Tag Archives: HSBC

China Said Issuing First Gold Import Licences To Foreign Banks

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IF SHANGHAI’S GOLD futures market is to take off, it will require greater participation by foreign investors than hitherto. That in turn will mean letting more foreign investors in to the physical market. Reuters reports the first signs of that, saying ANZ and HSBC have been granted the first gold bullion import licences to be given to foreign banks. The news agency attributes its intelligence to unnamed sources. Neither bank would comment on the report, but it gains credibility from the fact that the pair were the first two foreign banks allowed to trade gold futures on the Shanghai Futures Exchange.

The People’s Bank of China said last September that it would increase the number of bullion import licences. Expanding the number of banks able to import gold to 12 from the current nine (China Everbright is also said to have been given a license) would also ease the demand pressures on the metal. The government controls import volumes with quotas. Nonetheless, last year gold imports more than doubled to at least 1,060 tonnes. As a result, China displaced India as the world’s top gold importer.

The exact volume of imports is uncertain. China doesn’t make pubic the volume of its gold imports, so we have to rely on the export volume from Hong Kong, which is the source of most of the bullion entering China. That is the number quoted above.

The constraint on supply means that physical gold usually sells in China at a modest premium to the world price. That is currently $15 an ounce, down from the $30 an ounce it reached in April and May last year. The new licences, if confirmed, won’t make much of a dent in that, but this Bystander expects more new licences for foreign banks to follow.

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April’s PMI Points To China’s Growth Slowdown Moderating

The flash (preliminary) HSBC purchasing managers’ index (PMI) for April came in at a two-months high of 49.1, 0.8 points higher than the final reading for March and reversing a five-months decline. Any number below 50 signals contraction; above, expansion. So factory activity remains sluggish, but not as sluggish as in recent months.

The HSBC index is weighted towards export-dependent small- and medium-sized manufacturers, and usually shows a lower number than the official PMI, which better reflects the activity at large companies.  The April number suggests that the increased bank lending that the central bank has allowed over the past month or so, even for small companies, is having some effect on moderating the slowdown in growth. The contraction in new orders is slowing and exports orders increase to a three-months high reflecting the modest recovery being seen in the U.S.  Even though the latest PMI figure will helping to ease concerns of a sharp slowdown in growth, we expect the central bank to remain measured about further easing of both monetary and fiscal fronts.

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London Expands As Offshore Yuan Center

Last year, the British and Hong Kong governments agreed to promote London as a center of trading offshore yuan. This week, some meat was put on the bones of that agreement with the issue of a three-year yuan-denominated bond in London. HSBC was the lead on the deal, the first so-called dim sum bond to be issued outside China. It raised 2 billion yuan ($317 million), mostly from European investors, and yields 3%. Demand from investors was so heavy that HSBC doubled the bond from its originally planned size.

Yuan-denominated deposits in London totaled 109 billion yuan at the end of 2011, according to a report commissioned by the financial district’s government and published to coincide with the launch of a working group to develop London as the western hub for offshore yuan business. The group includes HSBC, the biggest issuer of dim sum bonds in Hong Kong, and Bank of China.

London’s is a sufficient pool of liquidity to start supporting a bond as well as a foreign-exchange market, but it is still less than a fifth of the 566 billion yuan in renminbi deposits in Hong Kong as of February. Despite the strong push London is making, Hong Kong remains the leading offshore yuan market, as Beijing desires. Singapore and New York also have designs on the business but London has stolen a march on them.

China’s doubling of the yuan’s trading band and other recent financial reforms, including allowing banks to hold short dollar positions, raising the ceilings on foreigners’ equity and bond investments in China, and a trial of giving domestic Chinese investors more access to offshore yuan markets, are all part of Beijing’s drive to expand the international use of its currency that started in 2008. More optimistic financial reformers have pencilled in 2015 for full convertibility. The more cautious fear that would be a destabilizingly quick timeline, especially if GDP growth continues to slow.

If the on- and offshore interbank markets forge a close link, that could force the pace. However, the offshore market is still in its infancy. Baby steps are yet to be made. In June, Hong Kong plans to extend its yuan payments trading to overlap with London hours. For its part, London is working on setting up local yuan clearing and settlement systems, probably piggy backing off Hong Kong’s. More European banks are expected to follow HSBC’s lead in issuing dim sum bonds in London later this year, as are the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.

Other yuan-denominated investment products will likely follow. But how fast London, or any other financial center, can develop as a hub of offshore yuan trading, will ultimately be determined by how quickly Beijing opens its capital account and lifts its foreign exchange controls so there is a sufficient volume of internationally circulating yuan to support the business. At present for every yuan deposited outside China, there are 99 inside.

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China’s Manufacturers Flash A Warning

HSBC Purchasing Managers Index, 2009-2011As straws in the wind go, it is scarcely encouraging. The flash reading on the HSBC purchasing managers index (PMI) for November is signaling that China’s manufacturing output will switch to contraction from growth. At 48.0, the number is down from 51.0 in November and its lowest since March 2009 though still well above the low in the depths of the global financial crisis in 2008 (see chart; the black line represents November’s flash forecast).

Now, this is the preliminary estimate, and the HSBC PMI overweights small and medium sized businesses against the large state owned enterprises that generate the majority of the economy’s output compared to the government’s index. So the final number and the government’s index, both due early next month, may turn out a tad higher, though it must be said that the flash reading usually turns out to be pretty accurate.

Whether either number can creep above the 50 level that marks the dividing line between growth and contraction will weigh on policymakers considering whether to turn their “fine tuning” of monetary policy into something more accommodating, albeit not as heavily as the prospects for demand in China’s largest export market, debt-crisis embroiled Europe, and domestic inflation, which though off its peak remains persistently high. Perhaps surprisingly, the flash PMI number suggests that export orders are holding up better than orders overall, suggesting that the policy tightening of earlier this year is still working its way through to the economy overall.

Earlier this week, the World Bank raised its forecast for China’s GDP growth this year to 9.1% from 9.0% though said it expected a slowing to 8.4% growth next year in the face of the drop of global demand. That pace of growth would be  at the upper end of what the PMI is now signaling.

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