The chief executive of Principal Global Investors says private banks are preventing the uptake of multi-asset funds, and believes Asia needs to change its pension structures to facilitate change.
Huatai Securities Co.’s shares rose as much as 7.3 percent in their Hong Kong debut, or about a fifth of the first-day gain of the last Chinese brokerage to list in the city.
The stock climbed 5.2 percent at HK$26.10 as of 10:10 a.m. local time on Monday. The benchmark Hang Seng Index rose 0.4 percent. Huatai’s gain compared with a 35 percent increase for GF Securities Co. when it listed in April.
The divergence of the two brokerages’ first-day performances may reflect concern that the Chinese stock-market boom will turn to bust after the Shanghai Composite Index more than doubled in the past year. A 6.5 percent plunge in the Shanghai index on Thursday highlighted the risk of a market correction.
Huatai raised $4.5 billion from its first-time share sale in Hong Kong. The extra cash raised by securities firms has helped to fuel China’s stock rally by filling their coffers for lending to investors.
Shares of Hong Kong-based investment bank Reorient Group Ltd. jumped to the highest level since 2007 after a private-equity fund backed by e-commerce billionaire Jack Ma agreed to invest in the company.
The stock surged 142 percent to HK$21.75 as of 9:50 a.m. local time after climbing as much as 178 percent to the highest intraday level since 2007.
Jade Passion Ltd., controlled by Yunfeng Financial Holdings Ltd., will buy 1.34 billion new shares in Reorient for HK$2.68 billion ($346 million), or HK$2 each, according to a Reorient statement to the Hong Kong stock exchange on Friday, giving it a 56 percent stake. It’s seeking exemption from a rule requiring it to make a mandatory buyout offer for Reorient.
“This is a strategic investment for us, very much in line with our endeavor in the financial-technology space as well as in extending our global reach,” David Yu, Yunfeng’s chairman and co-founder, said on Friday. “We look forward to the joint exploration with Reorient in areas such as Internet finance.” Yu holds 60 percent of Yunfeng and Ma 40 percent, according to the statement.
Ma, chairman and founder of Alibaba Group Holding Ltd., China’s biggest e-commerce company, is boosting his investments in financial services. He controls Zhejiang Ant Small & Micro Financial Services Group Co., which owns Alipay, China’s biggest online payment system, and operates a bank, a money-market fund and a credit-scoring service.
Among Yunfeng’s partners in Jade Passion is a company owned by Huang Youlong, who is the husband of Chinese actress Zhao Wei and an investor in Alibaba Pictures Group Ltd., Alibaba Group’s Hong Kong-listed entertainment arm.
Reorient said it will sell a total of 1.94 billion new shares, including those Yunfeng’s group is buying, raising HK$3.89 billion. It will use the money to support development of financial services operations and as general working capital.
All of Reorient’s executive directors except Johnson Ko and Brett McGonegal will resign on completion of the share sale, according to the filing.
Reorient’s shares were suspended since April 21.
Even smaller Islamic banks will benefit.
Moody"s Investors Service says that the Indonesian government"s Islamic finance roadmap will encourage consolidation among smaller Islamic banks in the country, and foster the development of a larger domestic sukuk market.
According to a release from Moody"s Investors Service, despite growth rates in excess of 30% a year, the Islamic banking sector only captures a 5% share of the Indonesian banking system.
"The Indonesian government"s Islamic finance roadmap should drive growth in the sector," says Khalid Howladar, Moody"s Global Head of Islamic Finance.
"The roadmap will also support the consolidation of state-owned and commercial Islamic banks, which will in turn increase the size of the banks" capital bases, improve cost efficiencies, and allow increased underwriting in the corporate and infrastructure sectors," says Simon Chen, a Moody"s Vice President and Senior Analyst for the Financial Institutions Group.
Here"s more from Moody"s Investors Service:
Chen says consolidation would also boost the banks" profitability levels and therefore their ability to generate internal capital and raise external capital. The higher profitability levels will in turn improve the attractiveness of the sector to investors; thereby driving growth in the sector.
Moody"s analysis is contained in its just-released report titled "Islamic Finance: Indonesian Government Roadmap Will Drive Growth and Consolidation of Islamic Banks," and is co-authored by Chen and Howladar.
Moody"s report says that since the end of 2005, Islamic banking assets in Indonesia have expanded at a 33% compound annual growth rate; outpacing growth in the conventional banking sector, the latter of which has also shown rapid growth against the backdrop of robust economic growth and the low penetration rate of financial services.
