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Rising U.S.-China tensions will hit financial markets

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The New York Stock Exchange building is seen adorned with banners on September 19, 2014 as Chinese giant Alibaba makes its Wall Street debut.

JEWEL SAMAD | AFP | Getty Images

Already bad friction between the U.S. and China has ratcheted higher in recent weeks, and now it’s expanded onto another front: the stock market.

As the coronavirus crisis draws on, the relationship has gotten more strained, with each country blaming the other about the true extent and origin of the coronavirus outbreak. U.S. President Donald Trump also threatened tariffs on China again this month.

In the latest move, the U.S. Senate passed legislation on Wednesday that could restrict Chinese companies from listing on American exchanges or raise money from U.S. investors, unless they abide by Washington’s regulatory and audit standards.

Though the law could be applied to any foreign company that seeks access to U.S. money, lawmakers say the move is targeted at Beijing. U.S.-listed shares of Chinese tech giant Alibaba dropped more than 2% on that news.

That issue is set to remain contentious, analysts say, as U.S.-China tensions take center stage — ahead of the U.S. presidential elections in November, where U.S. President Donald Trump will try to hold onto the White House.

“In the past several months, US politicians proposed to delist Chinese companies from US stock exchanges with different criteria, and cap Americans’ exposure to the Chinese market,” analysts from investment bank China Renaissance wrote in a Thursday note. “We expect the debate to remain among the top topics of the 2020 US presidential election.”

Louisiana Republican Sen. John Kennedy, who sponsored the bill, would require companies to certify that “they are not owned or controlled by a foreign government.”

“The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on U.S. stock exchanges,” Kennedy, a member of the Senate Banking Committee, had tweeted.

According to China Renaissance, apart from the delisting of Chinese companies, other actions the U.S. could take would include capping Americans’ exposure to the Chinese market through government pension funds, and putting limits on the Chinese companies included in stock indices managed by U.S. firms.

That pressure would inevitably cause more Chinese firms to go elsewhere, analysts say. Many of them have traditionally flocked to list in the U.S. because of the associated prestige, as well as a more attractive environment with better valuations and a more knowledgeable investor base.

“This would definitely drive more Chinese companies to list in the greater China area,” said Tianjun Wu, deputy economist at the Economist Intelligence Unit.

More Chinese companies will flock to Hong Kong

Even as the U.S. is tightening rules, Hong Kong has been making it easier for companies with primary listings elsewhere — such as the U.S. — to list on its stock exchange.

Just this week, Hong Kong’s benchmark Hang Seng index made a major change which paved the way for China’s tech giants to expand their trading presence in Asia and give more investors access to their stocks.

The Hang Seng index will for the first time allow companies with primary listings elsewhere, as well as those with dual-class shares, to be included in the 50-year-old benchmark. That followed a similar move by the city’s stock exchange in 2018 to also allow secondary listings.

More U.S.-listed Chinese companies are likely to take advantage of the easing to plan secondary listings in Hong Kong, says investment bank Morgan Stanley in a Monday report.

It pointed out that a number of such companies, such as JD.com and Trip.com, are reportedly already planning secondary listings in the Chinese city. Morgan Stanley says it expects this trend to continue, given the increased American scrutiny on Chinese companies.

Chinese tech giant Baidu said Thursday in an interview with China Daily that it is “discussing options” such as a secondary listing in Hong Kong or other places.

“Our basic judgement is, if it’s a good company, there are many options for places to list. It’s not limited to the U.S., so we aren’t that worried that pressure from the U.S. government will cause irreparable damage to the company’s business,” said Baidu CEO Robin Li in that interview, according to a CNBC translation.

According to data from Chinese Renaissance, 36 Chinese firms listed in the U.S. qualifies for a secondary listing in Hong Kong.

Chinese companies could lose ‘brand premium’

As a start, Hong Kong is set to benefit from such developments, with more money flowing into the markets there.

“This trend should help retain and attract more capital inflow into the Hong Kong market in the long run and help strengthen a more Asia-based trading and investment base for Chinese companies,” Morgan Stanley wrote in a Monday report.

But Chinese firms could suffer from the less immediate trade-offs eventually.

“For the Chinese business, that would mean losing a brand premium of being listed in the US. The US stock market has long been viewed as much more transparent than the local markets” in greater China, said Wu of the EIU.

As for retail investors in the U.S., they could have “less accessible methods” to gain exposure to investments in Chinese firms, he said.

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EasyJet says finance chief Findlay to leave in 2021 | News

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FILE PHOTO: Andrew Findlay EasyJet Chief Financial Officer poses for a photograph during an event of the British budget carrier EasyJet to p
FILE PHOTO: Andrew Findlay EasyJet Chief Financial Officer poses for a photograph during an event of the British budget carrier EasyJet to p

LONDON (Reuters) – British low cost airline easyJet said chief financial officer Andrew Findlay will leave the company in May 2021, and it had started the search for his successor.

Findlay, who joined easyJet as CFO in 2015, on Friday survived an attempt by the airline’s founder to oust him, the chief executive, the chairman and another director.

EasyJet said on Tuesday that Findlay has advised the board of his intention to leave and in line with his contractual obligations is expected to stay on for a year.

