MUMBAI: India will withdraw its highest denomination currency note from circulation, the central bank said on Friday (May 19). The 2,000-rupee note, introduced into circulation in 2016, will remain legal tender but citizens have been asked to deposit or exchange these notes by Sep 30, 2023. The decision is reminiscentContinue Reading
More than half of the teachers’ cooperatives nationwide have reduced the interest on debts owed by teachers who are facing increasing financial difficulties, according to the Cooperative Promotion Department (CPD).
About 900,000 teachers collectively owe at least 1.4 trillion baht. Of this amount, 890 billion baht, or 64% of the loans, is owed to the teachers’ cooperatives, followed by 349 trillion baht to the Government Savings Bank.
The cooperatives, which are overseen by the CPD, have been trying to alleviate the teachers’ debt problems, said Wisit Srisuwn, the CPD director-general.
The department has secured financial support and know-how to sustain the cooperatives, which form an important financial lifeline for many member teachers, Mr Wisit said.
The CPD has signed a memorandum of understanding with the Education Ministry and 12 financial institutions to formulate a comprehensive plan to tackle teachers’ debt.
The plan involves revising the interest charged to teachers and bringing the rate down to around that offered by commercial banks. At the same time, the Education Ministry will advise cooperatives on how to streamline their operations.
Mr Wisit said so far, 70 of the 108 teachers’ cooperatives around the country had joined the interest reduction programme and managed to cut the rates by between 0.05% and 1%.
Of the 70 cooperatives, 11 were able to bring their interest rates below 5%, immediately benefiting at least 460,000 teachers whose debts stand at one million baht on average.
Mr Wisit said for every 1% of interest lowered, each teacher would see their debt go down by up to 10,000 baht per annum. He added that the department had issued cooperatives a guideline for assisting the teachers in controlling their debts.
He also dismissed calls by some members to be allowed to sell their shares in the cooperatives and take out their savings in them while still being able to continue borrowing from them. He said it was not legally possible to do so as the cooperatives were designed to encourage the teachers to have savings.
Artificial Intelligence-powered tools, such as ChatGPT, have the potential to revolutionize the efficiency, effectiveness and speed of the work humans do.
And this is true in financial markets as much as in sectors like health care, manufacturing and pretty much every other aspect of our lives.
I’ve been researching financial markets and algorithmic trading for 14 years. While AI offers lots of benefits, the growing use of these technologies in financial markets also points to potential perils. A look at Wall Street’s past efforts to speed up trading by embracing computers and AI offers important lessons on the implications of using them for decision-making.
In the early 1980s, fueled by advancements in technology and financial innovations such as derivatives, institutional investors began using computer programs to execute trades based on predefined rules and algorithms. This helped them complete large trades quickly and efficiently.
Back then, these algorithms were relatively simple and were primarily used for so-called index arbitrage, which involves trying to profit from discrepancies between the price of a stock index – like the S&P 500 – and that of the stocks it’s composed of.
As technology advanced and more data became available, this kind of program trading became increasingly sophisticated, with algorithms able to analyze complex market data and execute trades based on a wide range of factors. These program traders continued to grow in number on the largey unregulated trading freeways – on which over a trillion dollars worth of assets change hands every day – causing market volatility to increase dramatically.
Eventually this resulted in the massive stock market crash in 1987 known as Black Monday. The Dow Jones Industrial Average suffered what was at the time the biggest percentage drop in its history, and the pain spread throughout the globe.
In response, regulatory authorities implemented a number of measures to restrict the use of program trading, including circuit breakers that halt trading when there are significant market swings and other limits. But despite these measures, program trading continued to grow in popularity in the years following the crash.
Fast forward 15 years, to 2002, when the New York Stock Exchange introduced a fully automated trading system. As a result, program traders gave way to more sophisticated automations with much more advanced technology: High-frequency trading.
HFT uses computer programs to analyze market data and execute trades at extremely high speeds. Unlike program traders that bought and sold baskets of securities over time to take advantage of an arbitrage opportunity – a difference in price of similar securities that can be exploited for profit – high-frequency traders use powerful computers and high-speed networks to analyze market data and execute trades at lightning-fast speeds.
High-frequency traders can conduct trades in approximately one 64-millionth of a second, compared with the several seconds it took traders in the 1980s.
These trades are typically very short term in nature and may involve buying and selling the same security multiple times in a matter of nanoseconds. AI algorithms analyze large amounts of data in real time and identify patterns and trends that are not immediately apparent to human traders. This helps traders make better decisions and execute trades at a faster pace than would be possible manually.