But despite this strong growth, Islamic banking assets comprised only 4.6% of total system assets as of November 2014 — up from 1.4% at the end of 2005 — and the number of Islamic banks increased to 12 from three.
The lack of a deep sukuk market in Indonesia has also limited the ability of Islamic banks in the country to raise non-deposit funding and match long-duration Islamic assets — such as home financings — with funding of similar duration.
Moody"s report points out that Islamic banks operate less extensive branch networks when compared to conventional banks, and their capital bases are smaller. Such banks also mainly focus on riskier customer segments such as retail, micro enterprises and small and medium-sized enterprises, rather than corporates.
The riskier customer base has led to non-performing financing ratios that are consistently higher than the comparable non-performing loan ratios at conventional banks. These higher credit costs and smaller economies of scale make Islamic banking less profitable than conventional banking.
Moody"s report also compares Indonesia"s sukuk market with that of its neighbor, Malaysia. The report says that Malaysia"s sukuk market is the largest and most liquid globally, with a deep institutional investor base.
This market took three decades to establish but has thrived over the last decade with the coordinated government support that Indonesia is now proposing.
Moody"s report points out that Indonesia has an advantage in that it can look at policy initiatives globally and learn from the best practice of other jurisdictions, such as Malaysia.
The report also says that because Islamic finance is now commonplace among many Middle Eastern and Asian countries, there is now a much larger pool of stakeholders to support the global Islamic capital market; of which Indonesia is a key part.
According to Moody"s report, Indonesia"s large domestic population and affinity for Shari"ah-compliant finance makes it highly likely that the country will become a much more significant contributor to the Islamic capital markets in the future.
Moody"s will be conducting workshops this year on Islamic finance. The workshop in Jakarta will be held on Thursday, 28 May, and the one in Singapore has been scheduled for Friday, 29 May.
Thanks to strong capital.
The report expresses Moody"s expectation of how bank creditworthiness will evolve in Malaysia"s banking system over the next 12-18 months, and looks at the system in terms of five factors: Operating environment (which is classified as "deteriorating"); asset quality and capital ("stable"); funding and liquidity ("stable"); profitability and efficiency ("deteriorating"); and systemic support ("stable").
On the banks" operating environment, Moody"s report says that systemwide credit growth should register 8%-9% in 2015, down from 10% in 2014; on the back of slower GDP growth in Malaysia (A3 positive) of 4.8% from 6.0% in the same periods.
Slower economic growth is expected to result from lower global oil prices and decreased government spending, given that oil- and gas-related industries generated almost a-third (30%) of government revenues in 2014.
Moody"s report points out that while the government has reduced expenditures and expanded revenue sources — for example, by removing fuel subsidies in December 2014 and introducing a goods and services tax (GST) in April 2015 — such moves will help stabilize the country"s fiscal position without arresting a decline in growth, which negatively affects the operating environment for banks.
For example, private consumption growth will weaken in the coming quarters, due to GST implementation and elevated household leverage. Such a situation will weigh on headline economic expansion.
Despite the challenging operating environment, asset quality should remain broadly stable over the next 12-18 months. Nevertheless, high household debt levels pose risks if unemployment rises, property prices fall, or interest rates rise.
Corporate loan quality will be supported by low debt levels at Malaysian firms. As for exporters, they have been benefitting from the ringgit"s 12% depreciation against the US dollar over the past two quarters.
On Malaysia"s high levels of household debt, Moody"s report says while this situation poses risks for the 57% of total bank loans that are extended to households, Moody"s expects stability in Malaysia"s low unemployment rates to partially offset the risk of higher household loan delinquency rates.
As for capital levels, Moody"s report says that bank capital levels are strong and can absorb the losses Moody"s estimates would occur in stress-test scenarios.
However, profitability will deteriorate over the next 12-18 months, given that credit costs will normalize from historically low levels. In addition, margins will fall because of the stronger competition for time deposits and high quality liquid assets, which is in turn due to the introduction of new Liquidity Coverage Ratio (LCR) requirements starting in June 2015.
On Malaysia"s capacity to provide support to banks in times of stress, Moody"s report says that such a capacity is strong, as the government"s fiscal reforms have bolstered resilience to cyclical commodity price shocks.
Moody"s report points out that recent regulatory reforms have not suggested any shift in government policy on the resolution of ailing banks, outside of liquidation.
