Category Archives: Financial Services

China’s Central Bank Faces Policy Redirection By Investigation

People's Bank of China headquarters in Beijing

THE ANTI-CORRUPTION INVESTIGATION of Fan Yifei, one of the six deputy governors of the People’s Bank of China, may suggest that all does not bode well for the central bank as Xi Jinping starts his second decade of leadership.

Xi has been investigating more than two dozen financial regulators, state banks, insurers and investment funds since last year to assert Party authority over a financial sector that Xi far from trusts. Fan is the most senior of several financial officials detained over the past year.

Fan spent most of his career as a banker with the Construction Bank of China, so there may be skeletons not as deeply buried in his cupboard as he may have thought. Over-closeness of party cadre to private sector business is now deeply out of favour.

Yet there a clues that there may be policy motivations behind his investigation. Earlier this year, the Central Commission for Discipline Inspection, the country’s top graft-buster, criticised the central bank for failing to meet Party objectives.

The central bank’s top leadership has been a stronghold of economic reformers and advocates of internationalisation of the Chinese financial system, a policy direction for which Xi has little instinctive enthusiasm.

The PBOC’s internationally respected governor, Yi Gang, and its party secretary, Guo Shuqing, were removed from the Party’s central committee during the 20th Party Congress last month. That is seen as a prelude to them leaving their positions early next year when senior government jobs get reallocated.

Their replacements are likely to be men who will ensure that the central bank — and the financial sector it regulates — fall into line with Party goals, just as the technology sector has been ‘rectified‘. This Bystander expects to be hearing more about financial inclusion for common prosperity.

Fan’s case is the more interesting because he was the vice-governor responsible for payments and financial technology, which involved overseeing the development of the central banks’ digital currency, the e-CNY or digital yuan. It is an area in which the PBOC has built a substantial lead over other central banks. Fan’s last public appearance, in September, was to announce a further expansion of its trial.

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China Signals Coming Crackdown On $3tn Trust Industry

REPORTS THAT THE leading companies in the $3 trillion trust industry are being audited suggest a coming crackdown on a critical part of China’s financial sector: a hybrid of commercial and investment banking, private equity and wealth management.

Bloomberg reports that for the past month, the National Audit Office has been going over the books of at least 20 trust firms, including the top five.

The concern is the risks the sector poses to financial stability. No other set of financial firms invests in such a broad class of assets, from property to stocks, bonds and commodities. They are also a key intermediary in China’s shadow banking system, a conduit for deposits into risky investments via products often designed to dodge capital or investment regulations.

Auditors appear to be focusing on trust firms’ loans to property developers, suggesting renewed concern on the part of authorities that the problems of the beleaguered property sector could spill over into the broader financial system.

So far this year, trust firms defaulted on $8.6 billion of investment products linked to property developers, according to industry data tracker Use Trust — the knock-on effect of developer defaults and frozen construction across the country.

Trust firms, including Minmetals Trust and Zhongrong Trust, have bought stakes in at least ten troubled real estate projects this year, betting that unfinished homes will eventually yield cash to pay off some of the $230 billion in property-backed funds they have sold to investors.

It is unclear how long the audit inspections will last, whether more firms will be reviewed, or what regulatory actions will follow.

Improving trust firms’ transparency and risk management seems the very minimum to expect. However, that in itself will be insufficient without other changes. Municipal finance needs reforming so that local authorities are not so dependent on land deals to raise revenue and mainstream financial institutions need to offer new retail savings and investment products that can be an alternative to those provided by the shadow banking system.

As Beijing has shown with its rectification of the platform tech companies, it is willing to bear the costs of disrupting even a large domestic industry once it believes that the cost of not doing will be even higher.

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US Reminds China It Is Still Taking Care Of Business

JUST BEFORE FORMER US President Donald Trump left office, he signed into law the Holding Foreign Companies Accountable Act (HFCAA), which allows the delisting of any foreign — for which read Chinese — company publicly traded in the United States that does not let US regulators inspect its finances to the same extent required of US companies.

US-listed Chinese companies must disclose their non-US operations’ audits, which Chinese regulations prohibit auditors from sharing.

The law also targets alleged Chinese government control of such companies and was part of Trump’s broader strategy to limit Chinese companies’ access to US capital and technology.

