Hong Kong Is China’s Financial Gateway To The World

Hong Kong is not only an international financial centre, it is the most important gateway to Mainland China – and connectivity is the key to enhancing cross-boundary transactions. The Chinese central government is committed to ensuring that Hong Kong maintains its status as a free port and a separate customs territory, and at the same time focus on the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

Hong Kong has long been a gateway to and from Mainland China, and different data points show that the city originates and intermediates about two-thirds of China’s inward foreign direct investment and outward direct investments. As one of the Mainland’s principal trading partners, Hong Kong not only provides a channel for goods and services to go global, but also catalyses the international usage of renminbi along to the process.

The renminbi (RMB) has retained its position as the fifth most active currency for international payments by value, with a share of 2.15% as of August 2021, according to Swift data. Since the launch of the pilot scheme for cross-border trade settlement in renminbi in 2009, RMB trade settlement handled by banks in Hong Kong has seen exponential growth.

Hong Kong remains the most important offshore RMB economy by weight, accounting for more than 75% of the global total. For the financial services sector, central and Hong Kong authorities are seeking to further promote cross-boundary RMB investment and financing activities, encourage competitive Mainland Chinese enterprises are also issuing green and sustainability related products in Hong Kong, aiming it to become a hub for green finance within the GBA.

“With complementary advantages of respective markets and systems in the GBA, the financial services industry in Hong Kong has much expectation on the coordinated development of the region,” said Laurence Li, chairman of the Financial Services Development Council (FSDC), a high-level cross-sectoral advisory body set up by HKSAR Government in 2013 to promote Hong Kong’s financial services industry.

“At the same time, different stakeholders have been engaging in conversations and preparatory work to enhance the connectivity and standards of financial services and product offerings. With some favourable measures being introduced and implemented in an orderly manner, the industry believes the ever-improving connectivity of financial markets will lead to uncharted market potentials.”

The FSDC has made efforts in facilitating Hong Kong’s financial services industry to capture market opportunities in the GBA. FSDC has recommended and advocated for connecting cross-boundary payment and transfer infrastructure, enhancing the convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, mutual funds, insurance and wealth management.

In a recent research paper, the FSDC recommended connecting cross-boundary payment and transfer infrastructure, enhancing convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, insurance and wealth management businesses. Through capitalizing on its unparalleled strengths, Hong Kong can play a unique role in driving the concerted development of the financial services industry, and in turn enjoy the growth momentum in the region.

The newly launched Wealth Management Connect scheme will help diversify investment portfolios through exposure to overseas markets via retail funds domiciled and regulated in Hong Kong, while attracting offshore investments to onshore wealth management products in Mainland. It will also allow Hong Kong investors to broaden their mainland exposure.

Wealth Management is a major breakthrough in which retail investment funds domiciled in Hong Kong and authorized by the Securities and Futures Commission (SFC) are eligible for the scheme instead of the traditional product by product approval approach.

The scheme further integrates the Mainland and Hong Kong markets and promotes cross-border trading, following on from the successful launch of the two Stock Connect schemes that linked the stock markets of Hong Kong with Shanghai and Shenzhen in 2014 and 2016, respectively.

According to a recent KPMG client note, Wealth Management Connect represents another “significant development” in the liberalization of Mainland China’s capital account following the launch of QFII/QDII, the Mainland-Hong Kong Mutual Recognition of Funds scheme and the Stock Connect and Bond Connect schemes. The firm expected these developments would accelerate RMB internationalization and strengthen Hong Kong’s position as a global offshore RMB hub.

Meanwhile, the new southbound leg of China’s Bond Connect programed will stimulate demand from Mainland Chinese investors for Hong Kong and US dollar-denominated bonds, boosting liquidity and, thus, facilitate a more efficient price discovery process. The launch of the southbound link could broaden the investor base for both Hong Kong dollar and offshore RMB bonds, whereas the support for the US dollar bond market could be strengthened even further.

