PETER’S BUSINESS & FINANCE BRIEFING - Wednesday 29 March 2023, 06:00 Hong Kong

• The annual Boao Forum modelled on Davos kicks off in China • Alibaba to split into six business groups • Sam Bankman-Fried accused of bribing Chinese officials

Alibaba will split its US$220 billion company into six business groups, each with the ability to raise outside funding and go public

Quick Summary - 4 Things to Know Before Asian Markets Open

1. The annual Boao Forum, modelled on the World Economic Forum in Davos, which draws hundreds of foreign investors and leaders to China, has kicked off on the Chinese island of Hainan. Premier Li Qiang will deliver a keynote speech Thursday. Supply chains and China’s connectivity with the rest of the world were in focus at the conference on Tuesday.
   
   

2. In a huge shakeup, Alibaba said Tuesday it will split its US$220 billion company into six business groups, each with the ability to raise outside funding and go public. In the most significant reorganisation in the Chinese e-commerce giant’s history, each business group will be managed by its own CEO and board of directors, to shorten its decision making process. Shares of Alibaba have soared over 14% in New York.

3. Federal prosecutors alleged Tuesday in a new indictment that FTX co-founder Sam Bankman-Fried paid out tens of millions of dollars in bribes to at least one Chinese government official. The indictment says accounts belonging to Mr. Bankman-Fried’s hedge fund, Alameda Research, were frozen by the Chinese police “in or around” November 2021. Prosecutors allege that Mr. Bankman-Fried and others “directed and caused the transfer” of at least US$40 million in cryptocurrency to one or more Chinese government officials in order to influence and induce them” to unfreeze some of the accounts.  

4. Hong Kong’s MTR Corporation will increase fares by 2.3% this year in the city’s rail operators’ first ticket price rise in four years. MTR Corp last raised ticket prices in 2019, by 3.3%. The increase is derived from a new fare adjustment formula that is based largely on the inflation rate and a wage index for transport workers. The increase means that 90% of MTR passengers will have to pay an extra 40 HK cents per trip at most. 

Wednesday’s Opening Call

Hang Seng (Hong Kong)    Projected Open: 19,893            +109 points,             +0.6%

Nikkei 225 (Japan)               Projected Open:   27,510            -8 points,      -0.0%

Boao Forum for Asia Opens

The annual Boao Forum, modelled on the World Economic Forum in Davos, which draws hundreds of foreign investors and leaders to China, has kicked off on the Chinese island of Hainan. The conference will be held from March 28-31 in Boao, Hainan, under the theme ‘An Uncertain World: Solidarity and Cooperation for Development amid Challenges.’ Premier Li Qiang will attend the opening ceremony Tuesday and deliver a keynote speech Thursday. Singapore’s Prime Minister Lee Hsien Loong, Malaysia’s Prime Minister Datuk Seri Anwar Ibrahim, Spain’s Prime Minister Pedro Sánchez, and Managing Director of the International Monetary Fund, Kristalina Georgieva, will be among the high-profile attendees.

Supply chains and China’s connectivity with the rest of the world were in focus at the conference on Tuesday. George Zhu, CEO of China-based Vital Thin Film Materials, said his company was looking to set up joint ventures in other countries and move part of its production chain out of China to stem the potential risks of further decoupling from the US. He said, “I am desperate because we are facing unstoppable changes every day. I think, currently, the shifting of supply chains is not being driven by the natural market economy, but rather manipulated by politics. We have to have a plan B.” Mr. Zhu reported that some regional governments were even helping companies relocate their supply chains to other countries such as Vietnam so that they could remain competitive with international counterparts. Many companies are embracing the so-called ‘China Plus One’ strategy in a bid to reduce their reliance on China. But Benjamin Simpfendorfer, a partner with consulting firm Oliver Wyman, said it will take more than a decade for other regions in Asia to supplant China in manufacturing. He said, “China will remain the world’s manufacturing hub. The country accounts for 80% of all smartphone exports. Three years has made it decline slightly, but they aren’t possibly back to zero, because no other market has the same production scale as China.”