Another important application of AI in HFT is natural language processing, which involves analyzing and interpreting human language data such as news articles and social media posts. By analyzing this data, traders can gain valuable insights into market sentiment and adjust their trading strategies accordingly.
These AI-based, high-frequency traders operate very differently than people do.
The human brain is slow, inaccurate and forgetful. It is incapable of quick, high-precision, floating-point arithmetic needed for analyzing huge volumes of data for identifying trade signals. Computers are millions of times faster, with essentially infallible memory, perfect attention and limitless capability for analyzing large volumes of data in split milliseconds.
And, so, just like most technologies, HFT provides several benefits to stock markets.
These traders typically buy and sell assets at prices very close to the market price, which means they don’t charge investors high fees. This helps ensure that there are always buyers and sellers in the market, which in turn helps to stabilize prices and reduce the potential for sudden price swings.
High-frequency trading can also help to reduce the impact of market inefficiencies by quickly identifying and exploiting mispricing in the market. For example, HFT algorithms can detect when a particular stock is undervalued or overvalued and execute trades to take advantage of these discrepancies. By doing so, this kind of trading can help to correct market inefficiencies and ensure that assets are priced more accurately.
But speed and efficiency can also cause harm.
HFT algorithms can react so quickly to news events and other market signals that they can cause sudden spikes or drops in asset prices.
Additionally, HFT financial firms are able to use their speed and technology to gain an unfair advantage over other traders, further distorting market signals. The volatility created by these extremely sophisticated AI-powered trading beasts led to the so-called flash crash in May 2010, when stocks plunged and then recovered in a matter of minutes – erasing and then restoring about $1 trillion in market value.
Since then, volatile markets have become the new normal. In 2016 research, two co-authors and I found that volatility – a measure of how rapidly and unpredictably prices move up and down – increased significantly after the introduction of HFT.
The speed and efficiency with which high-frequency traders analyze the data mean that even a small change in market conditions can trigger a large number of trades, leading to sudden price swings and increased volatility.
In addition, research I published with several other colleagues in 2021 shows that most high-frequency traders use similar algorithms, which increases the risk of market failure. That’s because as the number of these traders increases in the marketplace, the similarity in these algorithms can lead to similar trading decisions.
This means that all of the high-frequency traders might trade on the same side of the market if their algorithms release similar trading signals. That is, they all might try to sell in case of negative news or buy in case of positive news. If there is no one to take the other side of the trade, markets can fail.
That brings us to a new world of ChatGPT-powered trading algorithms and similar programs. They could take the problem of too many traders on the same side of a deal and make it even worse.
In general, humans, left to their own devices, will tend to make a diverse range of decisions. But if everyone’s deriving their decisions from a similar artificial intelligence, this can limit the diversity of opinion.
Consider an extreme, nonfinancial situation in which everyone depends on ChatGPT to decide on the best computer to buy. Consumers are already very prone to herding behavior, in which they tend to buy the same products and models. For example, reviews on Yelp, Amazon and so on motivate consumers to pick among a few top choices.
Since decisions made by the generative AI-powered chatbot are based on past training data, there would be a similarity in the decisions suggested by the chatbot. It is highly likely that ChatGPT would suggest the same brand and model to everyone. This might take herding to a whole new level and could lead to shortages in certain products and service as well as severe price spikes.
This becomes more problematic when the AI making the decisions is informed by biased and incorrect information. AI algorithms can reinforce existing biases when systems are trained on biased, old or limited data sets. And ChatGPT and similar tools have been criticized for making factual errors.
In addition, since market crashes are relatively rare, there isn’t much data on them. Since generative AIs depend on data training to learn, their lack of knowledge about them could make them more likely to happen.
For now, at least, it seems most banks won’t be allowing their employees to take advantage of ChatGPT and similar tools. Citigroup, Bank of America, Goldman Sachs and several other lenders have already banned their use on trading-room floors, citing privacy concerns.
But I strongly believe banks will eventually embrace generative AI, once they resolve concerns they have with it. The potential gains are too significant to pass up – and there’s a risk of being left behind by rivals.
But the risks to financial markets, the global economy and everyone are also great, so I hope they tread carefully.
Pawan Jain, Assistant Professor of Finance, West Virginia University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
“The power to tax [and I would add the phrase ‘the power to regulate,’ or rather ‘guess-ulate’] is the power to destroy.” – Daniel Webster
There have been 553 bank failures in the US since the year 2000. Credit Suisse Group AG, a banking house founded in 1856 that built itself up to become a financial powerhouse of worldwide reach, influence and significance, is among those in trouble.
