japan and Germany.


HSBC “considers joining the CLO market as arranger”

HSBC is considering whether to enter Europe’s US$300 billion collateralised loan obligation (CLO) market as an arranger, according to a Bloomberg report citing people familiar with the matter.

A decision may follow shortly, the individuals indicated. The bank recently hired Nikunj Gupta as head of credit structuring in order to strengthen its existing team. Gupta had previously headed up the European CLO primary business at Deutsche Bank.

HSBC has not previously acted as an arranger of CLOs - which bundle leveraged loans into bonds of varying risk and reward – who have three main roles to provide temporary lines of credit, known as warehouses, to CLO managers; to work with managers to come up with the deal structure; and finally, to syndicate the deals into the primary market.

Banks that are already investing in CLOs via their treasury departments are interested in entering the market, which offers a good fee-making addition to their fixed-income business.

From 2013 until Russia’s invasion of Ukraine — and the subsequent surge in inflation and series of rate hikes — the CLO market had grown exponentially in both Europe and the US, according to James Smallwood, a partner at law firm Allen & Overy LLP specializing in CLOs.

HSBC is “likely seeing the potential of the market which will hopefully continue to grow as a conduit between private capital, the wider leveraged loan market and the international capital markets,” he said.

BNP Paribas currently heads up this year’s league table for arranging European CLO structured products, with over 15% of market share, according to data compiled by Bloomberg. Barclays fis a close second with 14.8%.


Ireland raises tax on banks

Ireland, which introduced a levy on banks in 2014, announced in Tuesday’s Budget that it will be raised and is expected to bring in €200 million (US$212 million), more than double the amount that will be collected this year.

Finance Minister Michael McGrath said the measure was to ensure banks show social solidarity. The levy was originally meant to be time-limited but has been regularly extended over the past nine years.

“It is important that the banking sector continues to make a contribution to the Irish economy following the support they received during the financial crisis,” McGrath said.

“In that context, I plan to put in place a revised bank levy in 2024, to raise €200 million. I will review the levy again next year to ensure it remains appropriately calibrated.”

The charge compares to the €87 million which is expected to be raised via the levy in 2023. Although the charge previously brought in €150 million annually, this year’s tally declined significantly as Ulster Bank and Permanent TSB left the Irish market.

There had also been calls to raise taxes on banks after lenders reported bumper profits this year, boosted by the European Central Bank (ECB) hiking interest rates.

Industry lobby group Banking and Payments Federation Ireland hit out at the payment, warning the “arbitrary” nature of the increase “risks Ireland’s reputation as a stable, consistent and transparent tax regime”.

“While State ownership has been a feature of the Irish retail banking sector for the past decade, the Government’s strategy is to return banks to private ownership,” the group said in a statement.

Other features of this week’s Budget included plans for a sovereign wealth fund (SWF) with assets of €100 billion by the middle of the 2030s. The fund will be set up using some of the corporation tax windfall that Ireland has received from major global companies.

China set to sell record yuan sovereign debt offshore

China is poised to sell a record amount of yuan (CNY)-denominated sovereign bonds overseas this year, in a move that aims to help authorities support a weakening currency and boost its global popularity in the long run.

The country’s Ministry of Finance (MOF) announced that it will issue CNY26 billion (US$3.6 billion) of such debt in Hong Kong in the current quarter, commencing with a first batch of CNY16 billion on October 25. it will be the third batch of CNY treasury bonds issued by the ministry in Hong Kong in 2023, the statement on its website added, taking the annual tally to CNY55 billion.

This is the most since China issued its first offshore CNY sovereign note in 2009 according to Bloomberg data.

Detailed issuance arrangements will be announced at the Central Moneymarkets Unit, a central securities depository for debt securities owned and operated by the Hong Kong Monetary Authority, (HKMA) said the statement.

An increase in such debt issuance will aid Beijing’s efforts to bolster the CNY, which is near a record low offshore, by raising demand for the currency and tightening its supply offshore. With the finance ministry as the second biggest issuer in the offshore CNY bond market behind the central bank, a steady supply of such notes also will help build a pricing benchmark for corporate borrowers in the long term. 

“Supporting the offshore yuan is probably the top goal of the increased issuance. The amount is tiny relative to fiscal aid,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence.

“The offshore government debt pool is still too small, and China will have the incentive to boost it for the long-term purpose of yuan internationalisation.”

Belgium to use revenues from frozen Russian assets for Ukraine

Belgium plans to use corporate tax income from the profits generated by immobilised Russian assets at Euroclear, the European clearing house, to help Ukraine.

Belgian prime minister Alexander de Croo said that the country would launch a €1.7 billion (US$1.8 billion) fund to help finance the war in Ukraine. “The source of [the] funds are the billions of Russian assets that are being frozen in Belgium,” he told reporters in Brussels, adding that the money would be used to buy military equipment and for humanitarian support.

De Croo’s comments, which come as the European Union (EU) considers a broader windfall levy on profits from the sanctioned cash, were made during a visit by Ukrainian president Volodymyr Zelenskyy to Nato’s headquarters.

Most of the frozen Russian central bank assets, which now exceed €200 billion, are held in Europe, with the bulk of them held by Euroclear in Belgium where the proceeds are subject to a 25% corporate tax.

More broadly the EU, along with Group of Seven nations, are still discussing a plan to tax the profits generated from immobilised Russian sovereign assets and funnel the revenue to Kyiv. US Treasury Secretary Janet Yellen is backing the idea, calling it a “reasonable proposal” that is distinct from actually seizing the cash.


Apex Group expands ESG and sustainability offerings

UK financial services group Apex has expanded its environmental, social and governance (ESG) and sustainability solutions. following the firm’s acquisition of two divisions of MJ Hudson in May this year.

Apex Group has now completed the acquisition of the Irish arm of MJ Hudson, a firm which provides asset management services. The deal came after MJ Hudson was effectively forced into a rapid sale of its assets in an effort to repay debt owed to its senior lender, Santander UK. The firm also sold its

Following Apex’s finalisation of the acquisition of the firm’s data and analytics arm it now plans to expand its ESG and sustainability advisory services, which are led by Emma Bickerstaffe, managing director, ESG and sustainability, who joined from MJ Hudson.

Apex Group said it would now deliver “the broadest range of ESG and sustainability services in the industry”, supporting investors through compliance, assessment and reporting, and strategy and transformation.

The firm has also expanded its range of impact solutions and carbon and climate services, which includes carbon emissions monitoring, decarbonisation strategies and nature solutions.

Bickerstaffe said: “We are at an exciting juncture in the evolution of Apex Group's ESG offering by combining the power of a proprietary technology platform with operational excellence and deep advisory experience.”

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