Shanghai-Hong Kong stock exchange link-up heralds new era of international trade

BY Fraser Tennant

Hailed as ‘historic’ and ‘a landmark’, the link-up between the Hong Kong and Shanghai stock exchanges has well and truly opened the floodgates, with billions of dollars set to flow in and out of mainland China – the world’s second-largest economy.

Officially known as the Shanghai-Hong Kong Stock Connect, the new trading platform is expecting to see US$3.8bn a day being generated in cross-border transactions. Many hedge funds, banks, brokerage firms and big institutional investors are waiting in the wings to get their piece of the action.

These international investors purchased 13bn yuan (US$2.1bn) of Shanghai shares on the opening day of the link-up (maxing out the daily limit), while mainland investors got through 1.4bn yuan of the 10.5bn yuan quota in Hong Kong.

While the Hong Kong-Shanghai link is a major step in opening up China’s financial markets, which until now had largely been closed to foreign investment, major trade restrictions, such as the daily US$2.1bn limit on buying stocks, remain.

"It's really the beginning of a new era," said Charles Li, Hong Kong Exchanges chief executive.  “The link is a massive bridge, a massive road. It is going to be here not for days, not for weeks, not even for months, it is going to be here for years and decades."

Others are more circumspect.

Investor Wang Chenyu said “The Shanghai-Hong Kong Stock Connect offers a limited scope of shares for trading and it has investment quotas. It does not have any special advantages."

Castor Pang, head of research at Core Pacific-Yamaichi, added “Mainland investors will have to get used to the trading system. Right now it's the wait and see attitude.”

Although early trading on the Shanghai-Hong Kong Stock Connect has gone smoothly, demand has dropped somewhat since the opening day extravaganza. Thus far, Chinese investors have shown little interest in Hong Kong-listed stocks, while international investment into China has slowed markedly since first day trading.

Whether this proves to be the norm, a sign that the link-up has been overhyped, is too early to say.

News: China Stock Link Goes From Through-Train to Ghost Train as Flows Slump

Asia Pacific investment: PwC presents executives’ 10 year perspective on growth

BY Fraser Tennant

Senior business executives’ views on the opportunities for growth and business investment in the Asia Pacific region over the next 10 years form the basis of PwC’s 2014 APEC CEO Survey.

The Survey – ‘New vision for Asia Pacific: Connectivity creating new platforms for growth’ – shows that business leaders believe that a more connected, more balanced APEC region is the way forward.   

The 600 senior executives surveyed as to their perspectives on investment, trade and connectivity, were unanimous on what they believed the region had to do to drive investment over the next decade – 'be bold and break down barriers to growth'.

The Survey also reveals that the senior executives see the momentum swinging toward free trade across the APEC region and goes on to speculate as to where businesses are likely to be building their platforms for growth.

Key findings in the report include: (i) investments are set to rise across the region; (ii) confidence in revenue growth continues to improve; (iii) process barriers to trade can be as material as tariffs; (iv) executives aspire to do more with business partnerships; and (v) confidence lags on returns from social network investments.

Dennis Nally, PwC’s global chairman, said “As more of the world’s economic activity shifts to the APEC region, confidence and revenue growth continues to improve. Our survey revealed that 46 percent of executives are very confident as to near-term revenue growth over the next 12 months.

“Businesses are acting on opportunities across the APEC region and a majority of CEOs plan to increase investment over the next year. Supporting much of this confidence is a vision of a more connected Asia Pacific region.

“As the world becomes more inter-connected, there is no choice for businesses to not only adapt, but to innovate.”

While the survey makes clear that many barriers to business growth in the Asia Pacific region have receded, others remain firmly in place. What business leaders say they are looking for is greater clarity and transparency around regulations and other 'soft barriers'.

Whether they get their wish remains to be seen.

Report: New vision for Asia Pacific: Connectivity creating new platforms for growth

Regulators hit banks with £2.7bn fine following FOREX investigation

BY Fraser Tennant

Six banks have been hit with fines totalling £2.7bn for their part in failing to stop traders who were manipulating the financial system by rigging the £3.5 trillion-a-day foreign exchange (FOREX) markets.

The penalties were handed out to Royal Bank of Scotland (RBS), HSBC, JPMorgan, UBS, Citibank and Bank of America Merrill Lynch following an 18-month investigation by the Financial Conduct Authority (FCA) and its counterparts in Switzerland and the US.

