China’s Central Bank Mulls Further Yuan Reforms

China appears to be considering further reforms to its foreign exchange market such as reduced state meddling and freer trading of the yuan, but analysts are sceptical about its efforts to relax currency controls.

A newspaper run by China’s central bank published a front page story on Wednesday in which experts called for less government intervention in the country’s foreign exchange market and a wider trading band for the Chinese currency.

The article is a sign that the People’s Bank of China is mulling the reforms and wants to avoid a repeat of August 2015 when its surprise announcement of a near two percent devaluation rocked global financial markets.

“I do think there is a good reason for them to want to provide advance warning to market participants that a move might be coming,” said Julian Evans-Pritchard, China economist at Capital Economics.

But Evans-Pritchard said the changes would be “cosmetic” because the yuan rarely hits the limits of its current trading range and government intervention has been minimal in recent months as worrying capital outflows eased.

If there were an increase in outflows “they would jump back in”, he said.

The Financial News article also comes after the central bank said in May that it was considering changing its mechanism for guiding the yuan’s value, an announcement widely interpreted as a sign Beijing would tighten its grip despite pledges to allow market forces to play a larger role.

Beijing currently sets a daily trading band for the currency, within which it is allowed to move, but the central bank statement indicated it may tweak that system to give authorities more control as a buffer against market forces.

“The timing is odd given all we hear and all we see are attempts to artificially prevent the yuan being a genuinely market-based currency,” said Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong.

“Might it be a pre-emptive shot across the bows ahead of the 16 July end of the 100-day period US President Trump set to solve US-China trade tensions? Perhaps.”

The yuan is restricted to trading up or down two percent from a daily reference rate, but policymakers have previously signalled their intention to broaden the band.

During last year’s presidential campaign Donald Trump had threatened to label China a currency manipulator but he has not done so since taking office in January and his rhetoric on the historically sensitive issue has softened.

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Trade In Other Currencies To Relieve Pressure On Dollar

The Bank of Ghana (BoG) has appealed to importers who trade from other countries apart from the United States to trade in currencies of the country of importation to free the pressure on the dollar.

The high request for the dollar for trading purposes has been a major challenge for the central bank in adequately meeting the demand of dollars for importers.

Due to this, some observers have also called for the use of other currencies to reduce the pressure on the cedi.

According to the Bank of Ghana, as at March this year the Ghana cedi had cumulatively depreciated by 3.5 percent against the US dollar, significantly recovering from 8.8 percent depreciation recorded by 8th March.

With Ghana being an import-driven economy, some financial watchers have advised that importers can trade in other foreign currencies such as the Chinese Yuan to reduce the high demand for the dollar.

Currently only two banks in Ghana is said to trade in the Chinese Yuan.

Meanwhile, China is a major trade partner of Ghana with trade volume estimated to hit over 3 billion dollars by close of 2017.

An importer, Nana Preprah who spoke to Citi Business News explained that most importers prefer the dollar due to its value in exchange for the Yuan.

“If you compare the value of the dollar to the Yuan, you will will realize that the dollar is easy to handle and easily convertible into lots of Yuan.

Assuming you handle $50,000, its equivalent in Yuan is so much that you may not want to handle it,” he stated.

He pointed out that most of the international currencies use the dollar as a benchmark converter hence, it provide an easy mode to transact business.

“All the market places such as Dubai, Singapore and China all accept the dollar directly so it makes trading very easy,” he said.

Ghana-China Friendship Association

Meanwhile, the Ghana-China Friendship Association, an organization championing trade between the two countries is of the view that Ghana could benefit in increasing trade in the Chinese Yuan due to the economic power of China.

An Executive Member an Communications Manager Henry Mallet told Citi Business News, Ghana must take advantage now to reduce the growing pressure on the cedi.

“There is a great advantage because you have to change your currency for about three to four times when you deal in the dollar. You have to change the cedi into dollar, then you change into Yuan so you lose in changing it into dollar , and you lose in changing it into Yuan because of the charges that go with it, but if you have the Yuan directly you gain,” he said.

He was of the view that importers will not only free the dollar from pressures of demand but it will also cut down the cost of imports.

For the Bank of Ghana, the move lies in the ingenuity of banks in the country.

The bank believes commercial banks can take advantage of the growing economy of China and aggregate Ghanaian businessmen who trade in china and provide them the service.

Head of Banking Supervision at the Bank of Ghana, Mr. Raymond Amanful admits there must be more education on the issue.

He maintained that banks must collaborate with international banks to help transact businesses in other foreign currencies.

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Chinese Yuan Can Offer Cedi Respite

The Association of Ghana Industries (AGI) has called on the Bank of Ghana (BoG) to consider enhancing its yuan trading capacities in order to provide an alternative to the dollar to importers who do business in China.

Humphery Ayim-Darke, Vice President of the AGI, in an interview with the B&FT, said the increased introduction of the yuan as another trading currency like the dollar, euro or pound will reduce the demand for dollars as the sole medium of currency exchange.

“We believe it [the increased introduction of yuan] is a policy, if well thought through and well-positioned, that should help us diversify our transactions,” he said.

According to him, as an import-driven economy where over US$5billion worth of goods are imported from China annually, traders should be able to buy the yuan directly from banks or forex bureaus without going through the dollar.

“Why don’t you issue invoices in the yuan? If BoG has sufficient reserves of the yuan to do transactions, it will support and diversify the currency usage,” he added.