You would be mistaken if you thought the Chinese socialist system protects them from capitalistic financial crises. China has found it necessary for its central government to bail out, with many trillions of yuan, subsidiary governments and other Chinese financial entities.
I use the word “swaps” to refer to this process. I use the word in both its technical meaning as a special kind of highly capitalistic financial document, and also as a generic term to indicate the general obligations taken over by the Chinese senior government from junior entities.
These made it liable to a web of other financial entities, in some cases international lenders, since the local junior borrowers cannot pay, or at least cannot pay the now increased interest, carrier costs or renewal demands, that, absent a bailout, will drive them into a most capitalistic state of bankruptcy.
That means nobody will lend them money and everybody will demand that the weak borrowers pay up or go bust, taking with them many innocent depositors, investors, capital-needy businesses and a whole host of ordinary economic citizens whose general operations are dependent on the financial web that is needed by socialists and capitalist alike.
The bailouts (a form of re-regulation) have been made neceaary by recent guess-regulations and generally unwise financial actions of governments worldwide, giving rise to the current situation of RI (recession/inflation).
Big Policy mistakes include interest rates of near zero encouraging marginal (at best) investment projects with low real yields that have suddenly been faced with renewal rates that are unaffordable.
They include panic flu-related lockdowns, shutdowns and forced shifts in business investments into exaggerated risk-avoidance along with independently, super-green spending aimed at a problem (in the minds of its critics) a hundred years in the future that caused investors to ignore politically “incorrect” solutions sometimes (as in the case of energy) right under their feet in the form of oil and gas fracking (again that libertarians will consider without preconceived bias).
My focus here is not an explanation of those past errors. In this article, I criticize current regulation that takes the form of minimizing, hiding, inadequate response, and worst of all, failing to inform a financially dependent community of citizens in China, America, Europe and everywhere else, just how expensive it will be to address the problem, even in the imperfect fashion now under way.
For example, Janet Yellen, former boss of the American central bank (“the Fed”) and now secretary of the US Treasury, has many times told the public (I paraphrase) “don’t worry, your deposits are safe,” as if that was the main or only problem.
I have been a consultant and visiting professor at the US Federal Reserve, working in the very department that looks after banking problems that required banks to merge, join holding companies, combine in various ways.
This quite often was in order to correct problems that exceeded the monetary competence of the banks that sought help or approval, as they hoped to find the best and, if not the ideal, at least a low-visibility, non-attention-getting solution to their inability to carry on or at least to survive while having a satisfactory level of bank services to customers, to maintain a healthy competitive financial community, and to continue to earn profits satisfactory to their suppliers of bank capital.
Without going into detail about my experience, since my purpose here is simply to list the much larger-than-depositor losses hidden from sight by announcements from all over the world (I mention Yellen merely as an example) from less-than-forthright regulators (and even bankers themselves) who imagine they might thereby exonerate themselves from the responsibility for the degree of trouble we face.
An incomplete but suggestive list of the hidden costs and problems associated with a bailout program includes, first of all, a public display of serious financial trouble.
The reason most readers don’t know that these 553 failures have occurred is that the first thing bank regulators do when faced with a problem bank is to search, sometimes the world over, to find private investors, takeover banks that come quietly to the rescue, so as to avoid making problems worse via, for example, bank runs that spread.
Bailout plans often include de facto ownership by the government of the doubtful assets that are the source of the problem. This was the case in the United States’ mortgage crisis of 2008. The derivative assets the government took on destroyed big parts of the regulatory apparatus.
Bailouts allow bankers, investors, and financial gamblers to take chances they ordinarily would avoid. They think they are on a one-way highway. They take profits but the government takes the losses. But the losses are real, and somebody has to absorb them, quite without their knowledge or acceptance.
More to the point, the taxpayer, or the plain citizen in a system where the government runs things, gets less than he deserves because government money goes to fixing the past instead of building the future.
Bailouts weaken the entire financial industry because the competitive pressure that results when players are motivated by fear of failure is diminished.
Big guys get saved with bailouts while small guys, who often are the source of new ideas, are too insignificant to rescue. Government will not take the real risk of trusting intuition, and take on the chance that the little guy with ideas is a better employer of taxpayer money than is the big guy who has lost his edge.
And of course, sometimes a big guy has ideas so big (Elon Musk wants to take his money to Mars) that not many bureaucrats would finance it. But I bet Musk will be proved right enough often enough to remain the richest man in the world.
Of course, when the regulator, or the rescue agent, has political as well as economic motivation, not all the taxpayer money goes to serve the general interest – some of it, maybe a lot of it, goes to serve a special interest, an interest possessed of political assets, not necessarily very productive ones.