Moody"s rates a total of 11 banks in Malaysia: eight are conventional commercial banks, one is an investment bank, one is an Islamic bank, and one is a government-owned development financial institution. The rated banks accounted for 75% of Malaysian banking-system assets at end-2014.
Guotai Junan Securities will seek approval from the China Securities Regulatory Commission on Wednesday for its proposed Shanghai IPO to raise up to Rmb30bn (US$4.84bn) based on its financials.... more
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China National Nuclear Power, one of the PRC’s top developers of nuclear power, is looking to raise up to Rmb13.19bn (US$2.12bn) from its Shanghai IPO after setting the price at Rmb3.39 per share.... more
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Singapore’s Ezra Holdings plans offerings of rights shares and convertible bonds to raise a combined US$300m.... more
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Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official.
“When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney — unequivocally,” Treasury Secretary John Fraser said in testimony before a parliamentary committee in Canberra Monday. “Frankly, whatever the data says, just casual observation would tell you that’s the case.”
Home prices in Sydney rose 15 percent in May from a year earlier although they fell 0.7 percent from April, according to Corelogic RP Data. Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10 percent a year.
“It does worry me that the very, very low — historically low — levels of interest rates are encouraging people to perhaps over-invest in housing,” Fraser said.
The Reserve Bank of Australia cut its cash rate target to a record 2 percent in May while lending to investors is near a record high. The proportion of home lending to speculators rose to 40.8 percent in March, just shy of the 40.9 percent record in December, according to government statistics.
The measures taken by the Australian Prudential Regulation Authority on mortgage lending are starting to have a modest effect, RBA Deputy Governor Philip Lowe said May 27 in answer to a question following a speech in Sydney.
Fraser, who took up his role in January, said he didn’t see the house price gains as a major risk to the financial sector.
“We do a lot of consultations with the banks, the four major banks and we recently had in the regional banks, and they’re very much alive to the issues and they’ve taken their own internal measures, as they should, to make sure their exposure is manageable,” he told the committee.
House price moves have been more modest elsewhere in the country having increased 9 percent on average across the country’s eight state and territory capital cities from a year earlier. The price gains have spurred a pick up in dwelling investment with building approvals having risen 16.3 percent in April from a year earlier, data released Monday showed.
Chinese policy makers are considering plans to as much as double the size of the clean-up program for shaky local government finances, according to people familiar with the discussions.
In what would be the second stage of the program, 500 billion yuan ($81 billion) to 1 trillion yuan of local-government loans would be authorized to be swapped into bonds issued by provinces and cities, the people said, asking not to be named because the talks are private. The first stage of the bond swap, currently under way, is 1 trillion yuan.
An expansion would signal officials are confident in the template they’ve crafted for reducing the risks of a record surge in borrowing that local authorities took on in recent years, funding a glut of investment projects. The complex process includes inducements for banks to buy new, longer-maturity, lower-rate bonds.
“The initial success of the first batches of bonds, especially the lower-than-expected yields, may have encouraged the Finance Ministry to expand the swap,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “Additional swaps, if confirmed, can show China’s handling of the local government debt problem will be faster than previous expectations.”
The up-sized plan needs State Council approval, according to the people. The Finance ministry didn’t immediately respond to a faxed request for comment. Finance Minister Lou Jiwei had previously said that the swap program could be expanded.
Chinese stocks extended gains after the news, with the Shanghai Composite Index up 1.9 percent as of 10:30 a.m. local time. By contrast, the MSCI Asia Pacific Index was down 0.5 percent.
By reducing debt-servicing costs for local authorities, policy makers are helping them sustain spending that’s crucial to shoring up China’s economic growth. A gauge of manufacturing today suggested that the fiscal loosening, along with monetary easing by the central bank, has helped arrest a deterioration.
Harvest Global Investment has been awarded an Rmb3 billion RQFII quota for its London operation, making it the first Chinese manager to have an allocation in both Hong Kong and the UK.
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Hong Kong subsidiaries may have to redesign their RQFII product offerings as a result of upcoming mutual recognition, as they face direct competition with funds offered by their mainland China parent firms.
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Shares across Asia were mostly trading down on Monday, taking their lead from the US markets, which fell on news that the world"s largest economy shrank by 0.7% in the first quarter of 2015.
... more 
Global regulators may soon be focusing on making individuals just as accountable for banking misbehavior as the institutions that employ them.
With a slew of scandals freshly in mind over benchmark rigging that led to billions of dollars in fines for international lenders, finance ministers of the Group of Seven nations decided last week that a new global code of conduct needs to be drawn up. The Financial Stability Board has been given the task.
