Yuan Trade Settlement Seen Reaching $1 Trillion

Cross-border trade settled in Chinese renminbi will triple to 6.5 trillion ($1.03 trillion) yuan within three years as relations with the world’s second largest economy grow, Royal Bank of Scotland Group Plc. said.

Settlement will grow from 12 to 20 percent this year, reaching $1.03 trillion in two years, up from $330.8 billion in 2011, Janet Ming, head of the China desk for RBS in Europe, Middle East and Africa, said in a Oct. 9 interview in Dubai.

“We’re seeing a lot more customers starting to practice in renminbi,” Ming said. “For most companies and banks, China and India is where the growth is. If you’re dealing with China, ignoring renminbi is not the right thing to do.”

The Euro and U.S. dollar are the top two settlement currencies with market share of 41 percent and 33 percent, according to the bank.

RBS also expects a growing number of foreign companies and governments to issue bonds in the Chinese currency as they become “more confident” with the renminbi as an international currency, Ming said.

“Different Asian governments are investing into the renminbi to use it as a reserve currency,” she said.

Hong Kong is currently the global hub for renminbi trade settlement. RBS, along with Industrial & Commercial Bank of China (601398) Ltd., HSBC Holdings Plc (HSBA), Standard Chartered Plc (STAN), JP Morgan Chase & Co., Barclays Plc and Deutsche Bank AG (DBK), is lobbying to make London another offshore hub for the currency. Singapore, Taipei and Paris are also being considered.

“London has many competitive advantages such as timezone, robust legal frameworks and efficient markets,” Ming said.

Global issuers accounted for a record share of yuan- denominated bond sales in Hong Kong last quarter as it became more attractive to raise Chinese currency and swap the proceeds into dollars.

Export-Import Bank of Korea led 10.7 billion yuan ($1.69 billion) of so-called dim sum offerings by non-Chinese companies, whose share of the market rose to 49 percent, excluding certificates of deposit, according to data compiled by Bloomberg.   

By Stefania Bianchi

World banking is gloomy, McKinsey consulting report

Banks worldwide remain scarred by the 2007-2009 financial crisis and are years away from developing new business models that will produce sustainable profits, according to a new study.

Despite progress in meeting regulators’ requirements to build capital, revenue growth is slow, costs are rising and new competitors exploiting digital technologies are emerging, McKinsey & Co said in a report.

The consulting firm prescribes a rigorous mix of cost cutting, business simplification models adapted from the auto industry and image repair that requires fundamental changes in employee culture and respect for societal values.

“It’s the banks’ game to lose,” Toos Daruvala, a McKinsey director who helped write the report, told Reuters.

The challenges are so great, though, that the consultant expects a host of large and small US banks over the next five years to throw in the towel and merge.

In the United States, where almost two-thirds of U.S. banks are earning less than their cost of capital. Reuters

“You will see significant consolidation, particularly among banks with less diversified income streams that are highly dependent on net interest margins,” Daruvala said. “They will be troubled and forced to sell.”

The report also sends an ominous message about banks’ central role in the global economy.

A 30-year trend in which national average bank revenue has grown faster than countries’ gross domestic products “is likely now being broken,” the study says. “In both emerging and developed markets, banking revenues are expected to flatline at around 5 percent of GDP for the foreseeable future.”

In the United States, where almost two-thirds of U.S. banks are earning less than their cost of capital, investors will have to wait three to five years for returns on equity (ROE) to return to historical averages of 10 to 12 percent, Daruvala said.

Banks cannot control central bank interest rate cuts that are squeezing their net interest margins but have only themselves to blame for outdated business models and internal cultures that fall short of customer needs and perceived societal values, the report says.

“MASSIVE” COST CUTS

Banks that rely heavily on trading and other capital markets activities are particularly challenged because of regulatory changes eradicating their proprietary trading models, according to the report. It prescribes “massive cost cutting” to supplement what has already occurred at the capital markets giants.

Retail banks, however, face decreasing customer loyalty and business banks “no longer enjoy structurally lower funding costs than many of their large corporate clients,” the study says.

Compounding banks’ problems are technologies that make it much easier for new competitors to steal customers. Wal-Mart Stores Inc  and American Express Co  on Monday announced a joint venture to provide financial services through a prepaid debit card aimed primarily at low-income customers.