To the extent that previously innovative financial players must take orders from notoriously non-innovative, excessively conservative political bosses, the industry is no longer controlled by makers. The fixers have taken over.
These problems, the ones that go way past lost depositor money, are feature problems for every financial player in the world. East and West, capitalist and socialist, big and little, all must learn that they only lose the respect of their audience if they give reassurances that paper over the size and complexity of the issues.
Taxpaying citizens will forgive, or at least understand, an inability to solve admitted problems. They won’t forgive duplicity. Regulators who recognize this reality have the best chance of keeping their job – into the long term.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.
SINGAPORE: Singapore has worked to prevent the flow of arms into Myanmar, the Ministry of Foreign Affairs (MFA) said in response to a United Nations (UN) expert who reported that entities in the country provide “critical supplies” to the junta’s weapon factories. An MFA spokesperson said on Friday (May 19)Continue Reading
A serious gambling addiction could have been a factor that pushed Sararat “Aem” Rangsiwuthaporn to murder 14 people using cyanide, the police said after investigating the suspect’s money trail.
Deputy national police chief Pol Gen Surachate Hakparn said on Thursday that an analysis of the 78 million baht which passed through bank accounts owned by the suspect, who has been dubbed “Aem Cyanide” by netizens on social media, suggested she had a gambling habit.
Some of the money was found to have been transferred to proxy accounts which were set up to receive cash transfers from gamblers, Pol Gen Surachate said, noting her supposed victims had transferred large amounts of cash to Ms Sararat’s account prior to their passing.
An investigation into her financial activities revealed that on one particular day, Ms Sararat lost almost one million baht to gambling, which could explain why the suspect often appeared to be in dire need of money to her relatives and friends.
When asked about the source of the cyanide used to poison the victims, Pol Gen Surachate said investigators have narrowed down the list of possible suppliers to about 10.
The police have ruled out the possibility that Ms Sararat’s late boyfriend, Sutthisak “Dae” Phoonkhwan, may have supplied her with the cyanide, said Pol Gen Surachate.
He said the police are closing in on one of Ms Sararat’s aides, who investigators believe may have been complicit in the killings.
The deputy national police chief said the examination of over 400 items collected from various crime scenes linked to Ms Sararat is being carried out by the police’s forensic team with the assistance of Weerachai Phutdhawong, an associate professor of chemistry at Kasetsart University.
The results will be included in the police’s final report, said Pol Gen Surachate.
Ms Sararat was arrested on April 25 when she was four months pregnant. Her arrest followed a complaint filed by the mother and elder sister of Siriporn “Koy” Khanwong, 32, of Kanchanaburi, who is one of the 14 victims.
Siriporn collapsed and died on the banks of Mae Klong River in Ban Pong district of Ratchaburi, where she had just released fish for merit-making on April 14 with Ms Sararat.
Convening war rooms, planning speedy bailouts and raising house-on-fire alarm bells: Those are a few of the ways the biggest banks and financial regulators are preparing for a potential default on US debt.
“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, said in a television interview.
The doomsday planning is a reaction to a lack of progress in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – another round of negotiations took place on May 16, 2023.
Without an increase in the debt limit, the US can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.
What happens if a default occurs is an open question, but economists – including me – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers.
A severe and prolonged global economic recession would be all but guaranteed, and the reputation of the US and the dollar as beacons of stability and safety would be further tarnished.
But how do you prepare for an event that many expect would trigger the worst global recession since the 1930s?
Jamie Dimon, who runs JPMorgan Chase, the biggest US bank, told Bloomberg he’s been convening a weekly war room to discuss a potential default and how the bank should respond. The meetings are likely to become more frequent as June 1 – the date on which the US might run out of cash – nears.
Dimon described the wide range of economic and financial effects that the group must consider such as the impact on “contracts, collateral, clearing houses, clients” – basically every corner of the financial system – at home and abroad.
“I don’t think it’s going to happen — because it gets catastrophic, and the closer you get to it, you will have panic,” he said.
That’s when rational decision-making gives way to fear and irrationality. Markets overtaken by these emotions are chaotic and leave lasting economic scars.
Banks haven’t revealed many of the details of how they are responding, but we can glean some clues from how they’ve reacted to past crises, such as the financial crisis in 2008 or the debt ceiling showdowns of 2011 and 2013.
One important way banks can prepare is by reducing exposure to Treasury securities – some or all of which could be considered to be in default once the U.S. exhausts its ability to pay all of its bill. All US debts are referred to as Treasury bills or bonds.