On March 8, HFCAA was used for the first time. The US Securities and Exchange Commission provisionally listed five Chinese companies that it said were not in compliance — biotech firms BeiGene and Zai Lab, Yum China, which runs KFC and Pizza Hut fast food outlets, ACM Research, a semiconductor process equipment manufacturer, and pharma firm HutchMed China.

As the accounting scandal involving Luckin Coffee in 2020 showed, there are legitimate investor reasons for HFCAA, and its wheels turn exceedingly slowly. Delisting will not necessarily follow. The firms have opportunities to come into compliance. Even if they do not, 2024 is the earliest delisting would occur.

So the timing may be coincidental, but this Bystander doubts it.

Concern about Russia using China to end-run Western sanctions over Ukraine is growing within the Biden administration. The SEC’s announcement follows warnings by US Commerce Secretary Gina Raimondo that the US could ‘essentially shut down’ any Chinese companies that defy US sanctions by continuing to supply chips and other advanced technology to Russia.

Semiconductor Manufacturing International Corp, a chipmaker Raimondo mentioned, could become a new Huawei.

Delisting the five companies named would not necessarily impact US efforts to isolate Russia technologically. and certainly not in time to disrupt wartime supply lines.

However, the threat adds to the signals to China and its companies to tread carefully when it comes to US sanctions (and Chinese firms will be careful not to put their exports to the US and EU at risk by overtly violating them), or exploiting the situation created by the war in Ukraine.

This week, Bloomberg reported that some of China’s state-owned energy and commodities giants, including China National Petroleum Corp, China Petrochemical Corp, Aluminum Corp of China and China Minmetals Corp, are considering the opportunities for investment in Russian counterparts such as Gazprom and Rusal.

As well as providing economic support to a strategic partner, any deals would bolster Beijing’s efforts to improve its energy and food security. China is already the leading market for Russia’s exports, taking 13.5% of the total. That will only grow as Western sanctions that China has no intention of honouring bite on Russia.

Trade deals announced shortly before the invasion of Ukraine when Russian President Vladimir Putin was in China for the Beijing Winter Olympics last month now seem even more like a prelude to the future.

That future will be about trade deals in which Russian commodities fulfil China’s needs for energy and food, and China meets Russia’s needs for technology and advanced manufactures containing it like aircraft.

Update: Reuters news agency reports that discussions between Washington and Beijing on resolving the audit issue are progressing ‘relatively smoothly‘, although it sounds as if there is still a fair way to go to bridge the gap between the two sides.

Footnote: Around 250 Chinese companies listed on US exchanges could fall foul of HFCAA, according to another little-known Trump-era agency, the US-China Economic and Security Review Commission, which advises on the US national security implications of China’s bilateral economic activities. A steady addition of small batches to the SEC’s provisional list would accelerate the relocation of listings from the United States to Hong Kong.

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Reining In All Round

Screenshot of China Cinda Asset Management web site captures on January 16, 2022

IT TAKES SOME deft reading between the lines to understand the unexpected decision by China Cinda Asset Management, a bad-debt manager controlled by the finance ministry, to drop its backing for the restructuring of Ant’s consumer finance business.

The only public reason that China Cinda has given for backing out late last week from its announced 6 billion yuan ($940 million) participation in a 22-billion-yuan funding round for the reformulated version of Ant’s consumer finance business is “further prudent commercial consideration and negotiation.”

As part of the ‘rectification‘ of Jack Ma’s Ant Group that commenced with regulators pulled the rug from under the group’s planned blockbuster $37 billion initial public offering in November 2020, Ant’s two consumer finance businesses, Huabei and Jiebei, were to be consolidated as Chongqing Ant Consumer Finance, in which Ant’s stake would be capped at 50% and regulatory oversight extended.

Authorities are pruning back the growth of China’s tech platforms for various policy reasons, from reining in financial risk to concerns about misuse of consumer data, overweening market power and a feeling that the platforms and their billionaire owners are just getting too big for their boots.

Yet authorities also have concerns about the four bad-debt managers straying from their core mission, especially now their cash flows are being squeezed and debt ratios rising. After all, there is still a potential real-estate sector meltdown to worry about. There is no appetite to repeat the bailout of China Huarong Asset Management, the largest of the four state-backed bad-debt managers established in the late 1990s to clean up the ugly parts of the large state-owned banks’ loan books.

The China Banking and Insurance Regulatory Commission (CBIRC) recently instructed the bad-debt managers to return to their core businesses of managing bad loans and distressed assets.