In his opening address on Tuesday, Vice-Minister of Foreign Affairs, Li Baodong, referenced the uncertain economic environment overseas. "If we take a look at what's happening around the world, we can see turbulence, financial crisis, energy crisis, inflation and war. There are a lot of uncertainties hindering our road to recovery. That's why we have to discuss in this forum how to find certainties amid uncertainties through cooperation," he said. A report released Monday said Asia is expected to record GDP growth of 4.5% this year, up from 4.2% from the year before, and that Asian growth is likely to be a standout this year amid the global economic slowdown. It also said the mainland and India would contribute half of the world's growth this year, citing data from the International Monetary Fund.

On Monday, China’s top leadership vowed to keep opening the economy to foreign investors. Premier Li said that China will remain open “no matter what happens” and maintain steady economic growth. Addressing the China Development Forum in Beijing, Mr. Li said, “we will align with international economic and trade rules that are of very high standards, expand our opening-up in a steady and systematic way, and strive to create a first-class business environment that is market-oriented, rule-of-law- based and internationalised.” He added, “no matter how the international situation changes, China will unswervingly keep expanding our opening up.”

China’s Commerce Minister Wang Wentao told delegates at the same forum that China wants foreign companies, including those from the US, to continue to invest in the country. He told the conference that "foreign companies are not guests, but family", adding that China would step up efforts to strengthen intellectual property rights and serve foreign investors. 

Meanwhile, Chinese Vice Premier Ding Xuexiang said Premier Li will meet with key foreign guests attending the Forums. On Monday, Premier Li met with Apple CEO, Tim Cook. Mr. Ding said opening up to the outside world is an “indispensable major national policy” and China will actively expand imports of high-quality goods and services, while he added China will further reduce tariffs, continue to expand market access and attract foreign investment. In his first public speech since becoming Vice Premier, Mr. Ding said, “China’s new development pattern is not based on isolated domestic circulation, but more open, dual circulation connecting domestic and external markets.” He added that the policy of opening up, launched four decades ago, was “a mark of modern China.” He also read a letter from President Xi Jinping who called for “consensus and cooperation” to facilitate the global economic recovery and repeated Beijing’s promises to open up its economy.

Alibaba to Split into Six Business Groups

In a huge shakeup, Alibaba said Tuesday it will split its US$220 billion company into six business groups, each with the ability to raise outside funding and go public, in the most significant reorganisation in the Chinese e-commerce giant’s history. Each business group will be managed by its own CEO and board of directors, to shorten its decision making process. The six independently run entities will be: Cloud Intelligence Group, e-commerce under Taobao-Tmall, Cainiao’s smart logistics operations, Local Services group, Global Digital Business Group, and the Digital Media and Entertainment Group. Alibaba said in a statement that the move is “designed to unlock shareholder value and foster market competitiveness.” It is hoped that the split will reinvigorate growth in the businesses. Daniel Zhang will remain as CEO of the holding company but will devolve all operational decisions including hiring and firing, research, profit and losses to the CEOs of each business unit, according to his letter to the company’s employees. Mr.  Zhang said the listing status of the company’s stock in New York and Hong Kong will remain unaffected. The Chinese government has criticised the influence of online platforms, particularly those of Alibaba and Tencent, which have grown by investing in hundreds of startups over the years. The move mirrors similar steps taken by JD.Com, with several of its businesses eventually listing in Hong Kong and Alphabet in the US. Shares of Alibaba surged over 14% in New York.

Jack Ma Seen in China After Long Absence

The Alibaba split coincides with the reappearance of the company’s founder, Jack Ma, who has been seen back in China after an absence of three years. The 58-year-old has kept a low profile since criticising China's financial regulators in 2020. But social media in China Monday was alight with reports of sightings of him visiting a school in Hangzhou, where Alibaba is headquartered. The South China Morning Post, which is owned by Alibaba, said he recently returned to China after more than a year overseas. The SCMP said he had made a short stopover in Hong Kong, where he met friends and also briefly visited the international art fair, Art Basel. Once the richest man in China, Mr Ma gave up control of financial technology giant Ant Group in January this year. 