The value of Treasurys is likely to plunge in the case of a default, which could weaken bank balance sheets even more. The recent bank crisis, in fact, was prompted primarily by a drop in the market value of Treasurys due to the sharp rise in interest rates over the past year. And a default would only make that problem worse, with close to 190 banks at risk of failure as of March 2023.
Another strategy banks can use to hedge their exposure to a sell-off in Treasurys is to buy credit default swaps, financial instruments that allow an investor to offset credit risk. Data suggests this is already happening, as the cost to protect US government debt from default is higher than that of Brazil, Greece and Mexico, all of which have defaulted multiple times and have much lower credit ratings.
But buying credit default swaps at ever-higher prices limits a third key preventive measure for banks: keeping their cash balances as high as possible so they’re able and ready to deal with whatever happens in a default.
Financial industry groups and financial regulators have also gamed out a potential default with an eye toward keeping the financial system running as best they can.
The Securities Industry and Financial Markets Association, for example, has been updating its playbook to dictate how players in the Treasurys market will communicate in case of a default.
And the Federal Reserve, which is broadly responsible for ensuring financial stability, has been pondering a US default for over a decade. One such instance came in 2013, when Republicans demanded the elimination of the Affordable Care Act in exchange for raising the debt ceiling. Ultimately, Republicans capitulated and raised the limit one day before the U.S. was expected to run out of cash.
One of the biggest concerns Fed officials had at the time, according to a meeting transcript recently made public, is that the US Treasury would no longer be able to access financial markets to “roll over” maturing debt.
While hitting the current ceiling prevents the US from issuing new debt that exceeds $31.4 trillion, the government still has to roll existing debt into new debt as it comes due. On May 15, 2023, for example, the government issued just under $100 billion in notes and bonds to replace maturing debt and raise cash.
The risk is that there would be too few buyers at one of the government’s daily debt auctions – at which investors from around the world bid to buy Treasury bills and bonds. If that happens, the government would have to use its cash on hand to pay back investors who hold maturing debt.
That would further reduce the amount of cash available for Social Security payments, federal employees wages and countless other items the government spent over $6 trillion on in 2022. This would be nothing short of apocalyptic if the Fed could not save the day.
To mitigate that risk, the Fed said it could could immediately step in as a buyer of last resort for Treasurys, quickly lower its lending rates and provide whatever funding is needed in an attempt to prevent financial contagion and collapse. The Fed is likely having the same conversations and preparing similar actions today.
Ultimately, I hope that Congress does what it has done in every previous debt ceiling scare: raise the limit.
These contentious debates over lifting it have become too commonplace, even as lawmakers on both sides of the aisle express concerns about the growing federal debt and the need to rein in government spending.
Even when these debates result in some bipartisan effort to rein in spending, as they did in 2011, history shows they fail, as energy analyst Autumn Engebretson and I recently explained in a review of that episode.
That’s why one of the most important ways banks are preparing for such an outcome is by speaking out about the serious damage not raising the ceiling is likely to inflict on not only their companies but everyone else, too. This increases the pressure on political leaders to reach a deal.
Going back to my original question, how do you prepare for such a self-imposed catastrophe? The answer is, no one should have to.
John W Diamond is Director of the Center for Public Finance at the Baker Institute, Rice University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Ukraine is close to retreating from Bakhmut. This could happen anytime now, but it has to happen fast enough before exit routes are closed down. Predictions of a timetable vary, but the Ukrainians should evacuate Bakhmut no later than the weekend, provided they can.
There are still a couple of roads open to exit the city, secured in part by Ukrainian army attacks on the flanks of the city. But these roadways and fields will not stay available if the Wagner forces pour in fast.
Monday night the Wagner forces stormed and took the two most fortified and defensible parts of the Citadel area of the city – pushing the Ukrainians back into the last part of the Citadel, which is mainly low-rise buildings. These will be hard to hold.
There is also fighting around a portion of the city’s northwestern sector where the Ukrainians are holding out at the Children’s Hospital (long since evacuated of patients). The purpose of the Ukrainian force is to hold this area to keep the road open out of the city in that direction and to divert Wagner forces from taking over the entire Citadel too quickly.
The Ukrainians could negotiate a safe withdrawal with the Russians, but it is unlikely that President Volodmyr Zelensky will allow that to happen. Furthermore, the so-called leaks about Wagner force boss Yevgeny Prigozhin’s communications with Ukrainian intelligence – although he has denied them heatedly – make it almost impossible for the Wagners to make any deals with their Ukrainian enemies.