With the cedi coming under intense pressure in the greater part of the first quarter of 2017, the argument to stem the annual decline of the local currency is gathering steam with industry players offering suggestions on how best to arrest the constant decline of the currency.

After seeing close to 9 percent depreciation in the first two months and a half, the cedi has rallied to regain some of its losses over the past two weeks. But analysts are of the view that, a long-term plan is needed to stem these perennial decline.

Emmanuel Asiedu, Partner and Head of Tax at KPMG, explained that the fall of the currency is an interplay between demand and supply and the supply side is highly affected by commodity prices on the international market, payment of debt by importers and the local units of multinational companies paying dividends to parent companies.

To him, once debts are cleared by importers and local units pay off their dividends, the cedi will stabilise and continue to regain some of its losses once forex comes from exporters and also the annual cocoa syndication facility.

However, Mr. Asiedu noted that if the yuan is introduced as a currency to be traded just like the dollar, the pressure on the cedi will reduce drastically. “I believe China is now a major player and there is nothing wrong in recognizing its currency and using it,” he said.

But Mr. Raymong Amanful, Head of Banking Supervision at the Central Bank, noted that the challenge BoG is facing in supplying yuan into the market is that traders prefer to carry dollars in cash due to its relatively lesser volume compared to carrying equivalent in yuan. Also, traders do not do business with large scale suppliers but do what is termed ‘shop to shop’ purchases where they buy from retailers.

“Currently, a dollar is equivalent to ¥6.89. This means if a trader needs US$10,000 equivalent in yuan, he or she needs to be carrying ¥68,900, or 689 pieces of ¥100, the highest denominated yuan as compared to just a 100 pieces of US$100, the highest denominated dollar.

“So the challenges include convenience and issues likely to be faced at the point of entry for carrying all that cash. One of the things we have to understand is that these traders do shop to shop buying and not a designated large scale wholesaler who they buy everything from and therefore they need to carry this money.

So if they have large-scale trading partners in China then transfers can be done on their behalf but because they shop on need basis, it is a challenge,” he said.

Mr. Amanful noted that there is a need for more education from banks that have Chinese desks and have representative offices in China to talk to traders to transfer funds on their behalf so they do not even have to carry money on their way to China.

He assured that the Central Bank is in the position to supply more yuan. “It is a tradable currency and so if our people demand more of yuan, why do we keep other currency? We have to meet their needs,” he noted.

But a currency trader, who spoke on anonymity at one of the banks that deal with Chinese traders, noted that converting cedi into yuan it is not as easy as it sounds because there is always the need for an intermediary currency, which is usually the dollar.

“There is no direct conversion between the cedi and yuan or rmb. There is always an intermediary currency, the dollar. This means banks must always have dollars in its offshore accounts and cannot even give the large volumes of yuan to traders directly,” the source said.

In explaining how it works, the source noted that when a trader wants to do business in China and contacts a bank in Ghana, the trader must first go to the local bank here and deposit cedi into his or her local account.

Then the local bank quotes the rate of conversion to the trader, who accepts the rate and then proceeds to begin his or her travel. The local bank now must have that cedi equivalent in dollars in its offshore account to begin the process of transfer through another intermediary bank, usually Citibank from USA, or Deutsche Bank from Germany. These intermediary banks then credit the account of the trader’s supplier in China in dollars. After all these are done, the supplier then can withdraw the money in yuan.

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Cedi Seen Wobbling In First Quarter

The cedi is expected to continue to wobble in the first quarter of the year as demand pressure increases, although analysts believe the instability will be short-lived.

From November to now, the cedi has depreciated by over 10percent, and has already done a year-to-date depreciation of 1.8percent against the US dollar, largely due to low commodity prices and low foreign exchange earnings, whereas the whole of the first quarter of 2016 saw a depreciation of 1percent.

But in a renewed effort to stabilise the cedi, the Bank of Ghana recently auctioned US$69million into the market.

According to RMB Global Research, the market intelligence arm of South African bank, FirstRand Bank, the recent auction “could keep demand at bay but without stronger FX inflows the currency could come under pressure again in the short term.”

But in the wake of the announcement by the new government of US$1.6billion of previously undisclosed spending, the cedi, unsurprisingly, has taken a knock. In the interbank market, the USD/GHS reached a high point of GH¢4.37, before recovering some of its losses.

“We expect weakening pressure to continue this week, although the BoG could intervene to tame the rate of depreciation,” RMB Global Research added.

Peter Nii Odoi Charway, Head of Research & Strategy at Ideal Capital Partners, said the BoG’s move is not sustainable, noting that the economy needs to earn more US Dollars through more local production and value added exports.

“We need to explore alternative opportunities for local production and export to earn more US dollars,” he added.

Jeffery Baiden, Chief Operating Officer at Nimed Capital, an investment bank, noted that the major factors that have accounted for the performance of the cedi, since the beginning of year, include the rise of the US Fed funds rate to 0.75percent, coupled with a gradual treasury yield decline.

“These factors have collectively triggered portfolio flows into less risky US debt instruments from our domestic market,” he added.

Mr. Baiden explained that the currency will see some short-term pressure as companies and businesses restock their inventory.

However, the central bank’s decision to pump into the market additional forex, amid expected increase in government’s receipts from increased oil production, will collectively ensure a reasonable trading range for the cedi.

