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Why the renminbi cannot rival the dollar yet

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HUDSON LOCKETT: 2020 was a banner year for Chinese markets and the Chinese currency. Foreign investors poured billions into renminbi-denominated stocks and bonds. That’s good news for Beijing. It strengthens its position as a global financial power and advances one of its main long-term goals– for the renminbi to finally step out of the dollar’s shadow and become a global reserve currency in its own right. But achieving equal status to the dollar will require a change of mentality in Beijing, where there is a culture of hoarding power. For the renminbi to really match the prestige of the dollar, they will have to break that instinct and give up control.

The dollar has dominated international finance for decades. And America has enjoyed the so-called exorbitant privilege that comes with that. Because it always pays in its own currency, the US can’t really run out of cash. In the simplest terms, global demand for dollars means the country can always print more without a huge impact. That’s a key reason why America can run an enormous deficit without fear of default.

US companies also benefit from not having to worry about exchange rate risk since everything is priced in their home currency. Trade, commodities, finance, pretty much everything that matters in the global economy, and areas in which China wants a bigger say, is priced in dollars. But while China has started to rival the US in international affairs, the renminbi isn’t even close to having the pull of the dollar yet.

China is making headway in raising the renminbi status by opening up its stock and bond markets to foreign investors. China’s economic recovery from the COVID-19 pandemic has sent its stock market soaring and buoyed yields on onshore bonds, drawing in well over $100 billion from overseas investors searching for profits. However, while its capital markets may accept foreign money, they do so primarily through cross-border exchange programmes that link Chinese onshore stock and bond markets to those in Hong Kong. Those stock and bond connect schemes are specifically designed to welcome overseas investment while maintaining a limit on how much of China’s currency can flow out.

Investments from overseas can be withdrawn relatively easily. But Chinese investors are subject to much, much stricter rules. As a result, it doesn’t matter how much money China’s central bank prints. Only a tiny fraction can make its way offshore. And that arrangement helps Beijing maintain control over the renminbi’s exchange rate. But it also limits how much renminbi other countries can hoard, and therefore the currency’s global standard.

Swift data show the renminbi’s share of international transactions languishing at about 2%, still well below its 2015 peak of only 3%. And Hong Kong, which has its own currency and financial system but is politically a part of China, accounts for about 3/4 of those payments. This is, at least in part, by design.

Even though China is allowing more foreign cities to act as clearing centres for the renminbi, policymakers in Beijing are very reluctant to allow the currency to accumulate offshore. And for central banks, the dollar’s supreme importance remains a plain fact. IMF data show them holding on to about $230 billion worth of renminbi assets in their forex reserves compared to almost $7 trillion in US dollars.

Five years ago, Beijing appeared on track to rapidly internationalise the renminbi. But those efforts were complicated by the decision to maintain a soft peg to the US dollar. When the greenback surged, it took the renminbi along for the ride, making China’s exports less competitive just as the domestic economy was losing steam. That prompted the People’s Bank of China to weaken the renminbi with a one-off devaluation of almost 2% in the summer of 2015.

The stated purpose for the move was market reform, to allow the renminbi’s trading band, which is set every morning by the central bank, to take more cues from foreign exchange markets. But it spooked investors who cashed in their renminbi assets and sent the currency on a historic route. Unable to convince investors to stop selling and facing accusations it was flirting with a currency war, China imposed strict capital controls and throttled the renminbi market in Hong Kong in order to stabilise the currency.

Since 2015, China’s foreign exchange policy has become far more transparent and market driven. And few traders today live in fear of a devaluation like the one in 2015. But the exchange rate is far from free floating.

And so far, China’s capital account is still far from totally open. To have a truly global renminbi and all of the advantages that come with it, Beijing will have to let the currency go wherever market forces and its citizens want to take it. For now at least, that looks like a long way off.



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How Jennifer Granholm will reshape the US Department of Energy

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Two things to start: ExxonMobil appointed two new directors to its board, its latest effort to placate activist shareholders. And Texas’s largest power co-op Brazos Electric went bust yesterday, as the financial damage from the arctic storm continues to mount.

Oh, and after the hiatus caused by the pandemic, energy-related emissions are rising again, according to the International Energy Agency. They were higher in December than a year previously, the agency said.