The battle for Bakhmut is Zelensky’s battle, because he demanded that his army stay there and fight even after his commanders told him it was too costly and not worth taking needless losses. The battle has raged for eight or nine months and, to a degree, has caused big losses on both sides. Recently his top commanders have put out statements that the fight was worth it. It is likely Zelensky demanded these statements of support.
The big question is: What is next? The Russians could use their forces to move toward Chasiv Yar and push the Ukrainian army back toward the Dnieper river. The Dnieper is absolutely strategic for Ukraine. If the Russians can reach its banks, Ukraine will be cut in half.
The Ukrainians have to be careful in mounting their planned but not yet executed great offensive because, if they leave their back door open, the Russians have sufficient forces to handle an offensive and to move on toward Chasiv Yar and beyond. There is a danger the Ukrainian army could be trapped from the north and the south and be unable to gain a breakthrough that could justify trying an offensive aimed at the Kherson region or the Zaporizhzhia region or even Crimea.
The US and NATO response is to stuff Ukraine with tons of modern weapons, some of which the Russians are blowing up before they ever get near a battlefield. But manpower remains Ukraine’s Achilles heel. It is becoming more and more difficult for Ukraine to recruit soldiers or dragoon young men into service. This will only multiply when the full impact of the Bakhmut defeat is known to the Ukrainian public.
The Ukrainian army leadership also is in doubt. Its top leader, General Valery Zaluzhny, seemingly has disappeared. And so, too, has General Aleksandr Syrskyi, commander of the Ukrainian ground forces. There are no answers but plenty of rumors.
One rumor is that Zelensky went on his European tour while the military opposition was eliminated. Another is that these two generals were involved in corruption and were caught. A third rumor is that both were killed in a missile strike.
If the planned offensive is delayed because the army’s leaders have been killed, for whatever reason, then Zelensky will face overwhelming problems.
A key problem understanding the war in Ukraine is the reliability of sources of information, a problem that relates to the fact that both sides specialize in disinformation and fake news. That said, the information coming from Bakhmut so far is confirmed. The rumors about the fate of Ukraine’s generals are not confirmed.
Stephen Bryen is a senior fellow at the Center for Security Policy and the Yorktown Institute. This article was originally published on his Substack, Weapons and Strategy. Asia Times is republishing it with permission.
Beijing regulators are leaning into a seven-week rally in China’s sovereign bond market by widening access to onshore interest-rate swaps. Yet what sounds like a rather technical turn of the screw is a huge and timely reform win for institutional investors keen on trading Asia’s biggest economy.
“Timely,” because it coincides with Group of Seven (G7) members heading to Hiroshima, Japan to contain any number of financial troubles. They include runaway inflation, failing Western banks, the specter of a US default and desperate attempts to woo Global South countries.
In China, though, the vibe is more about opening a recovering financial system to global investors hungry for growth and higher-yielding assets as the post-Covid-19 trade gains momentum.
Here, the new “Swap Connect” program between China and Hong Kong is wisely timed. It opens the way for overseas funds to access derivatives vital to hedging bets in China’s bond market. The dearth of hedging tools has long turned off the biggest of the big money.
The swap scheme will enable punters to deal in key money-market rates tied closely to People’s Bank of China (PBoC) policies. This will likely deepen institutional investors’ involvement in China markets, building on the existing Bond Connect plan. The move dovetails with a powerful bond rally driven by expectations that the central bank will add more liquidity this year.
For Chinese leader Xi Jinping, Swap Connect helps fulfill a pledge to open mainland capital markets to international funds. It turns the page, to some extent, from the regulatory crackdowns of 2020 and 2021. It also reminds top investment banks that geopolitical turbulence between Beijing and Washington isn’t getting in the way of market reforms.
The program “will be a huge leap forward in developing the domestic derivatives and bond markets,” says Rose Zhu, chief China country officer at Deutsche Bank, which Beijing named as a key market maker for Swap Connect.
“Leveraging our cross-border strengths, we look forward to playing an active role in helping international investors get a head start via Swap Connect” and “helping accelerate the opening up of China’s financial markets and RMB internationalization.”
Monish Tahilramani, head of Asia Pacific markets at HSBC, says the hedging tool marks “an important complement to Bond Connect and a positive sign that onshore markets continue to open up.”
It’s not that simple, of course. Nicolas Aguzin, CEO of Hong Kong Exchanges and Clearing Limited, is absolutely right to call Swap Connect “the latest chapter in our ‘connect’ story.”
The reference here is to Xi’s habit of connecting markets to Hong Kong’s first-world system to increase China’s financial street cred. First it was Stock Connect, then Bond Connect. Now, Swap Connect rounds out Xi’s regional ambitions.
