Martin North – Page 1027 – Digital Finance Analytics (DFA) Blog

Launch of the Official Australian Renminbi Clearing Bank

Glenn Stevens spoke at the launch yesterday. The launch of a local RMB clearing bank in Australia is an important event. It should make it easier to make RMB for payments, especially for larger transactions. It should establish a more direct connection with the liquidity in RMB which is provided by China’s central bank, the People’s Bank of China (PBC). Next, it will facilitate access to China’s Real-time Gross Settlement System (CNAPS), making it will be easier to track and confirm when payments to China reach their recipients. Finally, as it develops, it has the potential to reduce risks via access to fiduciary accounts structures maintained by the PBC on behalf of its clients. In addition, more broadly, the establishment of an RMB clearing bank underscores the international importance of Sydney as an Asian financial centre and strengthens the bilateral relationships. Now, it is up to local businesses to grasp the opportunity to transact in RMB in Australia.

Today’s events mark an important step in the further development of a local renminbi – or RMB – market. But more than that, they mark one more step in a lengthy and very important journey that has seen the flowering of trade relations between China and Australia, and which promises benefits from the maturing of financial ties.

On its own, the key direct benefit of the official Australian RMB clearing bank is that it can more efficiently facilitate transactions between Australian firms and their mainland Chinese counterparts using the Chinese currency. Bank of China (Sydney)’s ‘official’ status – which was granted by the People’s Bank of China (PBC) – affords it more direct access to the Chinese financial system, with flow-on effects for local financial institutions and their customers.

But an official Australian RMB clearing bank also confers some indirect benefits on the Australian financial sector and its customers, particularly when viewed as one element of a broader range of initiatives.

In particular, the establishment of the clearing bank helps to raise awareness among Australian firms that the local financial system has the capacity to effect cross-border RMB transactions on their behalf. This is important, because over the long run, Chinese firms may increasingly wish their trade with Australian firms to be settled in RMB. To be sure, today the bulk of global trade is settled in US dollars. But with China now a very large trading nation, and continuing to grow into a ‘continental sized’ economy, it would be surprising if at some point we do not see much more use of China’s currency for trade purposes. Already its usage is growing quickly, if only from a small base. So Australian firms and the Australian financial system need to be well prepared.

To that end, the RBA has been directly involved in several initiatives, with the aim in each instance being to ensure that there are mechanisms in place that allow the private sector to increase its use of the Chinese currency as and when it chooses to do so. This of course included the signing of a Memorandum of Understanding with the PBC to enable the establishment of an official RMB clearing bank in Australia, in November last year following the G20 Leaders’ Summit in Brisbane.

In addition, there was the establishment of a bilateral local currency swap line with the PBC in 2012, which is designed to provide confidence to both Chinese and Australian financial institutions that appropriate RMB and AUD liquidity arrangements are in place in the event of dislocation in the market.

More recently, there was the negotiation of a quota to allow financial institutions based in Australia to invest in approved mainland Chinese securities under the Renminbi Qualified Foreign Institutional Investor Scheme – better known as RQFII.

Finally, I note the RBA has invested a small proportion of Australia’s foreign currency reserves in RMB.

Official initiatives like these help to lay the groundwork. But ultimately, the development of an RMB market in Australia will depend on the extent of benefit the private sector sees in using RMB for trade settlement and investment purposes. It is worth noting that private sector-led initiatives are now becoming increasingly important drivers of the RMB market’s development. For example, forums such as the Australia-Hong Kong RMB Trade and Investment Dialogue and the ‘Sydney for RMB’ Working Group are beginning to have a more prominent role in raising awareness of the financial sector’s capacity to conduct RMB business and in identifying any further market development issues that may need to be addressed.

Did HSBC Help Wealthy Clients Evade Tax?

Claims that Britain’s biggest bank helped wealthy clients cheat the UK out of millions of pounds in tax via HSBC’s private bank in Switzerland have been made. HSBC may faces criminal investigations. The suggestion, based on leaked documents, is that they allowed clients to withdraw cash, often in foreign currencies of little use in Switzerland, marketed schemes likely to enable wealthy clients to avoid European taxes, colluded with some clients to conceal undeclared “black” accounts from their domestic tax authorities and provided accounts to international criminals, corrupt businessmen and other high-risk individuals.

Whilst a numbered bank account is now illegal in most western countries, it is still part of Switzerland’s banking system. This dates from 1934. Article 47 of the Federal Act on Banks and Savings Banks made it a criminal offence to disclose the identity of clients. A depositor’s true identity will be known to only a select group of employees, and in order to withdraw cash or make a wire transfer, the account holder is asked for a codeword. A breach of professional confidentiality, even for retired bankers or those who have had their licence revoked, is punishable by three years in jail. By 2018, Switzerland has committed to an automatic exchange of information about individual accounts, taxes, assets and income along with 50 other nations under an OECD agreement.

Rate Cut Unlikely To Cut Defaults – Fitch

Fitch Ratings says that the Reserve Bank of Australia’s move on 3 February 2015 to cut its official interest rate to 2.25% down from 2.50%, which led to mortgage rates in Australia falling to their lowest point in 50 years, is unlikely to improve the performance of domestic residential mortgage loans.