The visit comes as Beijing tries to restore confidence in the private business sector after a crackdown on the tech sector that has lasted several years. Mr. Ma’s absence from China has undercut the government’s attempts to develop a business-friendly image. Beijing is hoping the publicity around Mr. Ma’s rare trip to mainland China can reinvigorate confidence for entrepreneurs as China battles to realign its economy to promote sectors such as technology, green initiatives, healthcare and insurance. However, not everyone is convinced. Christopher Marquis, co-author of ‘Mao and Markets: The Communist Roots of Chinese Enterprise,’ said, “the public messaging is supporting entrepreneurship, but the strong state control and ideology is still going to blow through. Business is still under the Party’s thumb.” In January, Chinese government entities exerted further control over Alibaba by taking a “golden share” in its media business unit. George Magnus, author of ‘Red Flags: Why Xi’s China Is in Jeopardy.’ said, “this is akin to taking them over from the inside.” 

Hong Kong’s MTR Corp to Raise Fares for First Time in 4 Years

Hong Kong’s MTR Corporation will increase fares by 2.3% this year in the city’s rail operators’ first ticket price rise in four years. MTR Corp last raised ticket prices in 2019, by 3.3%. The increase is derived from a new fare adjustment formula that is based largely on the inflation rate and a wage index for transport workers. The increase means that 90% of MTR passengers will have to pay an extra 40 HK cents per trip at most. The annual inflation rate in Hong Kong increased to 1.7% in February 2023, easing from a 2.4% rise in the previous month. It was the lowest increase in consumer prices since May 2022. MTR posted an overall profit of HK$9.8 billion (US$1.25bn) for 2022, up 2.9% from the previous year.

US to Allow Japanese Vehicles to Benefit from EV Tax Credit Scheme

Washington and Tokyo have agreed to make Japanese vehicles eligible for tax credits in a US initiative for electrified vehicles that use critical minerals from the United States or countries that it has free trade agreements with. Yasutoshi Nishimura, minister of economy, trade and industry, said the deal is expected to be signed later on Tuesday, paving the way for EVs made with metals processed in Japan to be eligible for tax credits under the Inflation Reduction Act, a landmark US climate, tax and spending law. Under the changes, the United States would relax the rules to allow EVs to contain key minerals provided by Japanese companies, such as parts makers, despite Tokyo not holding a free trade agreement with Washington. As part of its Inflation Reduction Act passed in August 2022, the US offers tax credits of up to US$7,500 on purchases of electrified vehicles that come off North American assembly lines and in which a certain amount of battery-critical minerals are sourced or processed domestically or from free trade agreement countries. Japanese companies play a major role in processing minerals sought for electric vehicle production. The issues of tax credits have been a source of tension between the two countries as they seek to bolster economic security cooperation in securing chips and battery materials.

Cryptocurrency Exchange OKX to Apply for Virtual Asset Licence

Cryptocurrency exchange OKX said it plans to apply for a virtual assets trading licence in the city as the SAR attempts to boost its attractiveness as a hub for digital assets. OKX said in a statement on Tuesday that it is applying for the licence in Hong Kong just two months before the city will officially make crypto trading fully legal. OKX, which claims to be the world’s second-largest crypto exchange by trading volume, after Binance, said during a media briefing in Hong Kong on Tuesday that it sees “immense potential” in the city and is willing to invest in talent and work with regulators “over the next five years to continue building the local ecosystem”. Hong Kong’s new regulatory requirements governing cryptocurrency exchanges will come into effect in June this year. Under the new regulations, crypto trading platforms will need a licence to provide trading services to Hong Kong residents.

Cryptocurrencies Fall After Binance Lawsuit

The prices of bitcoin and ether fell roughly 3% over the past 24 hours before reversing course after US officials filed a complaint against major crypto exchange Binance and its co-founder Changpeng Zhao. According to Coin Metrics, Bitcoin traded below $27,000, before rebounding to be up 1%, while ether fell to $1,712 before rebounding to $1,773.

US regulators accused Binance of violating "numerous" US financial laws. In a civil complaint filed Monday, the Commodity Futures Trading Commission (CFTC) said the firm had failed to properly register in the US and was also accused of failing to follow "know your customer" rules intended to thwart money laundering. The lawsuit said that much of Binance’s reported trading volume and profitability have come from “extensive solicitation of and access to” US customers, contradicting the exchange’s claims. Chief executive Changpeng Zhao was also named in the CFTC’s complaint that seeks fines and an injunction. The writ said, “Binance’s solicitation of customers located in the United States subjected Binance to registration and regulatory requirements under US law. But Binance, Zhao, and Lim have all chosen to ignore those requirements.” The CFTC is seeking remedies including monetary penalties, registration and trading bans as well as disgorgement and a permanent injunction against further violations.