Yet the question is whether this time financial reforms will keep pace with rising investor optimism? Or will this be another episode of China over-promising and under-delivering?
New Premier Li Qiang has signaled the former. Since March, when he formally took over as Xi’s No 2, Li seems to have hit the brakes on the tech company crackdown that in recent years has sent foreign capital fleeing.
In March, for example, Li said that “for a period of time last year, there were some incorrect discussions and comments in the society, which made some private entrepreneurs feel worried.
“From a new starting point, we will create a market-oriented, legalized and internationalized business environment, treat enterprises of all types of ownership equally, protect the property rights of enterprises and the rights and interests of entrepreneurs.”
The plan, Li explained, is to “promote fair competition among various business entities and support the development and growth of private enterprises” and to “shore up” investor confidence.
Hence the importance of Swap Connect. It’s equally important, though, that Li’s reform team ensures that China follows through this time.
Earlier episodes of market opening saw Xi’s government putting the proverbial cart before the horse. In 2014, for example, the Stock Connect program lured tidal waves of capital but steps lagged to increase transparency, level playing fields and reduce limits on yuan convertibility.
The same with Bond Connect in 2017. Regulatory upgrades lagged as capital zoomed in. In between there, in 2016, China gained access to the International Monetary Fund’s “special drawing-rights” program.
That came after years of lobbying by former PBoC Governor Zhou Xiaochuan. The yuan’s inclusion in the IMF’s club of reserve currencies along with the dollar, euro, yen and the pound signaled China was achieving prime-time status.
Unfortunately, seven years on, the yuan still isn’t fully convertible. That’s limiting the yuan’s appeal as a rival to the dollar — even as the US government does its worst to damage the reserve currency’s credibility.
Part of the problem, though, is what this state of affairs says about Xi’s first 10 years in power: China doesn’t trust markets to decide the yuan’s value. If so, the thinking goes, why would investors trust Team Xi?
Still, the Swap Connect narrative is a powerful one if Li can reinvigorate the reform process as Xi’s third term heats up. It’s a “northbound” trading system enabling dealing in mainland yuan-denominated contracts with a net cap of 20 billion yuan (US$2.9 billion) per day. Next, a “southbound” channel might be added from China to Hong Kong.
As Hong Kong’s Chief Executive John Lee said this week: “The new scheme will strengthen Hong Kong’s role as an offshore yuan trading center and as a risk-management center.”
Julia Leung, CEO of the Securities and Futures Commission, added that Swap Connect “deepens connectivity between mainland and overseas capital markets and bolsters Hong Kong’s position as a risk-management hub.”
In a note to clients, HSBC argued that “compared to offshore interest-rate swaps, onshore interest-rate swaps are less volatile and correlate better with onshore bond yields. This makes onshore interest rate swaps more efficient interest rate hedges of onshore bonds. The other benefit of entering the onshore swap market is having access to SHIBOR interest rate swaps, which are rarely quoted in the offshore market.”
HSBC analyst Candy Ho notes that “Swap Connect has immediate value for global investors and is a timely move in China’s ongoing commitment to its markets opening up.” She adds it will make “participating in the world’s second-largest fixed-income market more attractive by introducing a central clearing model and providing better access to the deep onshore liquidity in financial derivatives markets.”
A deep and vibrant bond market is needed to finance everything from the growth of the private sector to adjust to an aging and shrinking population to funding bigger social safety nets so China can pivot to a consumption-led growth model. Beijing is expected to rack up a record 3.88 trillion yuan ($557 billion) deficit this year.
A more resilient debt market would help PBoC Governor Yi Gang’s team gain greater traction when it tweaks monetary policy. The odds of more assertive PBoC easing may have increased Tuesday with news that retail sales, industrial output and fixed investment expanded much less than hoped in April. The youth unemployment rate meanwhile hit a record high of 20.4%.
“China’s activity indicators missed expectations by a wide margin even with a favorable base,” says economist Xiangrong Yu at Citigroup. “With China now out of the sweet spot of reopening, hope of further sentiment repair could be diminishing in the absence of decisive government actions.”
Such trends may be more positive for Chinese bonds than stocks in the short-to-medium term. And here, news that Beijing is stepping up efforts to develop a more developed bond market to provide the economy with a bigger shock absorber if global markets go awry will bolster confidence. The ability to hedge is an important step in that direction.
The new risk-hedging instrument is being introduced just as rising US interest rates put foreign outflow pressure on China’s bond market, with overseas funds cutting their holdings by $169 billion over the past five quarters. At the same time, global investors still own 10 times as many of the securities as they did a decade ago.