Australian variable interest rates have tracked well below historical levels for a long time, and there is little room for further improvement in mortgage performance in terms of loan defaults and delinquencies. Fitch data shows that the current delinquency rate of loans that are more than 30 days past due (a measure of borrowers who have missed one or more payments) on residential mortgages is now just 1.08%, the lowest recorded since December 2007.

Financial distress is one of the key factors that borrowers cite when they default on mortgages. However, interest rates are already at low levels, while household finances have improved following lower petrol prices, both of which mean that now is one of the least likely times for borrowers who remain employed, to be unable to pay. Fitch is of the view that a 25bps cut in rates will have no impact on mortgage performance.

Any defaults in the current environment will be due to other key factors such as sickness, business bankruptcy and divorce, which are unaffected by interest rates. Fitch remains vigilant for over-commitment of borrowers and poor underwriting in the mortgage market, although there is little evidence of such practices now.

Fitch currently rates 139 Australian residential mortgage backed securities (RMBS) transactions and five covered bond programmes which include over 1.4 million individual housing loans as collateral. These loans represent approximately 18% of the Australian housing loan market and so provide a good proxy for the market as a whole.

RBA Lowers Growth Forecast

The RBA published their statement on monetary policy today. They point to a lower than expected growth and inflation forecast, but higher rates of unemployment. GDP is now projected at 2.25 per cent to June, and a quarter percent lower by the end of the year than their last projection. They are expecting unemployment to remain higher for longer, and above 6 per cent during 2017. Inflation is forecast at a headline level of just 1.25 per cent, thanks to lower oil prices, although the bank’s favoured core inflation measure still sits within its 2-3 per cent target.

Looking at the economic drivers, the banks said that the 9 per cent fall in exchange rates had yet to flow through into higher prices, and the fall in oil prices are estimated to have increased real household disposable income by 0.25 per cent over the last half of 2014, and will lift spending power by an additional 0.5 per cent over the first three months of this year.

“While growth in non-mining activity has picked up a little over the past two years, all components except dwelling investment look to have grown at a below average pace over the past year,” the RBA said.

The ABS capital expenditure survey suggests that there will be only very modest growth in non-mining investment in 2015.

The most significant comment for me related to the behaviour of households who have experienced significant lifts in wealth thanks to rising house prices, yet may not be turning this into higher rates of consumption.

“However, another possibility is that ongoing buoyant conditions in housing markets will have less of an effect on consumption than previously. In particular, in recent years fewer households appear to have been utilising the increase in the value of their dwelling to increase their leverage or trade up”.

This cuts to the heart of the problem. Their core strategy was to allow housing to expand, to lift wealth, to encourage spending, to drive growth, until the business sector kicks in. However, there is mounting evidence that households are not convinced, and are unwilling or unable to spend. Retail is still below trend, and as interest rates of savings fall, households become more conservative. It could be that their core thesis is flawed. Indeed, they had previously acknowledged

“we shouldn’t expect consumption to grow consistently and significantly faster than incomes like it did in the 1990s and early 2000s, given that the debt load is already substantial”.

In our recently published household finance confidence index we noted a consistent fall. No surprise then households are not performing as expected.

Bank of England maintains Bank Rate at 0.5%

The Bank of England’s Monetary Policy Committee at its meeting today voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The Committee’s latest inflation and output projections will appear in the Inflation Report to be published at 10.30 a.m. on Thursday 12 February.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The previous change in the size of that programme was an increase of £50 billion to a total of £375 billion on 5 July 2012.

The Bank will continue to offer to purchase high-quality private sector assets on behalf of the Treasury, financed by the issue of Treasury bills, in line with the arrangements announced on 29 January 2009 and 29 November 2011.

NAB 2015 First Quarter Trading Update

NAB released its trading update today. Overall cash profit was a little below expectations, and loss provisions were up. Looking in more detail, revenue rose approximately 4%, but after excluding gains on the UK Commercial Real Estate (CRE) loan portfolio sale and SGA asset sales, on a like for like basis, increased approximately 2% thanks to higher markets income and growth in lending balances over the quarter. Group net interest margin (NIM) was flat, but after excluding Markets and Treasury, was slightly lower. Expenses increased approximately 4% after excluding specified items in the September 2014 Half Year. The main drivers include timing of enterprise bargain agreement-related salary increases, normalisation of performance based incentives and investment in the core franchise. The charge for Bad and Doubtful Debts for the quarter rose 30% to $227 million, but was stable excluding releases from the Group Economic Cycle Adjustment (ECA) and UK CRE overlay in the September 2014 Half Year.

The Australian business appears to be settling now, with business banking losses easing despite intense competition. Mortgage lending is still strong. No further comments were made on the UK exit strategy. The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.74% as at 31 December 2014, an increase of 11 basis points from 30 September 2014. As previously announced, the Group will target a CET1 ratio of 8.75% – 9.25% from 1 January 2016, based on current regulatory requirements.