Category Archives: Markets

China Cracks Down On Crypto Again

CHINA’S POLICYMAKERS MAY love the digital yuan, but their attitude towards private cryptocurrencies is much different.

New restrictions expand the crackdown on cryptocurrencies initiated in 2017 that included a ban on Initial Coin Offerings (ICOs). Chinese regulators have now banned financial institutions and payment companies from providing any services related to cryptocurrencies.

Banks and online payment firms were already prescribed from offering customers crypto-related services such as new accounts, registration, trading, clearing, settlement and insurance. To this list is added services not previously covered, such as exchanging bitcoins and other cryptocurrencies into yuan or foreign currencies and including anything crypto-related in wealth management products.

Authorities are concerned about the rise in financial risks as bitcoin’s soaring price has sent speculative crypto trading soaring again. The official word is that ‘virtual currencies are not supported by any real value’.

The latest crackdown effectively ends crypto-related transactions. This Bystander expects the next step to be outright bans on crypto assets.

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Delisting US-Listed Chinese Equities Advances Glacially

Screenshot of US Securities and Exchange Commission announcement of proceeding with Holding Foreign Companies Accountable Act, March 24, 2001

THE UNITED STATES is formally proceeding with Trump-era plans to restrict Chinese companies access to US capital by delisting them from US stock exchanges. 

Under the Holding Foreign Companies Accountable Ac that became law in mid-December, the penultimate month of the Trump presidency, the SEC had 90 days to outline a process by which it will request certain US-listed companies to submit documentation to establish that they are not owned or controlled by a foreign government — by which the Trump administration meant China. Foreign firms will also be delisted from US exchanges if they fail to comply with US accounting standards. 

The US Securities and Exchange Commission (SEC) announced on March 24 that it had adopted measures to comply with the legally required 90-day deadline. 

Delistings now look inevitable in a one day, someday, maybe never sort of way. The procedures that have to be followed for US government agency rule-making gives the SEC the latitude to spin-out the process, should it so choose, a choice that the prevailing winds from the White House would drive. 

Many US-quoted Chinese companies could also spin-out any investigation into their ultimate ownership, plus they have to fail to meet the US audit requirement for three successive years. Nonetheless, they would have trouble complying with US audit requirements without violating Chinese laws. It is anyway improbable that they would prove willing to throw open their books to a foreign regulator.

It is possible that even after delisting, Chinese companies’ shares could trade in over-the-counter markets in the United States — unless the Biden administration or, more likely, its successor, decides to implement another Trump initiative to ban US investors from owning Chinese equities.

A bigger headache for Chinese tech firms at the moment is Beijing’s crackdown on the largest of their number, including Alibaba and Tencent, purportedly in the name of antitrust but more likely to rein in the growing power of a sector mostly privately, not state-owned but which authorities need to be aligned with state management of both the economy and cyberspace.

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Request To Reverse Telco’s NYSE Delisting Proffers Early Olive Branch

THE BACK AND forth over the New York listing of the shares of China Mobile, China Telecom and China Unicom HK takes another turn with the three state-backed telecommunications companies asking the New York Stock Exchange (NYSE) to review its twice reversed decision to delist them.

The NYSE took the action in response to the then US administration’s banning of investment by US citizens in companies deemed to have connections to the People’s Liberation Army.

In a filing to the Hong Kong Stock Exchange, where all three have their primary listing, the companies said that they had asked the NYSE to lift the suspension of trading in their shares pending the reviews.

The requests came as Joe Biden was sworn in as US president in succession to Donald Trump and China’s foreign ministry spokesperson made a call for a reset of US-China relations if not exactly a return to the pre-Trump era status quo.

In the past few years, the Trump administration, especially [ex-US Secretary of State Mike] Pompeo, has laid too many mines, burned too many bridges and destroyed too many roads in China-US relations, which are waiting to be cleared, rebuilt and repaired. I think both China and the United States need to show courage and wisdom, truly hear, see and show respect to one another. This is what we should do as two major powers.

As the Trump administration left office, Beijing imposed sanctions on several of its officials, including Pompeo, accusing them of having ‘seriously violated’ China’s sovereignty. This followed Pompeo’s designation of China’s actions against Muslim Uighurs in Xinjiang amounted to crimes against humanity and genocide and a host of other actions taken in its final weeks of office.

However, the Biden administration will be in no hurry to pick up any olive branches being extended in its direction. The new president did not include any China-related executive orders by Trump in the slew he overturned on his first day. Nor has the invitation to Taiwan’s representative in the United States to attend his inauguration ceremony gone unnoticed in Beijing.