China Cinda already owns 15% of Chongqing Ant through its wholly-owned subsidiary Nanyang Commercial Bank. Expanding that to become the second-largest shareholder in China’s largest consumer finance company does not fit CBRIC’s mandate.

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Ant Knuckles Down

Logos of Ant Group and Alipay

ANT GROUP HAS applied to become a financial holding company. That will put Jack Ma’s fintech group spun out of Alibaba under central bank oversight. Thus authorities tighten their grip a significant notch over the sprawling fintech sector.

The somewhat imposed decision on Ant will require it to restructure itself as a payments services company. That was what regulators told the company to do after forcing the pulling of Ant’s proposed blockbuster initial public offering (IPO) last November. However, the first go-round did not pass muster. The central bank and the three other top financial regulators hauled in Ant executives on Monday for further talks.

Following those, the People’s Bank of China announced the company will now adopt its new structure as part of a ‘comprehensive and feasible rectification plan’ following its coming under strict regulatory oversight last year.

Critically, Ant has agreed to decouple its Alipay mobile payments app from other financial services it offers, such as unsecured online lending via its Huabei virtual credit card and Jiebei consumer loans. The company says its focus will be on enabling micro-payments for consumers and small-and-medium-sized enterprises, which is how it started. As part of this, it will set up a personal credit reporting company and improve consumer data protection. A separate (regulated) Ant consumer finance company will run Huabei and Jiebei.

The company also says it will improve its consumer data protection, rectify monopolistic behaviour and shrink the assets under management of Yu’e Bao, its giant money-market mutual fund. These changes all toe the new party lines for reining in the internet giants and scaling back highly leveraged lending.

Ant also contritely says it will plan its growth ‘within the national strategic context’ and ‘contribute to the new development paradigm of domestic and international circulations’. This reinforces the view this Bystander expressed previously about the platform companies being marshalled into becoming a ‘strategic height’ of the economy and a competitive advantage for China internationally.

The freewheeling days for fintech are now over. Ant’s affiliate Alibaba’s record 18.2 billion yuan ($2.8 billion) antitrust fine was further warning that Ant and all the other fintech companies will have to behave like traditional financial institutions and do as their regulators tell them in line with national policy objectives.

Where this leaves Ant’s IPO is uncertain. The restructuring will make the group less valuable than the $34 billion it was initially hoping to raise. Alipay has more than one billion users in China and holds approaching three-fifths of the $17 trillion mobile payments market, well ahead of its closest rival Tencent’s WeChat Pay’s two-fifths. That dominant market share tied together a vast and detailed trove of consumer data collected across Alibaba and Ant.

Weakening the ability to use Alipay across all its services will reduce those market shares, which is also the intent of new draft measures announced in January to curb market concentration in online payments.

Update: The State Administration for Market Regulation has told 34 internet platform companies, including Tencent, ByteDance, Pinduoduo, Baidu and, to get any anti-competitive practices sorted out within the next month — confirmation, as if it was needed, that the crackdown on Ant Group and Alibaba is neither all about Jack Ma nor over.


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Peoples’ Bank Of China Lays Out 2021 Policy Priorities

THE PEOPLES’ BANK OF CHINA has set out its ten priorities for the year. The three it has added to last year’s list of seven are what caught this Bystander’s eye as they indicate what is at the forefront of official thinking: developing green finance, playing a greater role in global financial regulation and containing risks in the bond market.

The priorities are set out in a statement following the central bank’s recent work conference, part of the cascade of work conferences across officialdom from the Politburo’s meeting in December on the 2021 economic goals and subsequent Central Economic Work Conference the same month.

Some high-profile defaults have made bond-market reform as high a priority for the central bank as reining in fintech companies. We expect to see regulatory reform to strengthen market governance, especially in the area of default resolution, and exemplary supervisory punishment of misconduct such as fraudulent issuance. The two bond markets are likely to be unified, with the introduction of common standards used as an opportunity to tighten regulation overall.

The central bank is signalling that it will closely monitor the carbon trading market that is due to start on February 1. It also seems set to get more deeply involved with central banks’ international effort to improve financial systems’ ability to manage climate-change risk and require more transparency from financial institutions about climate-related impacts of their lending and investment.

On the domestic front, the bank will steer the financial system to provide more finance for green development as a prop for an important pillar of national policy. This will be mirrored for other national priorities, including the tech and agricultural sectors and small businesses, which are being weaned off the shadow banking system.