He believes that in alleviating the pressure on the currency, the central bank can increase the amount of forex it anticipates to auction in the short-term.

But Kisseih Antonio, Managing Director of Ecobank Capital, opined that nothing the BoG will do can help stabilise the cedi if government is not prudent in helping deal with the current account imbalances which fuel the demand for forex.

“The BoG cannot wave a magic wand to stabilise the currency when the problem we have is a structural one, not a monetary one. We all seem to point fingers at the BoG when the cedi is not doing well but the government, and not the BoG, is in charge of fiscal policy and matters. The BOG can only help in the short-term by intervening in the FX market to mitigate any depreciation,” he said.

He noted that ongoing weak growth in Ghana’s key export markets of South Africa, the EU and China will continue to undermine export prospects, which could adversely impact the performance of the local currency.

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China’s Central Bank Launches Spot Checks On Bitcoin Exchanges

China’s central bank said on Wednesday it launched spot checks on major bitcoin exchanges in Beijing and Shanghai, knocking the price of the cryptocurrency down by more than 6 percent.

The probe of bitcoin exchanges, including BTCC, Huobi and OKCoin, was to look into a range of possible rule violations, including market manipulation, money laundering and unauthorized financing, the People’s Bank of China (PBOC) said. It did not say if any violations had been found.

On the Europe-based Bitstamp exchange, the bitcoin price BTC=BTSP fell as much as 7 percent. By 1030 GMT (5:30 a.m. ET), it traded down around 4 percent. On Huobi’s website, the price quoted in yuan CNY=CFXS slid nearly 10 percent before pulling back to trade about 6 percent lower.

Chinese authorities have been ratcheting up efforts to stop capital outflows and relieve pressure on the yuan to depreciate. The currency lost more than 6.5 percent against the U. S. dollar last year.

With bitcoin’s soaring price and the relative anonymity it affords, some believe the digital currency has become an attractive option for tech-savvy Chinese to hedge against the yuan and circumvent rules that limit the amount of foreign exchange individuals can buy each year.

The Shanghai arm of the PBOC said it visited BTCC on Wednesday.

“The checks focused on whether the firm was operating out of its business scope, whether it was launching unauthorized financing, payment, forex business or other related businesses, whether it was involved in market manipulation, anti-money laundering or (carried) fund security risks,” it said.

In a separate statement, the PBOC in Beijing, where officers visited the offices of OKCoin and Huobi, said “the spot checks were focused on how the exchanges implement policies including forex management and anti-money laundering”.

Shanghai-based BTCC’s CEO Bobby Lee confirmed the visit, but said he believed the company was not out of line.

“We’re definitely vigilant. We think we are in compliance with all the current rules and regulations of running a bitcoin exchange in China,” he told Reuters by phone.

“I wouldn’t call it an investigation. I think they are working closely with us to learn more about our business model and the bitcoin exchange industry. We had a very fruitful meeting today,” Lee said.

A Huobi executive who declined to be named confirmed the PBOC visited their office on Wednesday, but declined to provide details. A spokeswoman for OKCoin told Reuters its platform was operating normally, and it was working with the authorities.

Last week, PBOC officials meet with the three exchanges, and the central bank publicly urged investors to take a rational and cautious approach to investing in bitcoin.

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Asian Stocks Cut Gains As Caution Grows; Dollar Eyed

Asian stocks cut early gains as investor caution grew before a news conference by President-elect Donald Trump on Wednesday, where his views on global trade and China will be carefully scrutinized for future policy implications.

The dollar stood tall against rivals on Monday after the latest U. S. payrolls data indicated strong underlying wage growth, strengthening the case for more rate increases in 2017.

MSCI’s ex-Japan Asia-Pacific shares index .MIAPJ0000PUS was flat on the day, having risen as much as 0.5 percent after posting a rare loss in the previous session. Australia’s S&P/ASX200 rose 0.9 percent while Hong Kong shares .HSI rose 0.2 percent.

Trading was light because Japan is shut for a holiday.

The caution in Asia is expected to ripple into European markets with futures pointing to a cautious start for various exchanges. FFIc1 FDXc1

“The dollar’s rising strength will be a growing concern for Asian markets, particularly Hong Kong, and investors will be waiting for Trump’s comments to get some clues on what areas the new administration will focus on,” said Alex Wong, a portfolio manager at Hong Kong-based Ample Capital.

Foreign investors will be wary of buying Hong Kong assets as the currency is pegged to the U.S. dollar, while the domestic business environment, particularly for retailers, will suffer more as residents up spending abroad.

Notwithstanding the growing worries around Trump’s stance on trade with emerging markets, 2017 has begun on a positive note in terms of capital flows for Asian markets, helped by an extended rally in U.S. equities.

Combined investment flows into Asia were positive at nearly $600 million for the week ending 4th January, reversing outflows posted for the previous week, data compiled by Nomura analysts shows.

U.S. stocks ended at record highs, fueled by optimism over Trump’s plans to stimulate the economy with lower taxes and increased infrastructure spending. Both the Nasdaq .IXIC and the S&P 500 .SPX ended at record highs. [.N]

But with markets perched at record highs and valuations at the upper end of historical trading ranges, particularly in the United States, market analysts are keenly aware that even a small disappointment from Trump’s policy proposals could trigger a massive wave of profit-taking.

In currencies, the dollar started the week on a firm note after Friday’s data showed a rebound in U.S. wages, pointing to sustained labor market momentum and more rate increases by the U.S. Federal Reserve.