Welcome to another Energy Source. Our main item today is on Jennifer Granholm, whom the US Senate last week confirmed as the country’s new energy secretary. Myles McCormick reports on her plan to revitalise her department and reorient it towards clean energy.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Granholm looks to reboot the Department of Energy

From scuppering the Keystone XL pipeline to freezing the allocation of new drilling leases on public lands, Joe Biden’s plans to shake up the American energy system are well under way.

Next on the president’s agenda is an overhaul of the sprawling leviathan that is the US Department of Energy. And the woman that will lead that process is now in situ.

Jennifer Granholm, a former two-term governor of Michigan, took the reins of the $35bn a year government agency five days ago. And already it is clear there will be a shift in its focus — away from promoting fossil fuel exports and towards driving innovation in clean energy and climate technology.

This is what Granholm wrote in a blog post last Thursday, her first day on the job:

“President Biden has tasked the Department, his in-house solutions powerhouse, with delivering a cornerstone of his bold plan: the goal of achieving net-zero carbon emissions by 2050. For DoE, that means developing and deploying the technologies that will deliver a clean energy revolution.”

That will require a shift in priorities at the “in-house solutions powerhouse” — but one that analysts said Granholm was well suited to execute.

“She understands the economic benefits of transforming the agency into the Department of Clean Energy,” said Mitch Bernard, president of the Natural Resources Defense Council.

Jennifer Granholm was sworn in as energy secretary on February 25 © Getty Images

What can the DoE actually do on climate?

American energy policy is divvied up among several government agencies, of which the Department of Energy is just one. Traditionally its primary responsibilities have been the US nuclear weapons programme, environmental clean-ups and scientific research and development through its oversight of the country’s national laboratories.

Despite the department’s name, Granholm’s ability to effect the Biden climate agenda is constrained. She does not have oversight of emissions targets (which fall to the Environmental Protection Agency) or oil and gas drilling licences (the Department of the Interior).

“I do think the DoE’s ability to advance climate goals is fairly limited,” Nader Sobhani, climate policy associate at the Niskanen Center, told ES.

But what it can do is reinvigorate the department’s R&D role.

“I think there will certainly be a shift in the programmatic focus of this DoE as compared to the previous administration, in that there will be a concerted effort to innovate, develop and deploy clean energy technologies that are critical to combating climate change,” said Sobhani.

That means driving forward research on carbon capture and storage, electric vehicle charging infrastructure, energy storage technology and zero-carbon fuels such as green hydrogen.

How will it set about doing this? The department has a few tools in its toolkit:

  • There are the 17 national laboratories, which are hotbeds for tech breakthroughs.

  • There are grant and loan programmes it can use to drive innovation and de-risk new technologies to coax in private sector investment. Granholm has already indicated she will restart a $40bn loan programme that was left untouched by the Trump administration.

  • Plus, it has regulatory authority to encourage energy efficiency in certain appliances and new transmission lines.

But all of this will require funding. While Congress ensured the agency was not financially gutted by the last administration, ramping up its R&D role will require more money. Biden has pledged $400bn over the next ten years for clean energy and innovation.

Granholm’s record on spending big — sometimes without the desired effect — has already sparked criticism from some quarters, with conservatives arguing her selection “should frighten every American taxpayer”.

Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco
Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco © Bloomberg

New leadership

Just as important as finance will be the shift in tone Granholm will bring.

While money kept flowing under the Trump administration, the agency lacked the strategic drive needed for clean tech innovation, said Emily Reichert, chief executive of Greentown Labs, North America’s biggest start-up incubator.

“When people look back on it, it was an absence of leadership — on innovation, on policy, on decisions, on strategy — that we needed to move forward faster,” she told ES.

The DoE’s role in convening experts from across the US has been central to driving the development of new technology. But as a divided country shifts rapidly towards a new approach to energy, that outreach role will be even more important.

That makes the appointment of Granholm key. A Michigan native, with years of experience dealing with the Detroit auto industry, she will be able to bring the climate change narrative to parts of the country that coastal liberals have often failed to reach.

“I think that Jennifer Granholm coming from a Midwestern perspective is a real game changer in terms of bringing the focus of this activity to the middle of the country, and recognising that the middle of the country can also get engaged in this developing the innovations around climate,” said Reichert.

But most importantly — four years after Donald Trump appointed an energy secretary who thought the department should be scrapped — Granholm’s championing of clean energy should get investors excited to spark the influx of funds needed for the “clean energy revolution” her boss has promised.