Hong Kong should also be a main contributor to the collaboration in green finance, development of Fintech and digital assets in the GBA in the future. Last but not least, the various financial liberalization measures carried out in the region will foster closer exchange among different stakeholders, including regulators and market participants, provide an appropriate market dynamic, and are in line with the longer-term national objectives of financial liberalization and internationalization. Hong Kong, in this context, will continue to play its unique role as China’s only international financial centre.

The cross-boundary nature of Hong Kong’s financial services sector, especially asset management, is constantly being reshaped thanks to the joint efforts of the government and the sector, leading to an increasing number of available product types, a wider reach to more local, international and Mainland investors with different experiences, and more diversified investment strategies and preferences. Just as the Wealth Management Connect is on the horizon, Hong Kong is marching steadily towards its vision of becoming the world’s premier wealth and asset management centre.

Follow FSDC on Twitter or LinkedIn. Check out www.fsdc.org.hk to stay in touch with their thought leadership.

Financial Services Development Council (FSDC) was established in 2013 by the Hong Kong Special Administrative Region Government as a high-level, cross-sectoral advisory body to engage the industry in formulating proposals to promote the further development of the financial services industry of Hong Kong and to map out the strategic direction for the development. The FSDC has been incorporated as a company limited by guarantee with effect from September 2018 to allow it to better discharge its functions through research, market promotion and human capital development with more flexibility.

Source: Hong Kong BrandVoice: Hong Kong Is China’s Financial Gateway To The World

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Modern Monetary Theory Isn’t the Future. It’s Here Now

The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as “payfors,” goes against their belief that money is merely a tool for government.

This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway.

MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects. In a tight economy—like we have now—MMT might want offsets to new spending. But higher taxes or lower spending elsewhere would be aimed at avoiding inflation, not at balancing the budget.

The government hasn’t embraced MMT. But important elements of it are now accepted by much of the economic and financial establishment, with major implications for how the economy is run.The most important claim of MMT is that a government need never default on debt issued in its own currency. The lesson of 2020 was that MMT is right.

“We got five or six trillion dollars of spending and tax cuts without anyone worrying about payfors, so that was a good thing,” says L. Randall Wray, an economics professor at Bard College in New York and a leading MMT academic. “In January [2020], MMT was a crazy idea, and then in March, it was, OK, we’re going to adopt MMT.”

It isn’t just MMTers who say the world took a turn toward a new way of thinking.

“Governments have lost their fear of debt,” says Karen Ward, chief market strategist for EMEA at JPMorgan Chase’s asset-management arm. “They were terribly worried about bond markets and investors punishing them. What they saw last year was record high levels of debt at record low levels of interest rates.”

Central banks that had struggled for a decade to boost inflation using monetary tools found that fiscal tools were far more powerful. Government spending does far more for inflation than quantitative easing, it turns out, and central-bank calls for more fiscal action to boost the economy are more likely to be accepted next time deflation looms.

Key parts of MMT haven’t been adopted, particularly its call for government to guarantee everyone a job. But the MMT critique of the status quo, where the central bank modulates the number of unemployed people to control inflation, hit a nerve. The Federal Reserve shifted in favor of running the economy hot to reduce inequality. Employment has become more important in its thinking, and its move to a target of average inflation means it is willing to accept higher inflation than previously.

Still, the Fed is (rightly) worried about inflation and is tweaking its tools to try to influence the economy with monetary policy, something MMTers think just doesn’t work. As Mr. Wray points out, it wasn’t when trillions in benefit checks landed in bank accounts last year that inflation went up; prices went up when the recipients went out and spent the money. “Money doesn’t cause inflation,” Mr. Wray argues, a view that infuriates monetarist economists. “Spending causes inflation.”

In the next downturn it is going to be very difficult for governments to resist calls to provide huge support, now that it has been shown that bond markets don’t care. That should mean recessions are shallower, debt is higher, the government is more involved in the economy and, assuming the Fed doesn’t accept that its tools are useless, interest rates are higher on average than in the past. Bond markets aren’t pricing in anything of the sort, though. The 30-year Treasury yield is only 2%, well below the 3.2% average of the 10 years up to 2020.