“With expectations of more rate hikes on the horizon, we believe the dollar will resume its upward trend versus emerging market Asia currencies in the coming weeks,” Gao Qi, an FX strategist at ScotiaBank in Singapore, wrote in a client note.

The dollar was trading at 117.47 yen .JPY, nearly 2 percent above Friday’s lows of around 115. It was steady at 102.40 against a basket of currencies .DXY

China’s yuan CNY=CFXS gained on Monday after Beijing’s daily official fixing was stronger than market expectations and following weekend news that foreign exchange reserves fell to near six-year lows as authorities stepped up their intervention to protect the currency.

Bonds were stung by the strong U.S. data, with both two-year and 10-year U.S. Treasury yields inching higher as market participants eyed the probability of more rate hikes in 2017.

The yield on two-year U.S. Treasury notes US2YT=RR was perched at 1.21 percent, off Thursday’s low of 1.17 percent.

Oil prices edged lower, thanks to a stronger dollar and growing concern whether OPEC producers would stick to an agreement to cut output. Brent crude futures LCOc1 were down 0.3 percent in early trade.

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Asian Flash Surge Takes Euro To $1.07

A short-lived surge in the euro dominated this year’s last day of trade in major foreign exchange markets on Friday, with dealers citing a handful of orders as driving the dollar to its lowest since Dec. 8.

The euro climbed to as much as $1.07, two full cents higher, and despite an immediate retreat was still up 0.6 percent on the day at $1.0563 EUR= in morning trade in Europe. It was also 1 percent higher on the day at 123.45 yen. JPY=

The yo-yo moves overnight prompted analysts to draw parallels with the “flash crash” in October which briefly knocked almost 10 percent off the value of Britain’s pound.

As then, the shift came in the period at the start of the Asian day when markets are at their thinnest and the bulk of liquidity available tends to come from the automated computer programs run by banks and other major houses.

“It looks like it was a combination of thin markets, some year-end rebalancing against the dollar and covering of shorts above $1.05,” said Alvin Tan, a strategist with Societe Generale in London.

“The fact that banks have reduced the provision of liquidity given regulatory restrictions contributes to this kind of move and makes it slightly more structural. These kinds of crashes are going to be with us for some time.”

Further gains for the dollar are one of the big consensus plays for investors going into 2017, although signs of doubt have appeared in recent weeks, with analysts beginning to wonder how much appreciation a Donald Trump White House will tolerate.

Despite all the gains for the dollar since Trump’s victory in November, the single currency is down just 3 percent for the year against the dollar. A number of major banks have predicted a test of parity early next year. EUR=EBS

The dollar index, which tracks the greenback against a basket of six major rivals, also slipped half a percent to 102.18 .DXY, down from a 14-year high of 103.65 hit on Dec. 20 and up 3.8 percent on the year.

Similarly, although the yen has fallen 15 percent against the dollar in the past three months on expectations Trump will boost U. S. public spending and inflation, it is still up almost 3 percent for the year.

“It’s a really thin market today, and suddenly offers disappeared and short-term players pushed the euro higher and took out stops. That’s all,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

China’s yuan CNY=CFXS looked set to end the year down around 7 percent against the dollar, making it the worst performing Asian currency.

Beijing announced late on Thursday it would nearly double the number of foreign currencies in a basket that is used to set the yuan’s value.

Analysts said the change was in line with the central bank’s intention to discourage investors from exclusively tracking the yuan’s fluctuations against the dollar, but it would have limited impact on the Chinese currency, which is widely expected to weaken further against the greenback in 2017.

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Trump-Fueled Risk Rally Shifts To Japanese Bonds, Euro

Investors resumed the post-U. S. election trade of selling bonds and buying stocks on Wednesday after a pause earlier this week, albeit less aggressively, with Japan’s 10-year bond yield hitting its highest since February.

The dollar was in demand again too, rising to a one year-high against a basket of currencies as the euro hit a nine-month low of $1.07, and to an eight-year peak against the China’s yuan.

U.S. President-elect Trump’s plans to cut taxes and boost infrastructure spending would boost economic activity while his proposals to deport illegal immigrants and impose tariffs on cheap imports are seen driving inflation higher.

That prospect has given rise to expectations that U.S. interest rates will rise faster than previously anticipated, boosting the dollar.

As the Bank for International Settlements warned on Tuesday, a stronger dollar poses risks for global markets. But for now, investors are enjoying the ride, meaning stocks and the dollar are in favor at the expense of bonds.

“With 10-year Japanese yields briefly edging back above zero, the market will at some stage focus on whether the Bank of Japan will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months,” Deutsche Bank’s Jim Reid said in a note on Wednesday.

The BOJ announced in September it would cap the benchmark 10-year yield at zero as part of its long-standing battle against deflation and anemic growth.

“It would be a strange decision to abandon the new policy so soon after announcing it, so assuming global yields remain elevated they may be forced to buy more (bonds) than they thought when the new scheme was announced,” Reid said.

Japan’s 10-year yield rose to 0.03 percent JP10YT=RR, a nine-month high. Comparable U.S. Treasury yields rose 3 basis points to 2.27 percent US10YT=RR, edging back up toward Monday’s 11-month high of 2.302 percent and up from around 1.86 percent before the election.