“The market signal it sends is that, one, the US is back in the game,” said Reichert. “And two, that climate related technology solutions around decarbonisation are a good place to invest your money, your time, your talents, and to move your assets.”

(Myles McCormick)

Data Drill

The energy transition could lower oil prices in the long term by $10 a barrel — by far the biggest threat to the net present value of oil companies, according to new research from Rystad Energy that assessed the resilience of 25 large operators. The consultancy quantified the risk to NPVs of stranded assets as less than 1 per cent, and that from rising CO2 costs at mostly below 10 per cent.

Oil sands and tight oil companies are most exposed to price risk because of high break-even costs. Oil sands would suffer most from higher CO2 costs. And ExxonMobil’s revenue risk is higher than its supermajor peers’, “primarily because its portfolio includes several large, capital-intensive projects”, including the Permian Basin assets and Guyanese shale.

Bar chart of Impact on net present value (%) showing The energy transition's corporate hit, quantified

Power Points

FT Energy Source Live

The FT Energy Source Live event will be taking place on 24 — 25 May 2021. Join industry CEOs, thought leaders, energy innovators, policymakers, investors and other key influencers to hear the latest thinking and insights on the future of US energy leadership and its global context. Find out more here.

Endnote

IHSMarkit’s CERAWeek, cancelled by the pandemic last year, is back on — and it has a new look.

Keynote speeches and panel discussions have moved from the Hilton’s plush ballrooms in downtown Houston to a slick new web interface. Many have been pre-recorded. Deals that came together in the hotel’s executive suites will have to wait. Journalists are missing the free lunches.

Still, the conference’s agenda boasts a who’s who of the energy industry, and increasingly beyond, as the sector grapples with the low-carbon energy transition — a topic that was scarcely mentioned just a couple years ago.

Andy Jassy, the head of Amazon’s cloud business, who has been picked to succeed Jeff Bezos as the company’s CEO later this year, had some advice that cut to the heart of the dilemma facing oil executives.

“If you want to be a company for a long period of time — which by the way turns out to be really hard to do — you have to be able to reinvent yourself, sometimes several times over,” said Jassy in a session with BP’s Bernard Looney, who pitched his company’s own transition away from oil.

“If something is going to happen, whether it’s good for you or not, if it is good for customers it is going to happen,” added Jassy. “So you have a couple of choices: you can howl at the wind and wish it away as a lot of companies do — big leading companies do — when there are new shifts technology, or you can embrace it.”

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



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Hedge fund manager Hohn pays himself $479m

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Billionaire hedge fund manager Sir Christopher Hohn has paid himself a dividend of $479m, one of the largest-ever annual personal payouts in the UK, after profits at his firm more than doubled last year.

Hohn, who is founder of Mayfair-based TCI Fund Management and one of the UK’s biggest philanthropists, made the payment to a company he controls during the year to February 2020, according to regulatory filings.

TCI, which manages more than $45bn in assets and tends to bet on rising rather than falling prices, has been a big winner from the bull market of recent years. During 2019 it made $8.4bn worth of profits for investors, according to LCH Investments, profiting from gains in stocks including Alphabet, Charter Communications and Canadian Pacific Railway.

TCI Fund Management’s profits for the year to February 2020 jumped 108 per cent to $670.9m. The $479m dividend was then paid to a separate firm TCI Fund Management (UK). Both companies are controlled by Hohn.

TCI declined to comment. The payment was first reported by The Guardian.

While the payout beats the £323m paid to Bet365 boss Denise Coates in 2018, much of it has been reinvested in TCI funds, filings show. It is also far from the biggest-ever hedge fund payday, being dwarfed by sums such as the $3.7bn earned by US manager John Paulson in 2007 thanks to bets on the subprime crisis.

In 2014, during testimony in his divorce battle with estranged wife Jamie Cooper-Hohn, Hohn described himself as “an unbelievable moneymaker”. A High Court judge later awarded Cooper-Hohn a $530m divorce payout.

Hohn, who grew up in Surrey and is the son of a Jamaican car mechanic, is known as one of Europe’s most aggressive activist investors. A backer of climate group Extinction Rebellion, he has been vocal in recent years in pushing companies to improve their climate policy, for instance threatening to sue coal-financing banks and warning his fund will vote against directors whose companies do not improve pollution disclosure.

In October Spanish airports operator Aena bowed to pressure from Hohn’s fund, becoming the first company in the world to give shareholders an annual vote on its climate policy.