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NYSE Delisting Move Reflects Hardening US Line Against China

THE NEW YORK STOCK EXCHANGE’S decision to suspend trading in the shares of China Mobile, China Telecom and China Unicom HK in preparation for delisting is mostly a symbolic move. The three state-owned companies’ businesses are domestic, and their shares are little traded in New York. Their primary stock exchange listing is in Hong Kong.

However, it is also symbolic of how the hardening of opinion against China in the United States is more widespread than just China hawks in the Trump administration.

All three telcos stand accused of having links with the People’s Liberation Army. Since November, US investors have been banned by US presidential executive order from buying and selling shares in Chinese companies designated by the US Department of Defence as being ‘Communist Chinese military company’. Both China Mobile and China Telecom were on such a list that the Pentagon published in June. China Unicom was added in an update published in October.

The NYSE says its move to delist the three telecoms companies is to be compliant with the executive order.

The list and executive order are part of the Trump administration’s attempts to slow both the PLA’s modernisation and the drive to develop indigenous technologies by denying Chinese firms access to US capital. Three of the world’s leading index providers, MSCI, FTSE Russell and S&P Dow Jones, have also dropped the proscribed Chinese companies from their indexes, depressing their stocks’ attractiveness to global investors.

More than 200 Chinese companies are listed on US stock markets with a total market capitalisation of $2.2 trillion. Prominent names like Alibaba and JD.com have pre-emptively taken secondary listings in Hong Kong.

The US House of Representatives has recently followed the US Senate in passing a bill requiring non-US listed companies (for which read Chinese firms) to comply with US stock exchanges’ auditing rules and disclose whether they are owned or controlled by a foreign government. Firms have three years to comply or face delisting.

The Trump administration has been ramping up its actions against China in its final weeks, intending to lock-in as much of its China policy as it can before it leaves office on January 20.

On December 18, it the Bureau of Industry and Security (BIS) in the U.S. Department of Commerce added more than 70 entities, including the high-profile chipmaker Semiconductor Manufacturing International Corp. (SMIC) of China, to the Entity List.

Listing effectively prevents a company doing business with any US firm as it requires the granting of a special export licence under the Export Administration Regulations (EAR) for any export, reexport or transfer to them of goods, software or technology. That licence is presumed to be denied for firms on the Entity List.

BIS followed that by announcing on December 21 that it was adding a new category, Military End User, to the EAR. Of the initial 103 entities so designated, 58 are Chinese.

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US Edges Closer To Pushing Chinese Companies Off Its Exchanges

Screeenshot of Senate bill S.945

ATTEMPTS TO EXCLUDE Chinese companies from US capital markets have advanced with the US House of Representatives approving a bill on December 2 that would ban foreign companies (for which read Chinese) trading on US exchanges if the US Public Company Accounting Oversight Board is prevented from reviewing a company’s financial audits for three consecutive years.

Existing firms that fail to meet the requirement would have to delist. The bill also requires a company listed on a US exchange to declare whether a foreign government controls it, and whether any of its directors is, specifically, an official of the Chinese Communist Party.

The US Senate passed the legislation in May. US President Donald Trump will undoubtedly sign it into law before he leaves office on January 20.

More than 50 foreign jurisdictions permit such reviews, but for more than a decade, China has refused to allow them, claiming strict confidentiality laws, but in effect because Chinese law prevents firms from sharing audit papers with foreign regulators on national security grounds. Regardless, more than 150 Chinese companies, with a combined value of $1.2 trillion, trade on US exchanges, including such well-known names as Alibaba and JD.com.

The business has been too lucrative for US exchanges not to turn a blind eye to the auditing review requirement. Trump, however, has become increasingly determined to cut off Chinese firms access to US capital markets, believing it supports China’s push for technological self-reliance and modernisation of the People’s Liberation Army.

Beijing’s response will turn on how it balances the need to ensure that Chinese firms have adequate access to international capital markets with its desire to develop its own in Shanghai, Shenzhen and Hong Kong.

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Repricing Risk At China’s SOEs The Hard Way

FOR THREE YEARS running, defaults on Chinese corporate debt have exceeded 100 billion yuan ($15 billion). Defaulters increasingly include state-owned enterprises, signalling that Beijing is no longer extending an implicit guarantee, even to its own.

The pivot towards market-based pricing of credit and away from policy lending (also known as unproductive investment) is to be welcomed. It demands better credit decisions by lenders and implies capital will go to the firms that can best use it.

However, Beijing’s new approach also entails risk, mainly if debt repricing happens too quickly, causing a domino-effect of corporate defaults that spill over into other markets.

The latest defaults show how real this risk is.