In response, Binance defended its practices. It said it had made "significant investments" to ensure that US users were not active on the platform, including blocking users identified as American citizens or residents, or having a US mobile number. It described the filing as “unexpected and disappointing.”

Bankman-Fried Accused of Attempted Bribery of Chinese Officials

Federal prosecutors alleged Tuesday in a new indictment that FTX co-founder Sam Bankman-Fried paid out tens of millions of dollars in bribes to at least one Chinese government official. The indictment says accounts belonging to Mr. Bankman-Fried’s hedge fund, Alameda Research, were frozen by the Chinese police “in or around” November 2021. Prosecutors allege that Mr. Bankman-Fried and others “directed and caused the transfer” of at least US$40 million in cryptocurrency “intended for the benefit of one or more Chinese government officials in order to influence and induce them” to unfreeze some of the accounts. Mr. Bankman-Fried and his associates considered and tried “numerous methods” to unfreeze the accounts, which contained around US$1 billion worth of cryptocurrency, prosecutors allege. According to the prosecutors, the accounts were unfrozen after the bribe payment was transferred around November 2021 from Alameda’s main trading account to a private cryptocurrency wallet. After the accounts were unfrozen, Mr. Bankman-Fried authorised a transfer of tens of millions of dollars in cryptocurrency to complete the bribe and used the unfrozen money to fund additional Alameda trading activity, prosecutors said.

Banking Crisis Among US Regional Banks Eases

Worries about the crisis among US regional banks have abated this week thanks in part to policymakers’ efforts to alleviate the funding pressures on small banks and to calm depositors’ fears. However, in a hearing before the Senate Banking Committee, three top regulators each said they favour more stringent rules for banks with more than US$100 billion in assets. Michael Barr, vice chair for supervision at the Federal Reserve, testified Tuesday that depositors withdrew US$142 billion from Silicon Valley Bank over two days before its collapse, representing a staggering 81% of SVB’s $175 billion in deposits as of year-end 2022. Mr. Barr and others pointed to mismanagement by bank executives. He testified that Fed supervisors began warning SVB management about the risk that higher interest rates posed to the bank’s balance sheet in November 2021. The bank “failed to address” Fed concerns in a timely way, exposing the company to its deposit run this month. The head of the Federal Deposit Insurance Corp, Michael Gruenberg, said the SVB saga had shown the increased risk of bank runs at a time when "money can flow out of institutions with incredible speed in response to news amplified through social media channels".

Meanwhile, Bank of England Governor Andrew Bailey said, “markets are trying to find points of weakness at the moment. I don’t think we are at all in the place that we were in in 2007/8 but we have to be very vigilant.” Mr. Bailey told the UK’s Treasury Select Committee that U.S. authorities are dealing with particular issues relating to regional banks stateside, and that Credit Suisse was an “institutional story” but affirmed that the UK banking system is “in a strong position capital and liquidity-wise.” UK banking officials admitted to MPs that the speed of the SVB's collapse had taken them by surprise and may mean that banking rules may need updating. Mr Bailey said it was "the fastest collapse from health to death" since the UK's Barings Bank failed in 1995 after suffering heavy losses resulting from fraudulent investments. Sam Woods, the chief executive of the Prudential Regulation Authority, told MPs that the stress tests applied to UK banks to make sure they can withstand a crisis would need to be looked at, given how new technology meant deposits could be withdrawn electronically in seconds.

US Consumer Confidence Unexpectedly Rises in March

US consumer confidence rose unexpectedly in March, but remains below last year's average, according to survey data released on Tuesday. The closely watched Conference Board consumer confidence index increased in March to 104.2 from 103.4 last month, exceeding forecasts for a reading of 101. The cut-off date for the latest survey was March 20, ten days after the failure of Silicon Valley Bank, which triggered broader concerns about the banking system. The sub-index tracking consumers’ assessment of current business and labour market conditions decreased, while a gauge measuring the short-term outlook of businesses improved slightly. Ataman Ozyildirim, senior director for economics at The Conference Board, said, "the gain reflects an improved outlook for consumers under 55 years of age and for households earning US$50,000 and over.” But he warned that, "while consumers feel a bit more confident about what's ahead, they are slightly less optimistic about the current landscape."