U.S. interest rate futures are pricing in an 85 percent chance of a rate hike in December, compared to 75 percent before the election.

DOLLAR RISES AGAIN

In currency market trading on Wednesday, the dollar rose 0.3 percent against the yen to a five-month high of 109.62 yen JPY= and a one-year high of 100.32 on an index basis .DXY.

Sharp gains in U.S. bond yields have drawn investors to the dollar, and the dollar index is just 0.5 percent away from its highest level in more than 13-1/2 years.

The yuan CNY=CFXS weakened to 6.8703 to the dollar, its lowest level since December 2008.

“The narrative on the dollar is strong,” said Simon Smith, chief economist at FXPro.

“A move higher in interest rates next month is now a near dead cert, with the implied path for rates next year also moving higher and providing further support for the dollar.”

In equities, the FTSEuroFirst index of leading 300 European shares .FTEU3 followed Wall Street’s lead from the previous day and was up 0.2 percent, underpinned by commodity-related stocks.

A 5 percent fall in Bayer (BAYGn.DE), however, weighed on Germany’s DAX .GDAXI, which fell 0.2 percent. The drugmaker fell after a placement of 4 billion euros of mandatory convertible notes.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.2 percent, bouncing back from a four-month low touched earlier this week, while the yen’s slide toward 110 per dollar helped lift Japan’s Nikkei by 1.1 percent .N225.

The dollar’s strength has fanned fears investors could shift funds to the United States from emerging markets. Emerging market stocks .MSCIEF, which had fallen 7 percent in the four sessions to Monday, also extended gains for a second day on Wednesday.

On Wall Street, the Dow Jones industrial average .DJI rose 0.29 percent to a record closing high while the S&P 500 .SPX gained 0.75 percent. Since Trump’s unexpected victory last week, U.S. shares have rallied while U.S. bond prices tumbled, pushing up their yields sharply.

In commodities gold XAU= was steady at $1,228 per ounce, not far from a 5 1/2-month low of $1,211.8 seen on Monday, while an oil industry report that showed an unexpected build in U.S. crude stocks helped take this week’s shine off oil prices.

Brent LCOc1 futures, the global benchmark, fell 0.8 percent to $46.55 per barrel.

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HSBC Gets Approval For RMB-CAD Trade

HSBC China announced on Friday that it has been approved to be one of the first market makers for direct trading of the Chinese currency Renminbi (RMB) against the Canadian dollar in the inter-bank foreign exchange market.

HSBC China Vice President Song Yuesheng said the launch will facilitate trade and cross-border investment between China and Canada and increase the presence of the RMB in the North American market.

He said China and Canada have cooperated extensively on the internationalization of the Chinese currency with the establishment of an offshore RMB clearance bank in Toronto. HSBC will continue to help companies and institutions seize business opportunities as China pushes for increased usage of the RMB in the global market.

HSBC is an active player in China’s foreign exchange market making business. It was among the first market makers for currency trade of the RMB against the Japanese yen, Australian dollar, New Zealand dollar, euro, Singapore dollar, Swiss franc, South African rand, UAE dirham and Saudi riyal.

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Shanghai FTZ To Test Yuan Bond Trading

Shanghai’s free trade zone will be the test bed for yuan-denominated bond trading targeting overseas investors this month when the city government issues no more than 3 billion yuan (US$442 million) of municipal bonds.

The three-year bonds, to be used for debt swap, will target global investors and is the latest move by Shanghai to liberalize the finance sector in the FTZ since it was set up in September 2013, China Business News said, without giving a specific time frame for the launch of the bonds.

The bonds may help attract foreign investors and expand the cross-border use of yuan while also aiming to unify pricing.

By issuing the yuan bonds in the FTZ, the authorities hope to link the onshore and offshore bond markets to stabilize the yuan exchange rate and control the offshore yuan pricing. The aim is to help build an asset pricing, payment and settlement center as well as boost the yuan’s internationalization.

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Chinese Buyers Eye London Property

Chinese investors have increased their focus on London’s property market partly due to pound depreciation and new restrictions on property purchases in China, the Financial Times reports.

Chinese investment in London’s most exclusive areas shows an increasing trend since the Brexit vote at the end of June. Investment in the commercial property market has also been increasing this year, despite other investors withdrawing capital.

The number of inquiries from Chinese buyers about British properties reached a record level in September, according to data from Juwai.com, an online property portal.

During the third quarter this year, the proportion of Chinese purchases of up-market London homes rose to 2.6 percent from 1.8 percent in the second quarter, according to real estate agent Hamptons International.

Charles McDowell, a high-end London real estate agent, said he sold a home in Mayfair to a Chinese buyer for 160 million pounds (US$198 million) after the Brexit vote. “The weak pound has made a difference to them… In fact, it has saved the London real estate market,” he told the newspaper.

The increase in the commercial property market was even more obvious: in the six months leading up to the Brexit vote, Chinese buyers poured US$1.7 billion into London commercial property, a 75 percent rise from a year earlier, according to Knight Frank, a property consultancy.

Despite the economic uncertainty created by Brexit, Chinese buyers see the British currency and property markets as stable in the long term, the newspaper said.

Sixty percent of Chinese people with assets of more than US$1.5 million planned to buy property overseas in the next three years, according to a survey conducted by Hurun Institute. Half of them said Renminbi depreciation was the key concern.

