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China Takes Next Step In Currency Globalization, With Some HK Stocks Priced In Yuan

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China’s gradual internationalization of its currency will shift to its next leg on Monday when about two dozen Chinese companies start trading in their home currency in Hong Kong’s stock market. Hong Kong stocks such as Alibaba (NYSE: BABA) and Tencent are among the 24 stocks which will be priced and traded in both yuan and the Hong Kong dollar under the Dual Counter Model on the Hong Kong stock exchange (HKEX) from Monday. The scheme is targeting overseas investors with yuan holdings initially, but will later include mainland investors via the Hong Kong-China Stock Connect link-up later. Offshore yuan deposits in Hong Kong alone are estimated at some 833 billion yuan ($117 billion). Fund managers say the step reflects Beijing’s desire to expand the use of yuan outside China and provide another avenue for yuan-denominated investment, thus reducing the risk of capital outflows chasing higher-yielding currencies such as the U.S. dollar. “China is pushing yuan internationalization to avert geopolitical risks and reduce reliance on the dollar, and for that purpose, you need wider use of the Chinese currency,” said Ding Wendie, strategist of Global Capital Investment at China Asset Management Co (Chunam). Ding said the scheme is a major milestone and expects the model to be expanded in the future, beyond stocks to bonds and even alternative assets, boosting overseas asset pools denominated in yuan. The initiative comes amid a steady stream of bilateral yuan-denominated deals China has struck with trading partners, from Chinese oil purchases in the Middle East to commodities trade with partners from Brazil to Russia. Beijing has retained close ties with Moscow despite the invasion of Ukraine. The U.S. dollar remains the dominant global currency, accounting for 42% of global payments. The yuan’s share is just 2.29%, but is up from 1.95% two years ago. A significant breakthrough in China’s efforts to promote use of the yuan came this month, when Pakistan paid for its first government-to-government import of discounted Russian crude oil in yuan. “When a currency is internationalized, it’s not only used in trade, physical goods, or services. It also has to be parked in investment vehicles,” said Dong Chen, Head of Asia Macroeconomic Research at Picket Wealth Management. For foreign investors with yuan holdings, “buying shares in Hong Kong without really going into mainland China will be a much, much easier way to park your holdings of this currency,” he said. YUAN INCENTIVES Under the dual counter arrangement, investors can choose to trade a stock either using Hong Kong dollars via the HKD counter, or yuan via the RMB counter, with market makers providing liquidity and minimizing price discrepancies. Most of the first batch of stocks eligible for yuan trading – which include AIA Group (OTC:AAGIY), Sun Hung Kai Properties and Hang Seng Bank Ltd – are not listed in China. Fund managers expect a lukewarm interest in the yuan counters initially, given near-term risks including a weakening yuan and wobbly stocks as China’s economy struggles. But they expect demand to pick up over time. “Mainland investors, including mutual fund companies like us, have genuine incentives to trade Hong Kong stocks in yuan,” said Ding of ChinaAMC. “Our fund returns and dividends are priced in yuan, so using the RMB counter can remove forex exchange costs, and shield us from currency volatility.” There are many other reasons to trade in yuan, said David Friedland, Asia Pacific managing director at Interactive Brokers (NASDAQ:IBKR), which offers yuan-trading services. “There’s lot of political uncertainty these days so you may want to hold yuan rather than U.S. dollars, or the Hong Kong dollar, which is pegged to the U.S. dollar.”

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Ford Signs Initial Deal To Sell Germany Plant To Investor

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Ford Motor Company (NYSE:F) held a work meeting Friday where the Detroit automaker revealed that they have found what was described as a major international investor for Ford’s German plant in Saar louis and signed initial agreements together with the western state of Saarland. “This is an excellent basis for further negotiations, with the potential to create around 2,500 jobs in Saar Louis,” said Martin Sander, head of the company’s German unit Ford Werke. “This week we have taken a big step towards this goal,” he said, adding that the aim was still to transform the plant and create future employment opportunities. According to a late January report by The Wall Street Journal, China’s BYD (OTC: BYDDY) was one of fifteen investors expressing interest in acquiring the Ford site in Saar louis once the production of the Ford Focus, its current model, ceases in 2025. Shares of F are up 0.67% in premarket trading on Friday.