US Home Prices Fall for Seventh Straight Month

US home prices fell for the seventh consecutive month in January as high mortgage rates continue to dampen housing demand, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday. The gauge rose 2.5% year-on-year in January, the smallest increase since November of 2019, following a 4.6% rise in December, and in line with market forecasts. 19 out of the 20 cities surveyed registered a decline, with prices falling 0.4% in January from December. Craig Lazzara, managing director at S&P Dow Jones Indices, said, “mortgage financing and the prospect of economic weakness are likely to remain a headwind for housing prices for at least the next several months.” 

US Stocks Slip as Treasury Yields March Higher

On Wall Street Tuesday, bond yields rose for the second day in a row, with the rate on the 2-year US Treasury note rising back above 4%, putting pressure on stocks and tech names in particular. The yield on 10-year Treasuries advanced 3 bps to 3.57%. The uptick in rates was a headwind for the tech-heavy Nasdaq, which shed 0.5% to close at 11,716. The S&P 500 fell 0.2%, ending at 3,971. The Dow lost 37.83 points, or 0.12%, and closed at 32,394.25. Banking stocks slipped after regulators told Congress that they favour more stringent rules for banks with more than US$100 billion in assets. The KBW Regional Banking Index fell 0.2%.

The Nasdaq Golden Dragon Index of US-listed Chinese shares closed 3.5% higher, boosted by shares of Alibaba and BYD. Alibaba surged over 14% following the news of its reorganisation. Shares of EV maker BYD jumped over 4% after the company reported net income soared 446% in 2022 to 16.6 billion yuan (US$2.4bn), after the Chinese automaker sold a record number of electric vehicles.

US Dollar Index Falls to its Lowest in 8 Weeks

The US Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.4% to an eight-week low of 102.45. The euro was 0.4% firmer at $1.0841. There were strong gains in the Yen despite the move higher in US yields with gains in the Yen reflecting corporate demand ahead of Japan's fiscal year end. The Japanese currency is 0.5% higher at ¥130.90. Sterling rose to $1.2335 and HKD9.6854. In offshore markets this morning, the Chinese yuan is 0.1% firmer at Rmb6.8795.

Commodities Mixed

Oil was higher after a clash between Iraq and its Kurdish region curtailed exports. Brent crude oil settled 0.7% higher at $78.65 per barrel. Natural gas continued to slide on Tuesday, shedding more than 1%. The commodity is on track to end the quarter down 54%, the worst quarter ever since the contract first started trading in 1990. Gold was up 0.9% at $1,974 an ounce.

European Equities Advance on Calm in Banking Sector

European equities gave up early gains yesterday despite investors turning cautiously optimistic that the worst of the recent banking crisis was over. The Stoxx Europe 600 Banks index rose 0.6%. That helped limit losses for the broader market with the benchmark Stoxx 600 down under 0.1%. London’s FtSE 100 climbed 0.2%.

Asian Equities Advance as Banking Turmoil Eases

Asian equities advanced on Tuesday as investors became increasingly confident that the global banking sector turmoil could be contained after regulators confirmed First Citizens Bank would buy much of the collapsed Silicon Valley Bank. In Australia, the S&P/ASX 200 rose 1.0%. Japan’s Nikkei 225 was up 0.2%. South Korea’s Kospi jumped 1.1%. Shares of banks in the Asia-Pacific region rose. In Australia, Macquarie Group rose 2.0%. In Japan, Mizuho Financial Group gained 2.5%. in South Korea, KB Financial Group climbed 2.6%.

In Hong Kong, the Hang Seng Index climbed 217 points, or 1.1%, to 19,785. The Tech Index added 0.9%. Trading was choppy ahead of key earnings reports from BYD, Nongfu Spring, China Southern Airlines, and WH Group. On the mainland, the Shanghai Composite was down 0.2% at 3,245. Foreign investors bought US$2.1 billion worth of A shares in the five days to March 22, the biggest weekly inflow since the end of January. The latest net purchases took this year’s tally to more than US$25 billion.

Peter Lewis’ Money Talk Podcast

On Wednesday’s “Peter Lewis’ Money Talk” podcast (available on Substack, iTunes, Google Podcasts and Spotify), I’ll be joined by Personal Wealth Advisor, Enzio von Pfeil, Sunil Kashyap, Director of Finmet. With a view from Japan is Tokyo-based journalist and author, William Pesek.