Earlier this week, a logistics subsidiary of Jizhong Energy Group, which is owned by the Hebei provincial government, missed a scheduled repayment of principal and interest on a 500 million yuan ($76 million) trust loan. Facing a potential cascade of cross-defaults on the parent company’s bonds that would have been triggered by its subsidiary’s default, the money was found to make the payment to the lender four days late, but still within a grace period.

Word is that the financing was arranged through the good offices — and no doubt hefty local arm twisting — of the Hebei provincial government, which wanted to avoid the political awkwardness that followed the surprise delinquency of the Yongcheng Coal and Electricity Holding Group earlier in the month.

On November 10, the state-owned coal miner in Henan province unexpectedly missed a repayment due on a 1 billion yuan of short-term commercial paper, despite having presented a healthy cash position in October, the very month it issued the debt. That raised some more red flags for investors about hidden risks in China’s bond markets.

Investors were already uneasy following a default late last month by Huachen Automotive Group Holdings, the parent of the Chinese joint venture partner of German vehicle maker BMW, and a AAA-rated issuer.

They were further discomforted by regulators promising to crack down on misconduct in the corporate bond market. A statement following a meeting of the Financial Stability and Development Committee chaired by Vice Premier Liu He warned that ‘acts of intentional debt evasion’ would be severely punished. Yongcheng, which was also AAA-rated, its underwriters, rating agency and accountants are now under investigation for possible wrongdoing, including fraud.

Nevertheless, the explanation may be as simple, if scarcely less reassuring, as that Yongcheng’s parent company, Henan Energy and Chemical Industry Group, was using Yongcheng’s earnings to cover losses in other businesses. The scale of the shortfalls is indicated by the fact that last year Yongcheng, which is the country’s leading producer of high-grade anthracite, contributed 995 million yuan to Henan Energy’s group profit of 38.8 million yuan. And, yes, you did read that right.

In October, the Henan provincial government provided a liquidity injection of 7 billion yuan to Henan Energy, suggesting the shortfalls were, if anything, getting bigger.

Some reports claim that Yongcheng also shuffled assets out of the reach of its bondholders ahead of its bond delinquency. That was an eerie echo of the accusation against Huachen that it had done the same with its 30% stake in Hong Kong-listed Brilliance China Automotive Holdings.

Beijing initiated a massive deleveraging in 2015 to curb excessive borrowing by local governments, financial institutions and businesses. As a result, any ticking debt time bombs within private companies have been identified and for the most part, defused. There have been defaults, and will continue to be, but not on a scale that would threaten the bond market.

The same is not true of state-owned enterprises, who are are thought to account for more than half of the nearly $4 trillion corporate bond market. Huatai Securities has calculated that the default rate for Chinese private companies rose sharply to 5.34% in 2018 from 1.83% in 2017, but defaults by state-owned enterprises remained at 0.02%.

Ten state-owned enterprises have defaulted on bonds worth a total of 54 billion yuan so far this year (out of a total of 109 corporate bond defaults), compared to 25 over the past five years, on a total of 156.8 billion yuan of bonds. This month and next could be rocky as state-owned enterprises are at risk of year-end cash crunches.

People’s Bank of China Governor Yi Gang wrote in the middle of this month that investors have to take on more risk as China moves away from implicit guarantees of the government backstopping state-owned enterprises’ debt.

For bondholders, that is coming as an unpleasant surprise — or rather a series of them.

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US Announces New Investment Ban On Chinese Companies With PLA Ties

TODAY WAS DEADLINE day for ByteDance’s divestiture of the short-video-sharing app TikTok, or the United States would ban the app. It is not clear where things stand (update: the deadline has been extended) but US President Donald Trump appears to have moved on to a new executive order.

Today he authorised a prohibition on US investments in Chinese firms held to be owned or controlled by the military. Putting the brakes on the modernisation of the People’s Liberation Army is a particular policy objective of his administration.

The executive order bans US investment firms and pension funds from buying and selling the shares of 20 Chinese companies designated in June by the Pentagon as having military ties. Eleven more companies were added to the list in August. They are also subject to the investment ban, which takes effect on January 11.

The list includes well known companies such as China Mobile and China Telecom, both of which have US-listed subsidiaries.

US shareholders must sell existing holdings by November next year. If more companies are added to the proscribed list, US investors will have 60 days to divest the shares.

This latest measure is based on the International Emergency Economic Powers Act, which gives the US president wide scope to take actions to protect national security, and is becoming an increasingly favoured tool of the administration to counter China.

It follows confirmation of the arrival of US marines in Taiwan for training exercises. While the word is that this is far from the first time that US forces have trained their Taiwanese counterparts, it is the first time that it has been publicly acknowledged — unlike the big-ticket arms sales which tend to get the full hullabaloo.