Under full-blown MMT, payfors would be ditched for a mix of micro-planning of the resources needed for new projects, and an assessment of the overall impact on the economy—and potentially, higher taxes.

MMT is both right and wildly optimistic that higher taxes could slow an overheated economy and bring down inflation. The flip side of last year’s demonstration of the power of fiscal policy is that higher taxes can suck demand out of the economy much more effectively than the Fed’s interest-rate tools.

There was a brief moment when it looked as though Democrats might impose higher taxes on billionaires as part of the payfors for the roughly $2 trillion social-spending bill, although they were dropped on first contact with reality. MMTers mostly aren’t worried about  Biden’s spending plans causing inflation anyway. But MMT prescribes that if tax rises are needed to slow demand, billionaires wouldn’t be the target: The rest of us would.

“It makes more sense to have a broad-based tax that would reduce demand across the broader economy, especially people who have a propensity to spend of 98%, which is the majority of Americans,” Mr. Wray said.

Other MMT ideas have infiltrated their way into the heart of the establishment, but the idea that the government should raise taxes on ordinary Americans, let alone that it should do so to control inflation, is exceptionally unlikely to be accepted.

That is a bad thing, because MMT’s ideas encourage more spending, and if that results in more inflation in the longer run, MMT is right that higher taxes are the simplest way to reduce demand and prevent a surge in prices.

James Mackintosh

By: James Mackintosh / Senior columnist, markets, The Wall Street Journal

Source: Modern Monetary Theory Isn’t the Future. It’s Here Now. – WSJ

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Pros And Cons Of Rebalancing Stock Market Investments

An asset allocation balances investment risk and return by specifying a particular mix of investments based on the investor’s risk tolerance. For example, an investor might decide to invest 60% of their portfolio in stocks, 30% in bonds and 10% in cash. Investment risk tends to increase as the return on investment increases. Investors can manage the risk of their investment portfolio by combining high-risk investments with low-risk investments.

As the investments change in value, however, the mix of investments may drift away from the original asset allocation. This creates a need to rebalance the investment portfolio by selling some investments and buying others. Otherwise, the growth in value of riskier investments might yield more risk than the investor is willing to tolerate.

Advantages of Rebalancing

Part of the purpose of an asset allocation is to dilute the impact of each asset class by limiting both the upside and downside impact of the investments. But, when a particular investment grows in value faster than the other investments, you are exposed to more risk than you originally intended. Rebalancing your portfolio returns your investments to your original risk tolerance and reduces the risk that your portfolio will drop in value.

Rebalancing a portfolio also improves diversification. When one stock grows significantly in value, the portfolio becomes weighted more heavily toward that stock, magnifying the impact of that stock on overall portfolio performance.

For example, suppose you invested $10,000 in Tesla TSLA , Inc. (TSLA) on April 1, 2020, when it was about $100 a share, and $10,000 in Intel Corporation INTC (INTC) when it was about $50 a share. (Figures are rounded to simplify this example.) You would own 100 shares of TSLA and 200 shares of INTC. On April 1, 2021, TSLA reached about $688 a share and INTC reached about $65 a share. Your TSLA shares would be worth $68,800 and your INTC shares would be worth $13,000. Your investment in TSLA would have grown from half of your portfolio to more than 80% of your portfolio.

Rebalancing also avoids the potential for emotions to interfere with your buy and sell decisions. It is hard to follow the advice to buy low and sell high when it means selling winners to buy losers. There can also be some resistance to selling a stock with a lot of gains in a taxable account. (This is why rebalancing is easier in retirement plan accounts, where the investor doesn’t have to pay taxes on capital gains.)

Rebalancing is also a natural consequence of investment glide paths that change the asset allocation over time, such as target date funds. These investment glide paths reduce the risk mix of a portfolio as the target date approaches. An example of a linear glide path is the old rule of thumb that the percentage invested in stocks should be 100 minus your age. It reduces the risk mix of the portfolio as retirement age approaches. Implementing an investment glide path requires rebalancing the portfolio periodically.