Revelations of foreign-exchange manipulation have worsened the image of a banking industry already darkened by the fallout from the financial crisis. At the same time, governments are recognizing that the response to misdeeds should move toward encouraging better conduct from the outset, and rely less on penalties that weaken banks’ capital health.
“This kind of malpractice has got to do with the dominant company culture but not just that — it’s also about the behavior of individuals, who should not be absolved from responsibility,” Bundesbank President Jens Weidmann said in the German city of Dresden on Friday, announcing the G-7’s lead. The code “should be a voluntary self-commitment made by the financial industry, an international initiative,” he said.
The G-7 consists of the U.S., Japan, the U.K., Canada, Germany, France and Italy. Last week’s meeting of finance ministers and central-bank governors will be followed by a summit of government leaders in Bavaria on June 7.
Rule makers and judicial authorities have so far found it difficult to hold individual employees responsible for misconduct and instead have imposed penalties on the banks.
While regulators spent seven years chasing the manipulators of the London interbank offered rate, or Libor, the first individual prosecution only started in May. Meanwhile, Deutsche Bank AG was handed a $2.5 billion fine in April, and six banks including JPMorgan Chase & Co., Barclays Plc and UBS AG were fined $5.8 billion on May 20 after a currency-rigging probe by the U.S. Justice Department.
“It is important to change the individual behavior of bankers,” said Thomas Mosk, a researcher on conduct in banking at the Sustainable Architecture for Finance in Europe Center in Frankfurt. “Culture is the buzzword of the moment. Regulators believe bad behavior at banks goes deeper than a few bad apples and demand a cultural change.”
Codes of conduct already exist in some countries, such as in the U.K. since 2011 and the Netherlands since last year. Senior U.K. banking executives are also taking part in a ‘banking standards board’ to help improve public trust. Even so, a global standard that major states sign up to might make it less easy for ethical breaches to be overlooked.
“Currently a certain number of disparate codes exist in different jurisdictions, and they were often ignored,” Banque de France Governor Christian Noyer said after the Dresden meeting. “We need to pull all this together, so that we have a code that is coherent and applicable everywhere.”
Ministers didn’t specify when the Basel-based FSB should deliver a final document. Officials said the work should be done in partnership with the industry and wouldn’t be handed down as a diktat.
The FSB brings together regulators and central bankers from the Group of 20 nations. It was set up in 2009 amid the financial crisis and is responsible for overseeing global financial policy making.
It can harness the experience of chairman Mark Carney, the governor of the Bank of England. The BOE is currently developing measures to tie senior bankers’ pay and personal reputations to the fate of their firms.
Those rules will implement recommendations made in 2013 by the Parliamentary Commission on Banking Standards, which was set up in the wake of the Libor manipulation scandal. They also increase the responsibilities of non-executive directors and introduce potential jail sentences for bankers who take risks leading to the failure of their firm.
In his role as FSB chairman, Carney has already called on eight central banks’ foreign-exchange committees to make sure currency traders follow conduct guidelines on conflicts of interest, gambling and client anonymity.
The G-7’s proposed global code should also attempt to reinforce the ethical basis of good conduct, according to Andre Spicer, Professor of Organizational Behavior at Cass Business School at City University, London.
It could start with “basic human universal values such as not lying outright,” Spicer said in an e-mailed response to questions. “The reality is that building a standard is the easy part. The much more difficult issue is ensuring it is complied with and it is actually used.”
The rout wiped out about $350 billion of market value in a week on the Shanghai and Shenzhen exchanges. It so traumatized traders who eight years later they still refer to it by the date it began: the 5/30 catastrophe.
The milestone for the modern Chinese stock market, which began in 1990, started on midnight, May 30, 2007, with Hu Jintao’s government unexpectedly announcing it would triple a tax on stock trading. The plunge sparked by the pronouncement had followed a breathless rally, making it eerily similar to last week’s events.
On Thursday, stocks erased almost $550 billion in value after surging 143 percent on the Shanghai Composite Index over the past year. Traders could be forgiven for a wave of deja vu mixed with a dollop of dread: In 2007, stocks recovered from their May losses only to drop more than 70 percent over the next 12 months from an October peak.
Here’s a look at the similarities and differences between China’s markets then and now.
What’s similar:
* Timing of declines: Both selloffs followed rallies that sent the benchmark index up more than 100 percent in just months.