Another visit by a senior US government official is also reportedly on the cards.

Taken together, and in the wake of Secretary of State Mike Pompeo’s pumping up of the Quad, this is starting to look like a president leaving a plateful for his successor or piling up his own plate in anticipation of a second term.

Either way, it is unlikely to go down well in Beijing.

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Regulators Rule

WHEN WE SAID we thought that the initial public offering (IPO) of Jack Ma’s Ant Group might come to be seen as an inflexion point in global capital markets, we thought it would be because raising such a considerable sum –$35 billion — outside of the United States would be a milestone in the development of China’s capital markets. But the abrupt pulling of the IPO of the fintech affiliate of Ma’s Alibaba group just days ahead of its scheduled launch because of ‘unexpected changes in the regulatory environment’ lays down a marker of a different sort, the power of China’s regulators.

Authorities from the People’s Bank of China and three other top financial regulators summoned Ma on Monday to inform him they had belatedly detected shortcomings, reportedly in Ant’s lucrative micro-lending units that will require reapplications for national operating licences and capital increases and restructurings. These will be necessary to comply with new regulations that took effect on November 1 to rein in systemic risks posed by companies that straddle at least two financial business lines. Ant’s businesses range from payments to lending, asset management and insurance.

This was no quiet word to the wise, but a none-too-thinly-veiled reminder to a business — and its owner — that is a threat to China’s state-run lenders, and thus by extension to the administration of state capitalism, that political loyalty and effectiveness as a policy instrument is just as expected of private companies as state-owned enterprises. Whether further actions are taken against other parts of Ant’s business will indicate the severity of the warning.

Ma may now judge as injudicious his recent likening of the big, state-owned banks to pawn shops and criticism of the Basel Accords, which set out capital requirements for banks, as a club for geriatrics.

The latter was part of a provocative futurist speech delivered in front of many of the country’s top financial regulators. They hold to the old-fashioned view that risk management, not innovation and growth is the foundation of a sound financial system. Nor will they have cared for Ma’s argument that China has no systemic financial risk as it has no financial system, and thus no need for systemic risk management. Authorities believe with good reason that there is cause to be wary of financial instability.

Ma is not the first fintech entrepreneur to hold that regulators and legacy lenders are dinosaurs, out of touch with digital innovation and the financial systems of tomorrow. He will not be the last to learn that until tomorrow comes, it is the innovators who have to comply with the regulators, not the other way round.

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Ant’s Incredible IPO

THE INITIAL PUBLIC offering (IPO) of shares in Jack Ma’s Ant Group may become to be seen as having been an inflection point in global capital markets. Even just a few years back the thought of raising $34 billion anywhere but in New York would have been incredible.

No longer. Next week’s dual listing in Shanghai and Hong Kong will be evidence of that. Ant’s IPO will be the largest ever and will value the Alibaba Group financial technology affiliate at $313 billion. That would make Ant more valuable than the largest US bank, JP Morgan Chase.

The Trump administration talks of excluding Chinese firms from US capital markets as a sanction. That is what is now starting to sound as lacking credence.

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China And US Increase Financial Distancing

DECOUPLING THE ECONOMIES of China and the United States would be a Herculean task after three decades of globalisation. US Trade Representative Robert Lighthizer told a US Congressional Committee as much this week before he was tweeted down by his president, who said complete decoupling remains a policy option for his administration.

The president has taken policy measures aplenty to discourage Chinese trade and investment in the United States, with the intent particularly of keeping US technology out of Chinese hands. This is small-scale decoupling on the ground.

One example is the increased use of national-security reviews by the Committee on Foreign Investment in the United States, commonly known by its acronym CFIUS. It has had its mandate expanded and new scope to investigate property deals near critical infrastructure and military installations is also being added.

The committee’s latest report to Congress, from which the chart below is taken, makes clear both how much broader is the swathe of inbound foreign investments CFIUS is taking an interest in since President Donald Trump took office in 2017 and how increasingly effective a CFIUS investigation is in prompting would-be acquirers to back off.

Roughly one-quarter of CFIUS reviews involve Chinese acquirers, the largest share of any individual country.

Another is the administration’s threat to promote legislation that could force Chinese companies from US stock exchanges by requiring them to report to US accounting standards.

Bloomberg reported recently that 58.com, an online classifieds firm, was going to go private and thus delist its shares from a US exchange. That would make it the fourth US-listed Chinese company to do so this year, an aggregate removal of $8 billion in market capitalisation, the fastest pace of withdrawal since 2015.

Bloomberg reports a similar trend with initial public offerings, with global banks walking away from deals to list Chinese companies in the United States.

Nothing like full decoupling, to be sure, but a step in the direction of increased financial distancing.

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