Disadvantages of Rebalancing

But, why would you sell investments that are doing well to buy investments that aren’t doing well?

Continuing the previous example, by November 1, 2021, TSLA stock had risen to $1,145 a share and INTC stock had dropped to about $49 a share. If you had rebalanced your portfolio on April 1, 2021, your portfolio would be worth $98,899 on November 1, 2021, about a fifth less than the $124,300 it would have been worth if you hadn’t rebalanced. The portfolio is worth more than the $81,800 the portfolio was worth back in April, but not as much as it might have been worth without rebalancing.

Rebalancing is an uninformed strategy that assumes that high-flying investments have nowhere to go but down or, at best, have no room for further growth. In the case of TSLA stock, it assumes that the investment will drop in value because it has come so far so fast. It argues that rebalancing the portfolio is necessary to protect it from a decrease in value.

But, past performance does not predict future results. Rebalancing is just as guilty of basing investment decisions on past performance as momentum plays, whether the rebalancing occurs on a schedule or upon a specified level of divergence from the target asset allocation. It is a pessimistic form of market timing, which is often less effective than remaining invested.

Rebalancing assumes that stocks are more likely to decrease in value when their value has increased, which is not necessarily true. It also assumes that low-performing investments are hidden gems that will increase in value, without any evidence to support the assumption. When an investment has been demonstrating lackluster performance, there is no reason to expect that it won’t continue to demonstrate poor performance. Sometimes, a stock is a low performer for a reason, in which case rebalancing is unlikely to improve the results.

Rebalancing also conflicts with other common strategies, such as buy-and-hold and harvesting losses to offset capital gains.

The decision to rebalance should be forward-looking, based on expectations about where the stock and bond markets will head in the future. You should sell an investment when your reasons for buying the investment are no longer valid, not because the investment is performing as expected.

For example, selling stocks now to buy bonds is problematic because bonds are likely to decrease in value when the Federal Reserve Board increases interest rates. Interest rates and bond prices usually move in opposite directions. Selling an investment that is expected to increase in value to buy one that is expected to decrease in value is a recipe for losing money.

Returning to the INTC and TSLA example, both stocks are affected by demand for their products exceeding supply, but there is no reason to expect INTC to outperform TSLA. Certainly, the market dominance of Tesla vehicles has eliminated an incentive for Tesla to add certain features that consumers want, such as heads-up displays (HUD) and digital rear-view mirrors. But, Tesla does not face a shortage of demand for its vehicles. Both INTC and TSLA are limited by how quickly they can ramp up production capacity to meet demand.

Rebalancing works well when an investment is volatile, going up and down frequently, especially when the gains and losses are out of sync with other investments. Rebalancing does not work well when one investment consistently outperforms the other investments.

Rebalancing may not be necessary if you have a long investment time horizon, which gives you time to recover from short-term losses.

Rebalancing also increases costs due to transaction charges from buying and selling frequently. In addition to incurring more fees, rebalancing also yields higher taxes from realizing capital gains.

A possible alternative to rebalancing based on percentages is to rebalance based on the original amount invested in each asset class, perhaps adjusted for inflation. That way, the original amount invested retains the same risk profile and can act as a safety net. Gains beyond the original investment are just icing on the cake.

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Source: Pros And Cons Of Rebalancing Stock Market Investments

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“Portfolio Rebalancing Calculator”. Archived from the original on 2013-04-11.

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Investors Buy Oil on Inflation Fears, Pushing Prices Even Higher

Luc Filip doesn’t work at a big energy company or an industrial manufacturer. He isn’t a day trader or an OPEC official. But he is still helping drive the surge in oil prices.

Mr. Filip is head of investments at SYZ Private Banking in Switzerland, and his big concern is inflation taking a bite out of the $28.5 billion of clients’ investments he manages. So he has been buying oil.