CEO Johan Lundgren praised Findlay for his efforts in helping to shore up easyJet’s balance sheet during the coronavirus crisis, as the airline battles to keep costs down at a time when its planes are grounded.

(Reporting by Sarah Young; editing by James Davey)




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HSBC board rethinks overhaul and seeks even sharper cuts

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HSBC’s board is set to deepen the biggest restructuring in the bank’s 155-year history after deciding that the coronavirus crisis requires more drastic measures.

In February, Europe’s largest lender said it would slash 35,000 jobs, $4.5bn in costs and $100bn of risk-weighted assets by radically shrinking its US and European businesses and investment bank. Executives plan to redirect resources to Asia, HSBC’s historical heartland and profit centre.

The pandemic — which HSBC fears could saddle it with $11bn of bad loans this year alone — caused management to pause lay-offs.

But the board is now pressing executives to restart the restructuring and come up with even more radical changes, including further cuts or even a possible sale of its US business alongside its retail network in France and operations in smaller non-strategic countries.

Some of the more marginal businesses that were previously given the benefit of the doubt are being re-examined, say senior figures at the bank. 

One person familiar with the discussions said the board wants a new strategic plan “sooner rather than later”, but that it will be several months before the review is completed. 

The bank’s US business is under particular scrutiny, where HSBC has a small east-coast retail network alongside trading and transaction banking operations. These were shrunk by almost a third in February, but management is now debating whether the US operation is viable at all.

A US sale “is possible, but it’s very early in terms of making that decision”, the person said. “What HSBC needs to understand is, for better or worse, their opportunity is in China.”

“We have to have a business there [the US], there’s no question of that, but the shape we’ve got to look at again,” said another person involved in setting strategy.

US profits fell 39 per cent last year and it made a return on tangible equity — a measure of profitability — of just 1.5 per cent. That compares with a 15.8 per cent return in Asia and 12 per cent in the Middle East.

HSBC declined to comment.

Line chart of Pence per share showing A rollercoaster decade for  HSBC

“We’ve been saying for a decade that HSBC should get out of US retail,” said Ronit Ghose, an analyst at Citi, adding that the bank could service US corporate clients “in Asia and internationally without a subscale American retail franchise”.

The bank’s retail network in France, with more than 200 branches and 4,000 staff, is also being evaluated and the bank has invited bids from other banks and from private equity firms.

Executives are also revisiting a long list of small, non-strategic countries including Malta, Bermuda, the Philippines and New Zealand to see if any of those divisions can be sold or closed. Previous efforts to sell were hampered by a lack of buyers acceptable to local regulators, one of the people said.

Mark Tucker, the bank’s chairman and a tough former insurance executive who joined in October 2017, is the key protagonist. He fired John Flint as chief executive within 18 months for not being decisive enough, replacing him with Noel Quinn, an HSBC lifer.

Mr Tucker wants the board to be “more assertive and more engaged”, believing that in the past it has been “too passive”, a person familiar with his approach said.

Investors were underwhelmed when the current strategy was unveiled on February 18 — its stock fell 6 per cent on the day.

Coronavirus has added to the scepticism. HSBC shares now trade at their lowest in more than a decade and retail investors in Hong Kong were furious when the Bank of England forced the bank to cancel its dividend for the first time in 74 years.

Covid-19’s early toll was revealed in HSBC’s first-quarter results. Profits fell by half after the bank boosted reserves against potential bad debts fivefold to $3bn. Mr Quinn warned provisions could hit $11bn by the end of the year in the worst-case scenario.

HSBC’s economic forecasts are among the most pessimistic of any global bank.

“We’ve got to look at where we want to be in five years’ time and get ourselves in position, not incrementally, but top down,” said one executive. “We have a fundamental reorganisation to do and we’ve delayed this, as a corporation, for 12 years.”

“We have to bloody well get on and do it . . . but we have to be sensitive to redundancies in this environment,” they added. “As Churchill said, one can’t waste a good crisis.”

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Lufthansa Group secures finance package from economic fund | News

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Lufthansa Group has secured approval from the federal German government’s economic stabilisation fund, WSF, for a €9 billion financial package.

Under the agreement the WSF will contribute up to €5.7 billion to Lufthansa’s assets including €4.7 billion in equity.

The measure will be supplemented by a syndicated three-year credit facility of up to €3 billion, provided by private banks and KfW – yet to be approved.

It says the “silent participation” is unlimited in time and can be terminated by the company – either in whole or in part – on a quarterly basis.

The remuneration will amount to 4% for 2020 and 2021, increasing gradually to 9.5% by 2027.

WSF will acquire shares to build up a 20% shareholding in Lufthansa Group at a price of €2.56 per share – equating to an overall cash investment of some €300 million.

It will be able to increase the shareholding further, to just over 25%, if there is a takeover of the company.

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If Lufthansa Group fails to remunerate the fund then an additional portion of the WSF participation can be converted into another 5% shareholding from 2024 and 2026 – although the second conversion only becomes valid if the shareholding increase from a takeover has not been exercised.

Subject to Lufthansa’s fully repaying the participations and a minimum sale price of €2.56 per share, plus annual interest of 12%, the WSF is undertaking to sell its entire shareholding at the market price by 31 December 2023.

Lufthansa Group says the stabilisation package still requires the final approval of its management board and supervisory board, while the measures are also subject to shareholders’ and regulatory approval.

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