The FCA’s portion of the fines represents the biggest financial punishment ever levied by the British regulator. 

Yet another British bank, Barclays, has been told to expect similar punitive action for its part in the scandal.

The regulators’ investigation discovered that some traders, who referred to themselves as ‘the A-team’, ‘the Players’ and ‘the 3 musketeers’, made millions for their banks while pocketing bonuses worth hundreds of thousands of pounds – often in just a single afternoon.

Evidence collected showed that traders posted messages on forums bragging about making 'free money' and collecting eye-watering profits – the very same forums where, over a five-year period, they colluded to share privileged client information. 

The regulators have also warned that anyone found guilty of manipulating the FOREX market could face jail but although it’s believed that 30 traders have been sacked or suspended, not one has faced charges.

Martin Wheatley, chief executive of the FCA, said “The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. These record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.

“But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”

News: Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

Lloyds hit with new mis-selling charge

Merely days after squeezing through a European banking health check, Lloyds Banking Group has been hit with another sizeable mis-selling charge.

Relating to the bank’s handling of the payment protection insurance (PPI) scandal, which came to light in the wake of the financial crisis, the £900m charge confirmed on 28 October brings the total cost required to cover Lloyds mis-selling of PPI to £11.3bn. The latest charge means that Lloyds has paid out more than any other affected bank, as well as close to half the total bill for the entire British banking industry. The PPI bill for Britain’s five biggest banks now stands at more than £22bn.

Further, it appears that the bank is still not out of the woods. Analysts have predicted that Lloyds will be required to set aside an additional £1bn to cover potential PPC compensation claims made in 2015. According to Lloyds' finance director George Culmer, PPC complaints in the third quarter of 2014 rose by around 2 or 3 percent compared with Q2, however new complaints are down by 18 percent on the year. The group also noted that should there be a similar level of complaints registered in the fourth quarter, as in Q3 the required provision would increase by around £600m.

Lloyds’ most recent PPI charge overshadowed a raft of other news released by the bank. In a statement Lloyds confirmed a 41 percent rise in underlying profits for the third quarter, with profits rising to £2.2bn following an improvement in bad debts. However, the bank also confirmed its previously reported plan to dispense of 9000 jobs over the next three years. The job losses will be the result of around 200 branch closures as the bank attempts to digitise its business.

Despite its recent tribulations, Lloyds is still confident that it will be able to pass the Bank of England’s stress test in December. The BoE’s test will assess whether Lloyds, the worst performing British bank in European testing, would be able to withstand a new financial crisis. Should Lloyds fail the test, it would be forbidden from paying its first shareholder dividend since it was bailed out by the British government.

News: Lloyds Takes $1.4 Billion PPI Charge, Shares Decline

Big banks cut lending

BY Richard Summerfield

Consumer and business lending by the UK’s largest banks has fallen by $595bn over the last five years, according to a new report from KPMG.

Total lending at Barclays, Royal Bank of Scotland, HSBC, Lloyds and Standard Chartered dropped 14 percent to £2.33 trillion in the first half of 2014, compared with five years earlier. The dramatic decline in lending is the result of the enormous fines and compensation packages which banks have had to accept in order to make amends for their recent chequered past. Since 2011, remediation payments made by the big six British banks have totalled £31bn, although the year on year remediation figure in H1 2014 was down 44 percent to £2.4bn.

The overall reduction in lending since 2009 is also a result of a new risk-averse mentality permeating the big UK banks. KPMG believes that major banking groups in the UK have lost sight of the risk-taking required in the sector. That said, it appears that a number of banks are beginning to take steps which will help the sector return to sustainable growth. Profits have begun to recover , thanks to a new tone at the top. The big six banks reported a combined profit of £15.2bn in H1 2014, continuing the return to profitability first recorded in the second half of 2013.

However, KPMG also notes that the UK’s wider banking sector is approaching “crunch time” due to the rise of pay day lenders and other shadow banking groups. Bill Michael, EMA head of financial services at KPMG, noted that “Shadow banking initiatives are increasingly penetrating under-served areas of the market. These initiatives are creating a challenging environment that traditional banks are unfamiliar with. Equally, if banks get to grip with technology quickly, there is a unique opportunity for banks to capitalise upon. While competitors entering the market do not have the same legacy-based obstacles preventing them from pursing new opportunities, banks can offer the scale, reach and experience many players cannot.”

Report: KPMG’s report analyses the published 2014 half-yearly results of Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered