Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive

Economic

Summary:

Borrowing costs are rising as exporters need to refinance debt.Expensive yuan financing leaves few options beyond ruble debt.

Yuan financing is becoming costly and sparse in Russia, choking off a pathway to foreign capital for companies that are already facing much higher domestic interest rates and a wave of debt due this year.

Two years after the invasion of Ukraine isolated Russia from the Western financial system, major energy and mining companies have come to rely on the yuan for most of their foreign-currency needs. But even as yields on China’s benchmark government bonds hover around a two-decade low, insufficient yuan liquidity in Russia and demand for the currency from importers are contributing to higher borrowing expenses.

The funding dilemma leaves companies like Russia’s biggest miner, MMC Norilsk Nickel PJSC, choosing between expensive ruble funding or the rising cost of domestic yuan debt. Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive_1

Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive_1

Russia more than doubled its benchmark last year, saddling corporate borrowers with as much as 1.2 trillion rubles ($13 billion) in extra debt-servicing costs, according to Moscow-based consultancy Yakov & Partners.

“Given current realities, the average cost of debt will be raising,” Sergey Malyshev, Nornickel’s chief financial officer, said in a statement sent to reporters last month.

Nornickel’s interest payments are set to reach $1 billion in 2024 after $800 million in 2023 — compared with $315 million in 2021, the last full year before the war. The burden is nearly as intense for the largest oil producer, Rosneft PJSC, pushing it to accelerate debt repayments after interest consumed 50% more money in the fourth quarter than a year earlier.

Not Widespread

After their debut in 2022, yuan bonds “haven’t yet become widespread” in the Russian market, the central bank said in a report published Monday. It listed limited free liquidity in yuan among lenders and the need to offer higher yields as factors “restraining potential interest in such placements among investors and issuers.”

The volume of Russian corporate yuan bonds – all sold on the domestic market — almost stalled in the final three quarters of last year and reached the equivalent of 800 billion rubles, according to the Russian central bank. And although loans in the Chinese currency nearly quadrupled to a record $46 billion in 2023, their share in corporate credit portfolios was still only in single digits.

The average yield on yuan securities for issuers went up by nearly 2 percentage points in the course of last year and approached 6%, according to the Bank of Russia.

The short-term cost of borrowing yuan on the Moscow Exchange has been so volatile that it spiked to 15.7% on March 1 before dropping to 4.1% three days later, according to calculations by Bloomberg Economics. The reluctance of major Chinese banks to link Moscow’s yuan market with offshore markets is most likely a key factor, according to Bloomberg economist Alexander Isakov.

What Bloomberg Economics Says...

“Yuan liquidity in Moscow is becoming more scarce and its costs more volatile. Yuan shortages in the Russian financial system indicate emerging problems for growing yuan lending for domestic banks — two years after the start of the war they still struggle to attract a sufficiently large and stable yuan deposit base.”

—Alexander Isakov, Russia economist.

Yuan bond issuance in 2022-2023 represented a “cheap source of funding,” according to Alexey Tretyakov, one of the founders of Aricapital in Moscow.

Facing a worsening yuan liquidity crunch, Russian lenders have had to turn to the central bank’s Chinese currency swaps to meet their needs, resulting in a “significant increase in yuan funding costs,” Tretyakov said. “A continued deficit could lead to a further rise in yuan bond yields,” he said.

Russian companies also haven’t borrowed within China itself, according to data compiled by Bloomberg, because capital controls there complicate the repatriation of money abroad. They haven’t sold yuan securities like panda or dim sum bonds since 2018 after 11 such issues in the prior eight years.

The barriers are proving too high to overcome even for the government, which has spent years planning its own yuan bonds. Finance Minister Anton Siluanov said in a February interview with RIA Novosti that discussions with China over taking out loans in yuan also have yet to produce results.

Chinese lenders including Industrial and Commercial Bank of China Ltd. — the world’s biggest by assets — have been ramping up their exposure to Russia through offshore branches. ICBC’s Russian subsidiary alone saw a five-fold increase in total local assets from the start of 2022 and through Oct. 1 last year, according to the latest data published by the Bank of Russia. Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive_2

Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive_2

The strain on Russian corporate coffers risks depriving industries of capital in a year when refinancing needs are sharply on the rise. Despite stellar profits, companies are feeling the pinch after the government imposed new export taxes to help fund the war, further undermining the benefit of a weaker ruble that helped drive record margins.

“High rates mean that the companies will be more careful with investments that require significant debt capital,” said Dmitry Kazakov, analyst at BCS in Moscow.

Source:Bloomberg

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Warren Takunda

Central Bank

Traders' Opinions

Economic

Forex

Australian Dollar Surges on GDP Data, Heightens Expectations of RBA Rate Cut_1

The Australian Dollar exhibited strength in response to the latest Australian GDP data, reinforcing the belief among analysts that the Reserve Bank of Australia (RBA) is poised to implement an interest rate cut in line with other major central banks.

The Pound to Australian Dollar exchange rate experienced a modest decline, settling at 1.9484, subsequent to the Australian Bureau of Statistics (ABS) report indicating a 1.5% year-on-year increase in Australia's economic output, surpassing the anticipated 1.4% rise.

While the fourth quarter of 2023 saw a growth of 0.2% quarter-to-quarter, a slight decrease from the previous quarter's 0.3% uptick and falling short of the consensus estimate of 0.3%, the Australian Dollar demonstrated strength against most currency counterparts following the data release. However, this surge is likely attributed to the broader strength observed in commodity currencies such as the New Zealand Dollar and the Canadian Dollar.

The Australian Dollar to U.S. Dollar exchange rate climbed by a third of a percent to 0.6523, brushing off the GDP figures, indicating resilience amidst prevailing market sentiments.

Despite the positive market reaction, the prevailing sentiment among analysts remains bearish towards the Australian Dollar outlook. The GDP release underscores signs of economic softness, reinforcing expectations of imminent RBA rate cuts. Real GDP growth of 0.2% quarter-to-quarter and a year-on-year increase of 1.5% fell short of expectations, while household consumption figures also disappointed, growing by a mere 0.1% quarter-to-quarter.

Market forecasts align with the likelihood of RBA rate cuts commencing in September, following similar moves by the Federal Reserve, European Central Bank, and Bank of England. Elevated Australian bond yields relative to peers offer temporary support to the AUD, but analysts caution against underestimating the potential economic slowdown, advocating for a more aggressive rate cut approach by the RBA.

While the market has priced in a September rate cut, expectations diverge regarding the pace of subsequent easing cycles. Analysts anticipate downward revisions to RBA rate cut projections, which could weigh on the Australian Dollar, potentially pushing the AUD/USD exchange rate towards 0.64 in the near term.

Moreover, the resilience of the GBP/USD pair in 2024 hints at further upside for the GBP/AUD exchange rate. The trajectory of the Australian Dollar hinges on Chinese growth trends and shifts in U.S. interest rate expectations, with upcoming events such as Fed Chair Powell's testimony and the Friday jobs report holding significant influence.

The recent boost in confidence towards a potential June rate cut by the Fed following below-consensus U.S. ISM services PMI data could sustain momentum for the Australian Dollar and its commodity counterparts, paving the way for further upside if such expectations materialize.

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Cohen

Central Bank

Economic

A top Chinese official defended his nation’s plan to grow the economy by around 5% this year, a day after the ambitious target was met with skepticism by some economists.

The goal is a “positive target that can well be attained through vigorous effort,” Zheng Shanjie, Chairman of the National Development and Reform Commission, said at a press briefing in Beijing on Wednesday.

He was joined at the event on the sidelines of the National People’s Congress, an annual meeting of China’s rubber-stamp parliament, by officials including Pan Gongsheng, governor of the People’s Bank of China, and Finance Minister Lan Fo’an.

The officials’ comments will be scrutinized by investors seeking details on how President Xi Jinping’s government will repeat last year’s expansion rate in more challenging circumstances without unleashing broad stimulus. Markets were disappointed by the lack of forceful steps announced at the opening of the legislature on Tuesday, while analysts surveyed by Bloomberg ahead of the confab only expected the economy to expand by 4.6% in 2024.

The joint press briefing was the first time in at least a decade that so many economic ministers shared a stage for one conference during the legislative session. Previously, officials typically held briefings in much smaller groups, except for pandemic years when many skipped conferences.

Zheng said China’s plans to issue 1 trillion yuan ($139 billion) of ultra-long special central government bonds this year will drive investment and consumption. He added that China’s “high-quality development” is seeing progress and bringing new competitive advantages, giving the economy a stronger foundation for growth.

Premier Li Qiang’s yearly report to China’s highest-profile annual political meeting kept the fiscal stimulus broadly the same as last year, and avoided aggressive moves to boost consumption or lift a slumping property sector. China’s No. 2 official didn’t directly address the Asian nation’s slide into its longest deflation streak since the 1990s.

The People’s Bank of China is expected to deliver more moderate cuts to interest rates and banks’ required reserves this year. The central bank has used surprise easing steps — such as a record cut to a key mortgage rate — to squeeze more value out of its policy actions in recent months.

Officials managing the world’s second-largest economy are grappling with record low consumer confidence, falling home prices and an increasingly competitive job market. That’s weighed on consumption and led to a price war among retailers, which has been hampered by weakening overseas demand that saw annual exports decline for the first time since 2016 last year.

Source:Bloomberg

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Ukadike Micheal

Forex

Economic

Optimism surrounds the US economy as analysts upgrade their 2024 forecasts, suggesting a potential delay in Federal Reserve interest rate cuts until summer. Strong growth in Q4 2023 and a resilient labor market in January have led economists to revise their GDP forecast to 2%, double the earlier estimate at the end of 2023.

The positive outlook has prompted expectations that the Fed's first rate cut in 2024 might occur in June or July, with three or four quarter-point moves by year-end. This marks a shift from initial predictions of six cuts, beginning in January. However, the buoyant economy poses challenges for President Joe Biden, potentially leading the Fed to maintain higher rates for longer, affecting borrowing costs for home and car buyers.

Despite falling inflation from 7% in 2022 to 2.4% in January, analysts anticipate a cautious approach from Fed Chair Jay Powell. Some even suggest the possibility of no rate cuts until year-end, especially if financial conditions ease and market forces naturally lower bond yields.

Powell's upcoming congressional hearings will likely emphasize the Fed's caution in declaring victory over inflation and stress that rate cuts will only happen when confident in achieving the 2% inflation goal. Analysts expect the Federal Open Market Committee to update its GDP growth estimate during the March 20 rate-setting vote.

Recent data, including a rise in the personal consumption expenditures index and strong January job numbers, support the Fed's hesitancy to cut rates too soon. Analysts attribute the economy's resilience to consumers' willingness to spend, with expectations of a potential slowdown in the second half of the year.

In the face of a robust economy, technical viewpoints highlight the potential impact on market dynamics. The Fed's cautious stance amid strong economic indicators may influence investor sentiment, affecting asset prices and market volatility. As the economy navigates uncertainties, the careful balance between sustaining growth and managing inflation becomes a crucial aspect for both policymakers and market participants.

The evolving landscape of the US economy and Federal Reserve policy signals a delicate dance between optimism and caution. While upgraded forecasts paint a promising picture, the potential delay in rate cuts and the Fed's nuanced approach reflect a complex economic reality. As markets adjust to changing expectations, the interplay of consumer behavior, inflation dynamics, and policy decisions will shape the trajectory of the US economy in the coming months.

Source: Financial Times

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Alex

Economic

Political

Jeremy Hunt plans to put personal tax cuts at the center of his annual budget on Wednesday as he navigates tight public finances to deliver on Conservative demands for a pre-election giveaway to boost the ailing governing party’s standing with voters.

The Chancellor of the Exchequer plans to cut 2 percentage points off the UK’s national insurance payroll tax, according to a person familiar with the matter, who requested anonymity discussing decisions that haven’t yet been announced. While he’s not expected to unveil what would be a more expensive cut in income tax — as preferred by Rishi Sunak team — senior Conservatives have signaled the Prime Minister plans to fight the general election on a promise of future income tax breaks.

With the Tories trailing Keir Starmer’s opposition Labour Party badly in the polls — an Ipsos survey published Monday put the governing party on an all-time low of just 20%, with Labour on 47% — Hunt is responding to Conservative pressure for voter-pleasing giveaways ahead of a national vote due in the next 11 months. He’ll present Wednesday’s move as part of efforts to lift economic growth, according to pre-briefed remarks from the Treasury.

“We can now help families with permanent cuts in taxation,” Hunt is due to say on Wednesday. “Conservatives know lower tax means higher growth.”

For all the Tory demands for tax cuts, Hunt has been hemmed in by tight public finances. The government’s fiscal watchdog, the Office for Budget Responsibility said he had just £13 billion ($16.5 billion) to work with before breaching his own rule to have the national debt falling within five years.

That’s why Hunt has been considering a range of revenue-raising measures to help fund personal tax cuts, including ending UK non-domiciled tax status, squeezing public spending and extending a windfall tax on oil and gas companies.

Hunt “wants to do something that appeals to voters, but faces the reality of fiscal and economic forecasts that suggest there is very little room for maneuver,” said Gemma Tetlow, chief economist at the Institute for Government think tank. “There’s not an easy win or easy giveaways to reach for.”

Hunt will present the national insurance reduction — which was first reported by the Times — as a £900 ($1,140) benefit to the average worker when combined with the identical cut he announced to the payroll tax in his last fiscal statement in November, according to the person. The Treasury declined to comment. Jeremy Hunt Plans To Put Tax Cuts At Center Of UK Budget As General Election Looms_1

Jeremy Hunt Plans To Put Tax Cuts At Center Of UK Budget As General Election Looms_1

Ministers had been considering whether to cut income tax or national insurance. Sunak pledged to reduce income tax during the Conservative leadership contest in the summer of 2022, and some of his aides favored making good on that promise at this year’s budget, believing it would be noticed and understood more by voters in election year. However, income tax is not now expected to be reduced in the budget, people familiar with the matter said.

That’s in part because cutting income tax would be more expensive, at about £13.7 billion a year on average over the next three years for a 2 percentage-point cut compared with £9 billion to £10 billion for the same reduction in national insurance, depending on whether the self-employed are included or not.

Source:Bloomberg

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Samantha Luan

Economic

India's healthcare innovation market may double to $60 billion by fiscal year 2028, according to a report by Bain & Company and HeathQuad.

This growth is likely to be driven by increased consumer demand, changes in the global healthcare value chain, advancements in Indian scientific and technological capabilities, and favorable regulatory conditions, said the report titled ‘Healthcare Innovation in India’.

In FY23, the overall Indian healthcare market was around $180 billion with healthcare innovation accounting for $30 billion, or 15% of the market. While the healthcare innovation market is largely dominated by pharma services and healthtech, biotech and medtech are also some of the emerging areas that show promise.

The Indian pharma services market, which was valued at about $16 billion in FY 2023, saw 85-90% of revenue driven by exports. Within this segment, CDMOs or contract development and manufacturing organizations received a big boost as it benefitted from a number of factors including global supply chains shifting away from China and improvement in capacity.

Healthtech market more than doubled in a span of three years to $7 billion in FY23. This growth, fueled by covid-19 pandemic and efficiency needs in healthcare, has seen healthtech claim roughly 25% of the overall healthcare innovation space, the report said.

Vaccines and biotech market, valued at about $4 billion in FY23, accounted for about 15% of the total innovation market. Its growth in the last three years was largely driven by exports with India being a vaccine powerhouse that catered to about 60% of the global vaccine demand.

India's medtech industry, a $11 billion market overall, saw nearly 80% of its revenues come from imports. Players within the industry accounted for about $2.5 billion in FY2023, up from about $1.8 billion in FY 2020, the report said.

Meanwhile, investments in the healthcare industry have been fairly consistent with 80-90% of deal volume in seed and early stage VC rounds, 3-7% in late-stage rounds and less than 5%in late-stage PE and other deals.

Some prominent investments in this space include online pharmacy player PharmEasy, which raised a total funding of more than $2 billion across more than 10 rounds, and digital health and wellness player HealthifyMe, which raised more than $110 million across five rounds.

However, in recent times, investors' emphasis on positive unit economics have increased as higher interest rates and global macroeconomic uncertainties have led to more cautious investments.

Enterprise-facing segments solving operational efficiencies or supply chain constraints saw particular investor interest due to their potential for strong unit economics, high total addressable market, and robust market acceptance.

This was seen in deals such as Medika-bazaar, a B2B e-commerce player, that raised about $65 million in FY 2023, while clinical data analytics firm THB raised about $20 million in the same time period.

While the last few years have seen the growth of innovation across segments, there may also be consolidation across segments for those smaller businesses that are not sufficiently funded or without a clear path to profitability, the report said.

Source:mint

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Ukadike Micheal

Economic

Stocks

In early trading, the pan-European Stoxx 600 experienced a marginal 0.1% decline, featuring mixed sector performance. Healthcare stocks saw a 0.4% loss, contrasting with a 0.7% gain in the chemicals sector. Investors awaited the presentation of the British budget by Finance Minister Jeremy Hunt, anticipating potential announcements on taxation and spending, with expectations of a National Insurance tax cut.

Meanwhile, futures linked to the Nasdaq 100 rose following a previous night's selloff in major U.S. averages. Attention turned to U.S. Federal Reserve Chair Jerome Powell's testimony before the House Financial Services Committee, with investors seeking insights into the central bank's monetary policy stance and clues regarding the timing and pace of anticipated interest rate cuts this year. Powell was scheduled to address the Senate Banking Committee on Thursday.

In Asia-Pacific markets, a mixed trend prevailed, with Hong Kong stocks leading gains, up over 2%, while mainland Chinese stocks, particularly the CSI 300, experienced a 0.6% slide. This decline was attributed to a tech slide on Wall Street, influenced by reports of iPhone sales dropping in China, particularly affecting Apple.

The subdued start in European shares reflected caution among investors as they awaited key economic data and Powell's congressional testimony. Positive earnings, exemplified by Symrise beating core profit estimates in 2023, contributed to a 5% rise in the company's shares. The chemicals sector led gains with a 0.8% rise. However, logistics giant DHL Group's shares dropped 4% due to a conservative 2024 profit outlook, despite surpassing pre-pandemic figures.

The market's nuanced response to various factors, including economic data, corporate performance, and global dynamics, highlights the complexity and sensitivity of current market conditions. As investors navigate uncertainties, technical analysis suggests that maintaining a balanced and diversified portfolio remains crucial, especially in the face of potential shifts in interest rates and global economic trends.

The interplay of global events and economic indicators continues to shape market sentiment. The cautious stance in European shares underscores the importance of staying attuned to key developments, both domestically and internationally. As investors seek clarity from central bank leaders and respond to corporate performance, the delicate balance between risk and opportunity remains a central theme in the current financial landscape.