US banks had an average ROE of 7 percent last year, up from 6.2 percent in 2010 as credit quality gradually improved, but “are still far from earning their cost of equity,” McKinsey said. Even if interest rates rise and banks reprice their services upward, they are “unlikely to return ROE to acceptable levels” any time soon, the report said.

Expenses for US  banks last year exploded to 68 percent of total income from 60 percent in 2010 while revenue grew just one percent, according to the study.

Bank revenue globally rose 3 percent to $3.4 trillion in 2011 from the previous year, slowing from a 9 percent rise from 2009 to 2010. Returns on equity last year fell to an average of 7.6 percent from the low double-digits and profit fell by 2 percent.

INVESTORS CHOKE

Investors’ doubts remain strong.

More than two-thirds of publicly traded banks in developed markets now trade “significantly” below book value, according to McKinsey, and the average price of insurance against bond defaults for 124 banks sampled by McKinsey rose to the highest level on record last year.

Bank stock prices globally last year traded at 11 times earnings, down from 15 in 2007.

Some analysts challenged the dire report. Focusing on conventional double-digit returns to shareholders when interest rates and funding costs are at historic lows is irrational, said Richard Bove, an analyst at Rochdale Securities.

“Anyone who says that banks should be making traditional returns on equity today when the ten-year Treasury is around 1.6 percent has got to explain themselves,” he said.

Bove said he was excluding the outlook for banks that are heavily involved in capital markets such as Goldman Sachs Group and Morgan Stanley.

Sanford Bernstein analyst Brad Hintz, in a note to clients last week, said few trading units anywhere are generating returns and echoed McKinsey’s pessimism about the outlook for their profitability. “Simply cutting compensation ratios and implementing technological improvements may not be enough to reach a target ROE,” he wrote.

The good news is that banks that adapt can prosper by financing infrastructure projects that are expected to grow 60 percent by 2020, the report says, and by selling advice and retirement products to aging populations in developed nations and core banking services to new customers in emerging markets.

The study was based on a review of financial data at the world’s 30 largest banks, with some data extending to over 2,400 banks in the 69 countries followed by McKinsey. - Reuters

Chinese telecom giants hit back at US allegations

 US blacklists China's tech giants 

 VIDEO: US BLACKLISTS CHINA’S TECH GIANTS CCTV News - CNTV English



US lawmakers have alleged so-called security threat from Chinese telecom giants Huawei and ZTE. The two Chinese tech companies have denied such allegations.

But the U.S. House of Representatives’ Intelligence Committee said it will release findings of a nearly year-long investigation of the alleged security risk on Monday local time.

Huawei and ZTE have had a tough time in the US, and now, it’s going to get even tougher.

The black listing of the two Chinese tech giants, comes amid U.S. allegations that the companies are involved in economic espionage and could pose a risk to the country’s telecommunication infrastructure.

A draft report by the House Intelligence Committee dominated by the Cold-War thinking, says the two firms "can’t be trusted" to be free of influence from the Chinese government and could be used to undermine US security.

In response, China’s foreign ministry has warned the US not to harm the interests of both countries.

Hong Lei, spokesman of Chinese Ministry of Foreign Affairs, said, "Investment by China’s telecommunications companies in the United States showed the countries have mutually beneficial relations. We hope the US will do more to benefit the interests of the two countries, not the opposite."

The firm’s top executives appeared at a hearing held by the panel last month, stressing that they were focused on business, not politics.

Charles Ding, Huawei Vice President, said, "It would be immensely foolish for Huawei to risk involvement in national security or economic espionage."

Zhu Jinyun, ZTE Vice President, said, "Would ZTE grant China’s government access to ZTE telecom infrastructure equipment for a cyber attack? Mr. Chariman, let me answer emphatically: no!"

Both Huawei and ZTE have rejected the allegations that their expansion in the United States poses a security risk and have denied any ties with the Chinese government.

Huawei said that it was "globally trusted and respected."

Although being the second largest telecom equipment maker in the world, the company has already had to drop several of its attempts to expand in the US -- due to allegations from U.S. lawmakers. 

US report accusing firms of being security threat sparks angry denial

Two telecom giants rejected as "baseless" the findings of a US congressional investigation that accused them of posing a national security risk.

The allegations indicated growing commercial disputes between China and the United States, especially in the high-tech sector, trade experts said.