Thursday’s tumble in Chinese stocks came after brokerages tightened lending restrictions and the central bank drained cash from the financial system. The Shanghai Composite shed 6.5 percent and fell another 0.2 percent in volatile trading on Friday.
On May 30, 2007, the Shanghai gauge also tumbled 6.5 percent after the government raised the stamp tax to 0.3 percent from 0.1 percent. The measure aimed to cool the stock market after it doubled in about six months and almost quadrupled from the end of 2005.
By June 4, the benchmark had lost 15 percent. The market then started to stabilize and rose another 66 percent to an all-time high in October 2007 before tanking again as the global financial crisis raged.
* Rookie traders: The two stock rallies were fueled by record amounts of new investors, increasing fluctuations.
About 29 million new stock accounts have opened this year through May 22, almost as many as in the previous four years combined, according to the China Securities Depository & Clearing Corp. Margin debt on the Shanghai exchange has soared more than 10-fold in the past two years to a record 1.35 trillion yuan ($220 billion) on Thursday.
In the first five months of 2007, more than 20 million stock accounts opened, four times the amount in all of 2006. Margin trading, or investing with funds borrowed from brokerages, wasn’t allowed then.
* Initial public offerings: In both instances, a flood of new companies came to the market to take advantage of rising share prices. More than 120 newly listed companies have started trading so far this year, almost matching the total for all of 2014.
In 2007, PetroChina Co.’s 67 billion yuan ($11 billion) IPO was “one of the catalysts” pricking the “bubble,” Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong, wrote in a note on May 28.
What’s different:
* Monetary policy: China’s economy was booming in 2007, prompting the central bank to extend a policy of raising interest rates for a third year. Higher borrowing costs eventually helped cool the market.
This time, policy makers are cutting interest rates as the economy slows, bolstering stocks. The People’s Bank of China lowered its benchmark for the third time in six months to 5.1 percent on May 11. The central bank will further cut it to 4.85 percent by December, according to economists surveyed by Bloomberg.
* Valuation: While stocks have become more expensive, price-to-earnings ratios are still lower than in 2007. Trading at around 18 times forward profit, the Shanghai benchmark is about 60 percent cheaper than at its at peak of 2007, data compiled by Bloomberg show.
* Liquidity: Unlike in 2007 when the Chinese market was largely off-limits to foreign investors, authorities have recently accelerated the accessibility of stock trading, luring more overseas funds.
A link between the Shanghai and Hong Kong exchanges established in November allowed international investors greater access to the local market. A similar program between Shenzhen and Hong Kong is due to start this year. Global funds investing in China added more than $4 billion in the week through May 27, more than double the previous record set in 2008, according to data provider EPFR Global.
* Government support: Policy makers repeatedly warned investors of risks in the stock market in 2007. This time, they’ve voiced their support. As the government tries to lower corporate debt levels, the equity market has become a more important venue for companies to raise funds, according to Andrew Sullivan, head of sales trading at Haitong International Securities Group in Hong Kong.
By moving money away from the “shadow banking” system, it makes investments “more controllable,” Sullivan said on Bloomberg Television.
“That’s where they want to keep it,” he said.
China’s success in bringing down borrowing costs will face a major challenge this month, with data showing rates rose every June over the past decade. What will make it worse this time are the biggest share sales in five years.
The seven-day repurchase rate recorded the largest or second-largest monthly increase in June of each of the last four years, the attached chart shows. The benchmark gauge of interbank funding availability will average 2.5 percent this month, according to the median estimate in a May 29 Bloomberg survey of five analysts and traders. That’s 44 basis points higher than May’s 2.06 percent.
The People’s Bank of China allowed the repo rate to surge to a record 10.77 percent in June 2013, rattling financial markets as banks grabbed cash for quarter-end loan-to-deposit ratio checks amid a crackdown on off-balance-sheet financing. New share sales will lock up 4.9 trillion yuan ($790 billion) this week, 60 percent more than in previous rounds, according to a Bloomberg survey of six analysts.
“IPOs and seasonal factors will probably send ripples through the market, driving rates higher,” said Li Liuyang, Shanghai-based chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd. “That will offer an opportunity for the PBOC to show where it wants rates to be at.”
The Shanghai Composite Index equities benchmark more than doubled in the past year to reach the highest level since 2008 last week, spurring a record amount of outstanding margin debt. Twenty-three companies, including China National Nuclear Power Co., are planning new share sales.
Institutional investors are shifting out of equities and into fixed income.... more
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