There is also a nod in the direction of not stifling financial innovation but a more vigorous waving of the finger in the direction of fintech companies, which can expect continuing tighter oversight both of the financial risks they may pose and their alleged abuses of market power.

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NYSE Said Considering Reversing Its Reversal On Chinese Telcos Delisting

This is spinninng faster than a revolving door, and with about as much control.

The New York Stock exchange is reported to be reconsidering (Update: has U-turned on) its decision not to proceed with the delisting of three state-owned telcos, China Mobile, China Telecom and China Unicom HK that it announced last Thursday.

This follows a rebuking telephone call from US Treasury Secretary Steven Mnuchin to NYSE president, Stacey Cunningham. The White House, apparently, was as caught unawares by the exchange’s sudden reversal as everyone else.

The NYSE is now reportedly awaiting clarification from the US government about who and what exactly was banned by US President Donald Trump’s executive order in November that stops US investors holding stakes in companies with alleged ties to the Chinese military. The order is due to come into effect on January 11, nine days before he leaves office.

The whole back-and-forth seems to encapsulate the chaos over the United States’ China policy in the final days of the Trump administration.


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NYSE Delisting Reversal May Reflect Hard Reality

THIS BYSTANDER IS as taken aback as anyone by the New York Stock Exchange’s abrupt and unexpected volte-face over delisting three Chinese telcos.

The only explanation the exchange has given for reversing its December 31 announcement that it was initiating the delisting of China Mobile, China Telecom and China Unicom HK to comply with a November executive order issued by US President Donald Trump, is that it no longer intends to move forward ‘in light of further consultation with relevant regulatory authorities’.

There is clearly more backstory to come out, including whose ‘relevant regulatory authorities’ were consulted.

The optimistic interpretation is that the about-turn reflects expectations of a less combative approach towards China once US President-elect Joe Biden takes office on January 20. Yet if that was the case, the NYSE could have slow-walked making its initial decision until after then.

To this Bystander. a more realistic explanation is that the NYSE has been given cause for concern that the trickle of listings moving from New York to Hong Kong will turn into a torrent and that Wall Street firms’ much-expanded access to China’s financial markets achieved over the past year — the real win of Trump’s Phase One US-China trade deal signed a year ago — is at serious risk of being cut back by retaliatory moves from Beijing.

At Tuesday’s foreign ministry’s daily press conference, spokeswoman Hua Chunying took the high ground, saying:

The role of the US as the global financial centre is dependent on the trust by global companies and investors in the inclusiveness and credibility of its rules. [Delisting} seriously breached the much-touted principles of market economy and fair competition, as well as international economic and trade rules.

Leaving plenty of room for low cunning.

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Regulators Will Bend Not Break Ant Group

JACK MA’S ANT GROUP, the fintech affiliate of e-commerce giant Alibaba, is to be restructured following the regulatory squashing of its would-be blockbuster initial public offering in November. The company says it is working on a timetable to meet the requirement of China’s regulators that it returns to being a payment-services provider at core (ie, go back to being just Alipay).

This will involve overhauling its lending, insurance and wealth management businesses to strip down their complexity, and then putting them under a single financial holding company. People’s Bank of China officials have told the company to do that to ensure both capital adequacy and compliance regarding related transactions while protecting personal data privacy in its credit-scoring services — the velvet glove of prudential regulation over the iron fist of supervision.

By corralling its financial businesses in a separate subsidiary, Ant will be better placed to comply with the new regulations on financial holding companies that took effect in November and mitigate the risk of a forced full-scale break up of the group, if not of having to bend to the regulators’ will.

November’s regulations require non-financial companies that control businesses in at least two different financial sectors to have a central bank-approved financial holding company to control them.

There is an element of bringing Ma to heel in the high-profile application of the new regulations to Ant. It also fits with the reining-in of the large tech companies that grew up outside the orbit of state-owned industries.

However, regulators are intent on tightening their grip on non-financial companies moving into financial services, including innovative fintech-enabled services such as online microcredit, as part of their broader desire to rein in systemic financial risk.

The restructuring will likely crimp Ant’s growth. For one, it will face tighter oversight and higher capital adequacy requirements, especially in highly-leveraged business lines such as online microcredit.

The overhaul of Ant’s financial businesses may also result in some regulator-driven divestment. That could eliminate synergies between Ant’s fast-growing fintechs and its existing businesses. It is in exploiting those synergies that the group’s real value lies.


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