Through his charity The Children’s Investment Fund Foundation, which in 2019 approved $386m of charitable payouts, he wrote to seven of the world’s biggest asset managers, urging them to put pressure on companies over climate policy.

Last year TCI was one of a number of funds looking to raise fresh assets from investors after suffering losses during the pandemic. It was also one of the big winners from betting against collapsed German payments group Wirecard, making as much as €193m in a week, according to data group Breakout Point.

Hohn’s fortune was estimated last year at £1.3bn by the Sunday Times Rich List.

laurence.fletcher@ft.com



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FCA first alerted to concerns over Neil Woodford’s business in 2015

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The Financial Conduct Authority was warned about problems within Neil Woodford’s investment business less than a year after it opened in 2014 but did not intervene for almost another two years, according to several people briefed on the process.

Woodford recently announced plans to relaunch his career at a time when the regulator faces pressure from politicians and campaigners critical of its oversight of the stockpicker’s failed business — and over how long it is taking to investigate his downfall.

The onetime star fund manager was forced to suspend his flagship £3.7bn investment fund in June 2019, trapping the savings of hundreds of thousands of investors in the biggest British investment scandal for a decade.

But concerns over its investment strategy were raised within the first year of its operation, when two of the company’s founding partners — chief operating officer Nick Hamilton and chief legal and compliance officer Gray Smith — resigned after falling out with Woodford and chief executive Craig Newman.

Given their senior roles in such a high-profile business, Smith and Gray were asked to discuss the reasons for their departures in exit interviews with the FCA in January 2015. The FCA did not act on the information they presented, according to those familiar with the regulator’s dealings with the company.

The four founders had clashed openly over the company’s compliance culture and the level of due diligence carried out on Woodford’s investments in private companies, according to former WIM staff members.

Hamilton and Smith were especially concerned with the amounts being committed to unlisted companies.

In response to FT questions over the exit interviews, the FCA said: “Where we receive information relating to concerns about firms or individuals we follow up and take action where appropriate. But we do not conduct our supervision of firms or individuals in public.”

Smith and Hamilton declined to comment. Several former staff at WIM said they were unable to talk publicly about their departure from the company.

A spokesman for Woodford said: “It is true that the FCA did not approach us after the interviews, and I am sure would have approached us had there been any concerns raised from the interviews.” 

The spotlight falls on the FCA at a tricky time for the regulator as it seeks to draw a line under a spate of industry controversies during the tenure of its previous chief executive Andrew Bailey, now governor of the Bank of England.

A recent review of its handling of the £236m collapse of mini-bond issuer London Capital & Finance found repeated failures by the watchdog to act on external warnings. “The FCA’s handling of information from third parties . . . was wholly deficient,” the review concluded. “This was an egregious example of the FCA’s failure to fulfil its statutory objectives”.

Bailey took over as head of the FCA in 2016, after the contract of his predecessor Martin Wheatley was not renewed, and led it during both the Woodford and LCF collapses.

In February he told MPs on the Treasury select committee that when he joined the FCA it had “no system for extracting information” from warnings or tip-offs. “I’m not hiding things that went wrong,” Bailey said. “There should have been a mechanism to alert supervision and enforcement.” 

Nikhil Rathi, the FCA’s current chief executive, and Charles Randell, its chairman, will be quizzed by the committee on Monday about its handling of LCF.

While giving evidence to parliament in June 2019, Bailey said the FCA’s first intervention with WIM was at the end of 2016 when the regulator spotted a conflict of interest in the business’s valuation process. By this point WIM managed almost £10bn and was the UK’s sixth best-selling fund manager.

The FCA has been dogged by questions over its oversight of WIM having approved the business to start trading just months after it found funds managed by Woodford at his former employer, Invesco Perpetual, exposed investors to higher levels of risk than they had been led to expect.

Invesco Perpetual was fined £18.6m for the breaches, which also involved several funds not managed by Woodford, in what was a record penalty imposed on a UK fund manager. 

Woodford is still approved by the FCA to act as an executive director of an investment company, having updated his status in December 2019.

Ten days ago Mel Stride, chair of the Treasury select committee, called on the FCA to conclude its investigation into WIM’s implosion, saying: “As the FCA’s investigation still continues over 18 months after the fund was suspended, the reports of the new fund may understandably be of concern to investors who previously lost out.”

Owen Walker’s ‘Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money’ will be published by Penguin on Thursday



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