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World Stocks, Commodities Climb As Economic Confidence Lifts

World markets had a swagger about them on Tuesday as upbeat economic data and signs of a revival in inflation pushed up stocks and commodity prices and kept the dollar at a nine-month high.

Factory surveys in the United States and Europe had boasted the best readings of the year so far on Monday and a six-month high for Japanese stocks in Tokyo [.T] overnight had followed a record close for the tech-heavy U. S. Nasdaq. [.N]

European markets started with Germany’s Dax .GDAXI nudging its highest level of the year as the closely-watch Ifo sentiment survey beat expectations a day after purchasing manager numbers had done the same.

The region’s mining firms .SXPP were the standout performers though as they hit a 14-month top as zinc surged to a five-year peak and iron ore reached its highest since mid-2014, all of which should pick up the pulse of inflation globally.

“We are seeing a pick up of economic activity against the backdrop of only one central bank — the Fed — that is likely to tighten policy and that is supporting asset markets,” said CMC Markets senior analyst Michael Hewson.

In the foreign exchange markets, the dollar .DXY took a breather having reached its highest since early February against other top currencies as traders continued to add to the bets on a December U.S. interest rate rise . [/FRX]

China’s yuan CHH=D3 went the other way, hitting its lowest since ‘offshore’ trading was introduced in 2010 as Beijing nudged down official rates again [CNY=PBOC].

It traded as soft as 6.7882 yuan per dollar. The currency’s fall of more than 1.5 percent since the end of September has prompted renewed suspicion of a possible extended slide in the yuan, even though officials have reiterated their expectations for a stable currency.

But the weakness has revived memories of a shock yuan devaluation last August and another rapid depreciation early this year – falls that triggered a bout of global market turmoil.

But analysts pointed out that during this round of yuan weakness, global risk sentiment was holding up.

“That highlights the extent to which dollar gains are unlikely to be as extended as they were (in the past),” said BNP Paribas currency strategist Sam Lynton-Brown, in London.

GOLDEN MINERS

The cheer around the mining sector increased as a production update pushed up London-listed giant Anglo American’s shares (AAL.L) up over 3 percent to take their gains this year to almost 270 percent.

The staggering rise has made Anglo the top performing stock on Europe’s STOXX 600 this year.

In Asia, Japan’s Nikkei .N225 rose 0.7 percent to levels last seen in April as a softening yen burnished the outlook for the country’s exporters. Australian stocks added 0.6 percent and Taiwan .TWII 0.7 percent.

Wall Street had taken encouragement from upbeat corporate results. Over one third of U.S. companies have now reported and 80 percent have beaten market expectations.

Another third of the S&P 500 components are scheduled to report earnings this week, including heavyweights Apple (AAPL.O), Alphabet (GOOGL.O), Amazon (AMZN.O) and Boeing (BA.N).

Merger and acquisition activity added extra fizz in the wake of AT&T Inc’s (T.N) $85.4 billion bid for Time Warner Inc (TWX.N), though the deal seemed destined to face stringent scrutiny from regulators.

In commodities, oil prices dipped on news of the impending restart of Britain’s Buzzard oilfield and Iraq’s wish to be exempted from OPEC production cuts.

Brent LCOc1 was down 9 cents at $51.37 a barrel, while U.S. crude CLc1 also lost 2 cents to $50.50.

But going the other way were metals with zinc shining and Chinese iron ore futures reaching their highest since August 2014.

Coal prices also reached new peaks after weeks of gains, a prop for the Australian dollar AUD=D4 as the two commodities are the country’s biggest export earners.

Another mover was the Canadian dollar which rebounded from a seven-month low after Bank of Canada Governor Stephen Poloz said the decision on whether to cut interest rates again was not one to take lightly.

The comments countered recent speculation about an imminent easing and nudged the U.S. dollar down to C$1.3333 CAD=D4 from a peak at C$1.3398.

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Nigeria Forex Crisis and Unfinished Naira-Yuan Swap Deal

Barely five months after a currency swap deal between Nigeria and China was enmeshed in controversy, the country’s import profile from the Far-East Asian nation has remained high and intermediated by the dollar.

While government denied striking such deal, the earlier move was widely celebrated as a panacea to unending huge dollar demand and pressure on the local unit. Still government agreed that the renewed relationship opened a new vista for the country’s political and economic relations with China, particularly as a major trading partner.

But a financial analyst close to government sources said the current administration has fast “developed a penchant for inaction or snail-paced response” to economic decisions that are capable of helping the struggling economy.

“While China’s gift can be a ‘suspect’ at certain times, it makes no sense to transact business with the country that records nearly half of our import bill in another currency, when it’s currency has been globally accepted as international one. This is all about running around, but not without self inflicted costs like exchange rate pressure,” the source said.

An investment and wealth advisory company- Afrinvest Securities Limited said that the strong participation of private investors in the Foreign Direct Investment and loan agreements will improve the implementation rate relative to past bi-lateral engagements and could potentially boost capital importation from China and domestic infrastructure investment.

“We are currently caught in-between the two positions taken by government. While still awaiting official clarifications, we think the ‘currency deal’ could either be a conventional swap, in which the CBN and China would exchange a stock of their currencies at a predetermined exchange rate to be reversed at maturity of the swap line.

It could also be a move by China to boost yuan-liquidity in Nigerian banks as a trade and investment currency in exchange for future assets transfer (probably oil) to China to liquidate the swap line.

“While we believe a ‘currency deal’ with China is not an effective substitute for appropriate fiscal and monetary policy flexibility in adapting to the lower crude oil price environment, we still view the development as positive as it could reduce the cost of transaction with Nigeria’s largest trading partner and also ease the immediate foreign currency challenges associated with Nigeria’s negative terms of trade.

“Key risk to the downside is that the ease of transaction with a highly competitive country like China could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity. We think this concern is justified and further emphasizes the need to deepen domestic policies on improving competitiveness,” the company said in a note to The Guardian.

Of course, the Nigeria-China currency deal, beyond the anticipated easing in foreign exchange logjam, especially for importers with bias for the Far-East Asian country’s products, hold other promises, as well as challenges, going by the proverbial “two sides of a coin.”

For one thing, former President Goodluck Jonathan also made a similar visit to China in 2013 in which several infrastructure deals were signed, but later, the economic integration between the two countries was reduced to trade than finance and capital flows.

This is especially true with China, a country which political ideology currently swings on almost equal proportion between capitalism and state control. Although the ICBC appear to be independent and capitalist-oriented, the obvious is that as a corporate citizenship, it would always act on behalf of state’s interest, where government’s control is not absolute.

But a top source at the Central Bank of Nigeria (CBN), unequivocally said there was no such deal and that it only existed in speculations and news reports.

But asked if such would not have been an option for the country, the source said that issues of that nature bother on both monetary and fiscal ratifications.

“If it is swap, how will it be exchanged- crude oil, reserves, or what? You find out that whatever, CBN government will be involved. It is an option that must be weighed thoroughly on its merits,” the source said.

Foremost industrialist, Mazi Sam Ohuabunwa, in a monitored programme, said that the optimism greeting the Nigeria-China deals might pale into nothing, if the negotiators fail in the contents and terms of the agreement, especially, knowing that antecedents of similar deals on other African countries have not been totally progressive.

“If the deal will give off technology transfer, employment opportunities and unfair competition against local investors, then it makes no economic sense,” he said.

He warned that Nigeria must have sound and focused representatives to get a favorable deal out of this development, not being blindfolded by the momentary gains, at the expense of other long term opportunities.

“What is the economic sense if the deal allows Chinese to take 100 jobs out of 110 jobs, leaving only 10 for Nigerians?” he queried.

The Foreign Affairs Minister, Geoffrey Onyeama, once admitted: “It’s not really a swap…They agreed that the money should be internationalised. So, they started that for a while. They were protecting it also. They did not allow it to be fully exchangeable. But now, their economy is fully strong, they are looking for a way to internationalise the currency. Now, they were saying essentially that they wanted to segment it.

“In West Africa, they are looking for a hub. Ghana is interested in being the hub for the currency to circulate for those who want to use it. It is not compulsory. But Nigeria is a bigger country with a bigger economy. So, that does make sense. And they became a kind of attracted to Nigeria to be the hub. So, for us, the benefit is that it gives us small flexibility.

“So, if Nigeria is buying Chinese goods, for instance, it will be in our interest to use the yuan because we know there is a lot of squeeze for the dollar. But we still use the dollar.

But if it is not enough and there are some people who want to invest in the country, instead of crying that they cannot take dollars out, there might be yaun that they would be happy to take out because it is now internationalised as a currency and they can use it. So, it gives us a much larger option.

“As you know, a lot of importers now are complaining that they are not able to access the dollars to buy goods and things like that. So, if in addition to dollar, we have yaun, then they can also make it available. So, it has given us a greater opportunity for those people who now import notwithstanding the shortage of dollars. So, that is really what it’s more about rather than a swap deal or any such thing.”

Statistics have shown that between 2013 and February 2016, Nigeria received $213.4 million worth of capital inflows from Mainland China, which is about 0.4 per cent of the $52.4 billion total capital importation into Nigeria within the period, ranking as the 18th largest source of foreign capital inflows into Nigeria.

But including the autonomous region of Hong Kong, total capital flows from People’s Republic of China was $484.2 million within the period, still less than one per cent of total capital importation into Nigeria.

Similarly, trade relations have been on the rise, with merchandise trade between the two countries estimated at $30.6 billion between 2013 and 2015, representing 8.5 per cent of Nigeria’s total merchandise trade.

Consequently, the Balance of Trade is heavily lopsided in favour of China, where import from the country between the review period is 7.8x more than Nigeria’s export. China remains one of the few trading partners that Nigeria still operates trade deficit with, with 22 per cent of Nigeria’s imports between 2012 and 2015 from China, while only 1.5 per cent of exports went to China.

“Efforts to buoy capital integration have mainly been a unilateral objective of Nigeria. The CBN over the past five years has built up its stock of external reserves denominated in yuan from $101.3 million in 2011 to $2.2 billion, representing 7.5 per cent of gross reserves, as at first quarter of 2015,” Ayodeji Eboh of Afrinvest’s investment banking arm, said.

The latest report of the country’s import trade by Nigerian Bureau of Statistics stood at N2.1 trillion at the end of second quarter (Q2), 2016, showing an increase of 38.1% from the value N1.5 trillion recorded in the preceding quarter. The increase in import value can be traced to a decline in the value of the naira.

The structure of Nigeria’s import trade by section was dominated by the imports of boilers, machinery and appliances; parts thereof, which accounted for 34.9 per cent of the total value of import trade in Q2.