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Dutch Curb Chip Equipment Exports Amid US Pressure

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The Dutch government on Friday announced new rules restricting exports of certain advanced semiconductor equipment, a move that comes amid U.S. pressure on its allies to curb sales of high-tech components to China. “We have taken this step in the interest of our national security,” said Trade Minister Lieske Schreinemacher, adding such equipment may have military applications. Schreinemacher added only a “very limited” number of companies and product models would be affected. China was not named. ASML, a Dutch company that is a key equipment supplier to computer chip makers, said in the reaction it would not change its financial guidance as a result of the new rules. The rules, which will require companies that make advanced chipmaking equipment to seek a licence before they can export it, are expected to go into effect on Sept. 1. A technical document specifying which equipment will require a licence accompanied the announcement. The introduction of the list is the result of a high-level agreement between the U.S. and two allies with strong chip equipment industries – The Netherlands and Japan – to tighten restrictions as Washington seeks to hobble Beijing’s ability to make its own chips. ASML, Europe’s largest technology company, repeated a March statement indicating the top section of models of its second most advanced “DUV” product line, which are used to manufacture computer chips, would need a licence. It named its 2000 series “and subsequent” models and said it did not expect the rules to have a material impact on its financial forecasts. ASML’s most advanced EUV machines have never been shipped to China. ASML’s shares were down 3.6% after the news, while smaller rival ASM International (OTC:ASMIY) dipped 1.8%. The U.S. in October imposed export restrictions on shipments of American chipmaking tools to China from U.S. companies like Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT) on national security grounds, and lobbied other countries with key suppliers to do similar. China decried the move, part of a heightening of tensions between the two countries that has spanned everything from 5G equipment and alleged spy balloons to relations over Taiwan. Reuters reported on Thursday the U.S. may introduce additional rules next month. Schreinemacher said she expected about 20 licence applications on an annual basis, representing a “limited part of the total product portfolio of the companies that fall under this rule”. ASML has been restricted from selling EUV machines without a licence under an international agreement known as the Wassenaar Arrangement, but the Dutch rules now make clear that EUV machines also fall under the Dutch rules.
European Union countries share a common trade policy and generally use the Wassenaar Arrangement to determine which exports are restricted on security grounds. The new Dutch list published may later be adopted by other European countries or added to the EU list, though few other European countries export high-end chipmaking equipment.
German manufacturers supply essential parts to ASML, including lasers made by Trumpf and lenses made by Zeiss, among others.

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SAIC’s MG Motor Brand Launches New Electric Vehicle Leasing Offer In France

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MG Motor, owned by Chinese company SAIC Motor, on Friday, announced a new leasing offer whereby drivers in France can get for 99 euros ($107.6) a month its MG4 electric car, matching a scheme the French government would like to see benefiting cars made in Europe. The offer runs from July 1 through to August 31 and is done in conjunction with MG Motor’s French banking partner Credit Agricole (OTC: CRARY) Consumer Finance. It is based on people getting a “super bonus” incentive of 7,000 euros for low-income buyers and also includes a 2,500 euros public aid paid in exchange for scrapping an old thermal engine car. MG Motor’s offer comes as major car companies from around the world compete in the electric car market, which is forecast to grow rapidly as customers ditch older models given current trends to protect the environment. The brand calls it its own “social leasing” offer, in reference to a scheme the French government is working on to make electric vehicles more affordable. It has been delayed several times because the French authorities fear it would benefit mainly Asian brands. According to a government source, it should be unveiled later this year and implemented in 2024, when the first European-made affordable electric cars will come to the market, such as the Citroen e-C3 from Stellates and the Renault (EPA: RENA) R5. The MG4, imported from China, was ranked as the 5th most sold EV in France in May, according to the French electric mobility association Avere-France.

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