Fund managers like Mr. Filip are contributing to a rally that has pushed oil prices to their highest level since the 2014 energy bust. While energy-futures markets are more typically the province of producers and commodities-focused hedge funds, an oil rally that shows no signs of slowing is now exerting a pull on traditional money managers who run portfolios of stocks and bonds.

Because commodities prices tend to rise alongside inflation, they can protect investment portfolios against its erosive effects. When combined with other commodities like copper and gold, energy is “quite a decent hedge,” said Mr. Filip, who has been buying energy futures and selling longer-dated bonds that will lose value if inflation turns out to be high for longer than expected.

To be sure, inflation fears aren’t the main driver of the West Texas benchmark’s run from $62 a barrel in August to $85 this week. The Organization of the Petroleum Exporting Countries has stuck to its plan to increase production in small increments. A shortage of natural gas has caused some industrial manufacturers to switch to diesel, which is refined from oil.

Untangling these inputs is hard. But traders and analysts say that some of the recent oil gains could be explained by inflation worries, especially on days with no news about supply that might drive trading by the usual players such as commodities brokers and oil producers.

What the Inflation of the 1970s Can Teach Us Today. The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s.

In one sign of investors’ interest, money has been pouring into funds that buy energy futures and stocks, accelerating just as inflation fears took center stage this fall. These funds have experienced four straight weeks of inflows for the first time since the spring, with last week’s $753 million the highest weekly total in five months, according to data provider EPFR.

Data from the Commodity Futures Trading Commission showed a rise in speculative buying of crude-oil futures and options in the week to Oct. 19. Bets on $100-a-barrel oil—a price last seen seven years ago—surged earlier this summer. This month, investors have put wagers on $200.

These investors, especially those that are newcomers or buying for ancillary reasons like inflation fears, are taking the risk that a sudden shock could send oil prices plummeting. That happened in the spring of 2020, when demand collapsed due to the Covid-19 pandemic just as Saudi Arabia ramped up production.

What is more, energy is a major contributor to the consumer-price index, the broadest measure of inflation. That means that investing in energy as a hedge against rising prices can be a self-reinforcing cycle: As oil prices rise, so does inflation, which sends money managers like Mr. Filip back to the energy market to reup their protection.

“People buy oil, that boosts inflation expectations, and that can feed on itself,” said Evan Brown, head of asset allocation at UBS Asset Management.

Inflation has gone from an expected and natural consequence of economies emerging from lockdowns to a major source of investor angst. Higher prices eat into yields on fixed-rate bonds and loans. Stocks of companies that can’t as easily pass on higher costs to customers tend to take a hit, too.

Some investors have bet that oil prices could rise to $200 a barrel.

U.S. consumer prices in September rose at a 5.4% annual rate, faster than in August and just below a 30-year high. Germany’s 4.5% annual rate in October was the biggest year-to-year increase since 1993.

Central bankers in the U.S. and Europe say higher prices are likely temporary and will ease as supply-chain delays are resolved and economies work through restart creaks. But investors aren’t so sure. In addition to more traditional inflation hedges, such as bonds whose yields are linked to consumer prices, they are flocking to commodities.

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Mr. Brown, who helps devise portfolios for some $1.2 trillion of client assets at UBS, is recommending commodity futures, energy stocks and currencies of oil-rich countries such as Russia and Canada. John Roe, head of multiasset funds at Legal & General Investment Management, said he is protecting his investments against runaway prices with Chilean pesos, which are linked to copper prices, and shares in gold miners.

So far the strategy appears to be working. Inflation is rising but so are the prices of energy and many metals. Paul O’Connor, head of multiasset at Janus Henderson, warned that might not last.

Today’s inflation is being driven by gummed-up supply chains that have created shortages of nearly everything, pushing the prices of raw materials higher. But he expects future inflation to be driven more by rising wages, and it is less clear if that would have the same effect on commodity prices. “Quite questionable,” he said of the strategy.