Other commodities, which contributed noticeably to the value of import, were mineral products 15.8 per cent, vehicles, aircraft and parts thereof, vessels 14.7 per cent, products of the chemical and allied industries 7.6 per cent and base metals and articles of base metals 5.1 per cent.

The import trade classified by broad economic category revealed that capital goods and parts ranked first with N663.6 billion or 32.1 per cent. This was followed by Industrial supplies with the value of N421.2 billion or 20.4 per cent and transport equipment and parts with N356.1 billion or 17.2%. The value of motor spirit stood N296.1 billion.

Interestingly, Nigeria’s import trade by direction showed that it imported goods mostly from China, Netherlands, United States, India and the United Kingdom. The imports’ were N493.5 billion or 23.9 per cent, N285.7 billion or 13.8 per cent, N199 billion or 9.6 per cent, N124.9 billion or six per cent and N119.3 billion or 5.8 per cent of the total value of goods imported respectively, during the quarter.

Further analysis of consumed goods is largely from Asia with import value of N886.1 billion or 42.8%.

While the move is still a stalemate, experts were optimistic that such would be positive step for the country.

The President of the Nigerian Statistical Association (NSA), Dr. Mohammed Musa Tumala was reported as saying that the currency swap deal will ease the demand pressure on the naira.

According to him, the option of taking to yuan-denominated bonds sold by overseas entities would provide support for the weak naira, following sliding value against the dollar, euro and others. Again, the yuan is cheaper than euro bonds.

Similarly, the Chief Consultant of Lagos-based B. Adedipe Associates, Dr. Biodun Adedipe, has said that the naira/yuan conversion deal has the prospects of shoring up the fortunes of the nation’s currency in the foreign exchange market.

He was optimistic that the initiative would ease trading transactions by investors in both countries, as the ordeal of converting the two currencies, first to dollar would cease, giving exchange value advantage to the traders.

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Government Issues 5-Yr Bond To Tame Cedi Pressure

Government’s decision to re-open a five-year GHC400million domestic bond has bolstered expectations that the cedi will from this week see one of its strongest runs amid rising pressure on the local currency in recent times.

This has prompted a flurry of speculations in the market with analysts predicting that the cedi will rally strongly against the major trading currencies as foreign inflows deepen on the back of the auctioning of the bond, which is available to both domestic and foreign investors.

A report by RMB Global Markets Research has forecasted that the bond, which will mature in July 2021 at a coupon rate of 24.75percent, will cushion the mounting pressure on the local currency.

“The cedi experienced some pressure last week as the flurry of dollar flows on the back of the auction and positive Consumer Price Index (CPI) numbers thinned out.

“However, we expect to see a stronger cedi this week as the re-opening of a five-year domestic bond maturing on July 20121 should attract some flows to the market,” the RMB report published every week.

The report further added that it expects the cedi to depreciate but at a slower place and that “the unit will settle at 4.05 against the dollar at the end of 2016.”

The cedi, in 2016, has offer a huge relief to investors who have been yearning for a stable currency regime.

It has been able to withstand pressures from market forces since January 2016, thanks partly to regular foreign currency supply, the presence of the International Monetary Fund (IMF), and new FX rules by the Central Bank.

However, recently the local currency has been under some pressure since the government pulled out of the sale of a record fifth Eurobond issue with the cedi rising to as high as 3.95 cedis to the dollar from 3.80 cedis, after government announced it will only “issue new notes at the optimal time and the right conditions.”

So far, the currency has lost about 3percent of its value this year, especially against the US dollar and has been hovering between GHC3.80 and GH¢3.95 since January. Previous years have seen between 15 to 40 percent currency depreciation.

Due to the new FX rules, the Bank of Ghana from this month is surrendering US$150 million in export proceeds to commercial banks just to shore up the cedi.

In earlier interviews, investment and fiscal analysts have noted that the currency in a long time, will not see substantial depreciations.

Sampson Akligoh, Managing Director of InvestCorp-an investment bank, told the B&FT he does not see a noticeable deprecation of the cedi in Q3-2016, adding, that the current trend is likely to continue.

“Reasonably, the tight monetary policy condition is helping to contain institutional portfolio investors, and the extent to which this will continue depends on policy credibility,” he said.

Government has also announced plans to issue as much as GHC25.3billion between now and December this year and 90percent of the expected amount, according to the government, is expected to be used to rollover maturing debts.

A statement from the Bank of Ghana said, “In accordance with the Government’s Medium-Term Debt Management Strategies (MTDS), the Bank of Ghana on behalf of the Ministry of Finance, announces for the information of Primary Dealers, Banks, prospective investors in the domestic securities market and the general public, the revised Issuance Calendar for Government of Ghana Securities for August to December 2016.”

The Central Bank’s statement also stated that government would consider accepting a reasonable amount above the target to build buffers which would be used to reduce borrowing.

Per the new calendar, GHC60million will be issued every two weeks for the 1-Year Note, through the primary auction. Settlement will occur on the first and third Mondays of each month. Also, the two-year Note will be issued monthly through the primary auction with settlement occurring on the second Monday of each month.

The 3, 5 and 10-Year issues will be done through the book-building method, with settlement on the last Monday of each month. Meanwhile the statement forecasts that the GH¢1billion 5-Year Bond scheduled for next month, may be issued partly in a United States Dollar equivalent Bond, with settlement on 12th and 26th September, 2016 for the cedi and US Dollar Bond respectively.

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