Huawei Technologies Co, the world's second-largest telecom equipment manufacturer in terms of revenue, described the US congressional report as containing "dangerous political distractions” from normal business practice.

"Baseless suggestions purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenges,” Bill Plummer, Huawei's US vice-president of external relations, said in an e-mail to China Daily.

The US House of Representatives’ Intelligence Committee said that Huawei and ZTE Corp, the world's fifth-biggest telecom gear maker, should be excluded from the US market because they pose a security threat.

ZTE urged the committee to extend equal treatment to all telecom equipment makers because "most or all US telecom equipment is made in China, including that provided by Western vendors”, it said in an e-mail to China Daily.

China hopes the US will "respect reality, discard biases and improve economic relations between China and the US, not vice versa”, Foreign Ministry spokesman Hong Lei said on Monday.

The report, which came amid rising trade disputes between the two countries, surprised experts.

"The report is not just about economic issues, but goes further with guesswork about alleged conspiracy," said Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation Institution. "It has obvious political intentions because displaying a tough attitude to Chinese companies may help win more votes with a presidential election campaign going on,” he said.

More trade disputes are likely to happen in the advanced industries like telecommunications, compared to low-end manufacturing, as Chinese companies move up the value chain and expand globally, Huo said.

There has been an increasingly large number of trade investigations into Chinese exports, led by the US, since 2009.

The committee launched a security probe into the two companies in November. In May, a congressional delegation, including some of the committee members, went to China where they met Ren Zhengfei, Huawei's board chairman, and the top management of ZTE.

On Sept 13, Charles Ding, Huawei's corporate senior vice-president, and Zhu Jinyun, ZTE's senior vice-president for North America and Europe, testified at the House committee hearing. This was the first time the Chinese telecom companies had the chance to communicate with US authorities in public.

In an interview after the hearing, Zhu told reporters that, due to different social and cultural backgrounds, there was one thing he felt difficult to explain to Americans: the relationship between the government, the Communist Party and the enterprise in China, especially when many Congress members still harbor a Cold War mentality and know little about China's development.

"ZTE really understands American concern about cyber security, but we expected more constructive solutions from the US government to address the issue instead of just finger-pointing,” Zhu said.

In a draft of the report made available to Reuters, the panel leaders said that US intelligence must stay focused on efforts by Huawei and ZTE to expand in the US and tell the private sector as much as possible about the purported espionage threat.

"US network providers and system developers are strongly encouraged to seek other vendors for their projects," it said.

The report is likely to have an impact on Huawei and ZTE, both of which are expanding aggressively overseas to fuel growth, said analysts.

"The two companies have been trying to build a larger presence in the US market but failed, and the report is likely to make their business in the US even harder,” said Xiang Ligang, a Beijing-based industry specialist and president of industry website cctime.com.

The companies may find it more difficult to win deals with US telecom carriers and their mobile phone business will be affected, he added.

Huawei, which ranks only after Sweden's Ericsson in the global market, conducts 70 percent of its business outside China. It reported sales of $1.3 billion in the US last year.

The Wall Street Journal reported earlier that Huawei is preparing for a public offering, but the company denied the report later. ZTE has a smaller footprint in the US, mainly through sales of devices like smartphones. Its sales in the US were $30 million last year.

The document cited what it called long-term security risks associated with the companies’ equipment and services but it did not provide detailed evidence, at least not in an unclassified version.

A classified annex provides "significantly more information adding to the committee's concerns,” the draft said.

Based on classified and unclassified information, Huawei and ZTE, "cannot be trusted to be free of foreign state influence and thus pose a security threat to the US and to our systems”, it said.

CBS aired a segment on Huawei on Sunday evening during 60 Minutes. The committee's chairman Mike Rogers told the program's host Steve Kroft: "If I were an American company today, and I’ll tell you this as the chairman of the House Permanent Select Committee on Intelligence, and you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers’ privacy, and you care about the national security of the United States of America.”

Plummer, the only person from Huawei who appeared on the show, insisted that Huawei is a company just doing business.

The company's "$32.4 billion in revenues last year” was obtained from "150 different markets, 70 percent of our business is outside of China. Huawei is not going to jeopardize its commercial success for any government, period”, he told Kroft.

By TAN YINGZI in Washington and CHEN LIMIN in Beijing 
Contact the writers at tanyingzi@chinadailyusa.com and chenlimin@chinadaily.com.cn
Reuters contributed to this story.