By: Anna Hirtenstein

Anna Hirtenstein is a reporter at The Wall Street Journal in London, covering financial markets. She was previously a reporter at Bloomberg in London, an investment banker at Greentech Capital Advisors in Zurich and has also worked as a field correspondent with a focus on oil in Northern Iraq and West Africa. 

Source: Investors Buy Oil on Inflation Fears, Pushing Prices Even Higher – WSJ

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Ng, Abigail (14 October 2021). “Goldman Sachs says oil prices could be higher for much longer”. CNBC. Retrieved 18 October 2021.

Shine on Sustainable Bonds Wears Off, Especially for Riskiest Borrowers

Rising regulatory scrutiny is damping investor appetite for sustainable bonds, especially those issued by riskier companies. Bonds sold to fund environmentally friendly projects and companies generally fetch higher prices and lower yields than conventional bonds. This “greenium,” though, has been shrinking in recent weeks as global regulators forge ahead on new disclosure rules and investors start to look more closely at companies’ claims about sustainability.

The selloff is sharpest for high-yield sustainable bonds, whose price premium over comparable conventional bonds has nearly halved since early September, dropping to 0.17 percentage point from 0.30, according to ICE bond indexes. The yield on a broad index of sustainable junk-rated bonds has risen to 3.82% from 3.33% over the same period. Yields rise when prices fall.

The greenium for investment-grade bonds has shrunk, too, though more slowly, halving since April to 0.03 percentage point.

Sustainable investing—also known by the acronym ESG for its environmental, social and governance factors—has attracted hundreds of billions of dollars, but until recently there has been little consensus about what qualifies as a green asset. Money managers are increasingly worried about being duped by companies exaggerating their sustainability bona fides. They are also having to prove the claims they make to their investors about how they evaluate green investments.

In a bellwether case, the Securities and Exchange Commission is investigating whether Deutsche Bank AG’s asset-management arm lived up to claims it made about its ESG investing criteria. A whistleblower and internal emails say that only a fraction of its assets went through a sustainability assessment, contrary to the firm’s public statements. DWS has said it stands by its disclosures.

This new scrutiny is prompting some investors to be more careful when assessing sustainable bonds, particularly those sold by lower-rated issuers, which tend to be smaller and disclose less about their businesses, said Tatjana Greil Castro, a credit portfolio manager at Muzinich & Co.

“There is definitely an understanding that you cannot just slap on your tick-box approach,” she said. Market dynamics may be partly to blame, too. Inflows into sustainable-investment funds haven’t kept pace with a flood of new issuances.

Investors put $95 billion into ESG funds in the second quarter, down from $142 billion in the first, according to the latest available data from Morningstar. Meanwhile, issuance of sustainable bonds stayed relatively stable, with $295 billion in the second quarter and $299 billion in the first, according to Bloomberg New Energy Finance.

With less money earmarked for green assets spread across more deals, investors can be choosier about which to buy and can negotiate higher yields.

Sustainable debt sold by higher-rated issuers are still finding strong demand. The yield on the European Union’s first-ever common green bond has fallen from 0.45% when it was issued Oct. 12 to 0.37% as of Wednesday. Investors piled into the U.K.’s debut green bond last month, which priced at a yield of 0.87%.

But corporate borrowers, especially those with lower credit ratings, are finding less appetite for their debt in the secondary market. A green bond issued by Daimler AG was yielding 0.51% on Wednesday, compared with 0.52% for the German auto maker’s comparable conventional bond. In February, the green bond was yielding 0.16 percentage point less.

A green junk bond issued by Ardagh Metal Packaging SA was yielding 2.20% on Wednesday, up from 1.81% in mid-September.

By: Anna Hirtenstein

Anna Hirtenstein is a reporter at The Wall Street Journal in London, covering financial markets. She was previously a reporter at Bloomberg in London, an investment banker at Greentech Capital Advisors in Zurich and has also worked as a field correspondent with a focus on oil in Northern Iraq and West Africa.

Source: Shine on Sustainable Bonds Wears Off, Especially for Riskiest Borrowers – WSJ

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