Before May 15, Beijing only allowed foreign funds to access onshore interest-rate swaps via the China Interbank Bond Market framework. Swap Connect vastly broadens access at a moment when G7 members are giving investors reasons to seek opportunities elsewhere – not least China.
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In early March 2023, General Laura Richardson, head of the United States Southern Command, told a US congressional hearing that Chinese actions in South America posed a threat to US safety. According to General Richardson, China is on a relentless march to replace the United States as the leader in the region.
While China’s presence in the region has grown substantially in the past decade, it is unlikely that China will replace the United States as the dominant political, economic and military power in Latin America for the foreseeable future.
On the economic front, China has made inroads into South America and the Caribbean, a region where US power once went unchallenged. Starting in the late 1990s, Chinese interest in South America and the Caribbean began to grow.
In order to sustain its unprecedented economic growth China began to search the globe for oil and other raw materials. In 2000, Chinese trade with the region totalled US$12 billion, reaching $314.8 billion in 2021. In 2023, China is the largest trading partner of nine countries in the region: Argentina, Brazil, Bolivia, Cuba, Chile, Peru, Paraguay, Uruguay and Venezuela.
While the growth in trade between China and the region is impressive, the United States remains Latin America and the Caribbean’s largest trading partner. In 2020, US trade with the region was $758.2 billion. But 71 per cent of this trade was with Mexico. In 2021, Chinese foreign direct investment in the region totalled $130 billion.
Before the Covid-19 pandemic, China was the biggest lender to the region, with Chinese development banks having issued $66.5 billion in loans — mostly for infrastructure projects that offer Chinese companies better access to the region’s rich natural resources. A small portion of these loans were provided under China’s Belt and Road Initiative (BRI).
While China’s economic footprint in the region has increased significantly, the United States and the European Union remain the largest foreign investors, accounting for 36 per cent and 34% of total investment respectively.
As China faces an economic slowdown due to the Covid-19 pandemic, Chinese loans have dried up. When countries in the region fall into financial crisis, Western institutions such as the International Monetary Fund have provided the lion’s share of structural adjustment loans, not China.
The extent to which China’s economic gains in the region have resulted in political and diplomatic influence is unclear. While China has been Brazil’s largest trading partner for over a decade, tensions have arisen under both left- and right-wing Brazilian governments.
In Panama, after relentless US pressure, several multibillion dollar infrastructure contracts initially awarded to Chinese companies were cancelled and given to South Korean and Japanese companies.
During her testimony to Congress, General Richardson also warned that China has increased its support for anti-US regimes in the region including Venezuela, Cuba and Nicaragua.
But with the exception of Venezuela, Chinese investment and trade with these countries is minimal compared with its presence in most other countries in the region. In the cases of Cuba and Nicaragua, their desperate economic situations and US sanctions render them less attractive to China.
In the defence and security sector, China has made modest inroads into the region. While the number of South American and Caribbean military and security officers going to China for training has increased, the United States remains the primary destination for training thousands of officers from the region. The United States has dozens of bases and other installations throughout the region and is the region’s ultimate guarantor of security.
While the power of the United States in the region remains solid, challenges on the economic front are increasing. No other power — not even the Soviet Union — has been able to challenge US economic dominance of the region.
Apart from in Cuba, Soviet trade and aid to the region was negligible and its diplomatic influence limited. While most countries in the region want to maintain close ties with the United States, they also want the benefits of China’s massive trade and investment flows.
On the eve of the pandemic, total trade between China and Latin America had hit $314.8 billion. Chinese foreign direct investment in Latin America was about $130 billion and net development lending by the China Development Bank and Export–Import Bank of China was about $66.5 billion. Taking 2000 as the baseline, the figures in all three categories have grown exponentially.
While trade and FDI inflows dipped slightly during the pandemic, Chinese development lending to the region dropped to zero in 2020. With just two years of operation in Latin America and the Caribbean, the BRI accounts for only a few million of the $43.5 billion disbursed to the region by Chinese policy banks between 2015 and 2019.
China’s growing presence and rising economic importance to the Global South should be expected. But China was able to build such a strong presence in Latin America and the Caribbean in large part due to US neglect of the region.
The United States can no longer take the region for granted. Perhaps Washington should start treating Latin America as its front yard rather than its backyard.
Loro Horta is a diplomat and scholar from Timor-Leste. He has served as Timor-Leste’s ambassador to Cuba and counselor at the Timor-Leste embassy in Beijing.
This article was originally published by East Asia Forum and is republished under a Creative Commons license.