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China unveils rate reform to steer funding costs lower for firms

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China’s central bank unveiled a key interest rate reform on Saturday to help steer borrowing costs lower for companies and support a slowing economy that has been hurt by a trade war with the United States.

The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower  real lending rates,” the PBOC said in a statement published on its website.

The central bank will “deepen market-based interest rate reform, improve the efficiency of interest rate transmission, and lower financing costs of the real economy,” it said.

Chinese banks’ new LPR quotations will be based on rates of open market operations, and the national interbank funding center will be authorised to publish the rate from Aug. 20, the PBOC said. It added the rate will be published every month on the 20th, effective this month.

Banks must set rates on new loans by mainly referring to the LPR and use LPR as the benchmark for setting floating lending rates, the PBOC said, adding that banks will be barred from setting any implicit floor on lending rates in acoordinated way.

The central bank said five-year and longer tenors will be added to the existing one-year LPR, which will help banks set rates on long-term loans such as mortgages.

China will add eight small banks, including two foreign-funded banks, to the existing 10 nation-wide banks that will be allowed to submit LPR quotations, the central bank said.

The move followed pledges from China’s State Council on Friday that the country will rely on market-based reform measures to help lower real interest rates for companies.

The central bank said that it will strengthen its supervision on banks’  rate quotations and punish banks for irregularities that disrupt the market order.

The central bank will incorporate LPR application into its macro-prudential assessment (MPA) to urge banks to use LPR pricing.

Sharper Slowdown

This week’s data broadly showed China’s economy stumbled more sharply than expected at the start of the third quarter, as the intensifying trade war with the United States took a heavier toll on businesses and consumers.

Second-quarter economic growth slowed to a near 30-year low. Tang Jianwei, an economist at Bank of Communications in Shanghai, said the reform could be seen as a guided rate cut as PBOC can guide rates of its open market operations, which will be closely followed by the LPR.

“The tool (LPR quotation reform) equals to a guided rate cut, and is only pushed out by the PBOC at crucial moments,” said Dai Zhifeng, analyst with Zhongtai Securities Co.

The central bank has pledged to gradually unify two interest rate “tracks” – its market-based rates developed in recent years and its benchmark bank deposit and lending rates.

Analysts say the new LPR rate will be lower than the current level, but they are divided over the scope of reductions on borrowing costs for firms.

To free up funds for lending and to accommodate local government project financing, most analysts still expect the central bank will cut banks’ reserve requirement ratios (RRR) further in coming months, on top of six reductions since early 2018.

Sources have told Reuters that more aggressive action such as interest rate cuts are a last resort, as it could fuel a sharper build-up in debt.

In July, central bank head Yi Gang said China would keep its benchmark deposit rate for a relatively long time, but would phase out its benchmark lending rate in the push to unify the benchmark lending rate and market-based rates.

China’s banks currently price their loans based on the benchmark lending rate that has been kept unchanged since October 2015, hampering the central bank’s efforts to lower borrowing costs.

The PBOC launched the LPR in 2013 to reflect rates that banks charge their best clients. But the LPR has been reacting little to market demand and supply, with the one-year rate currently at 4.31%, versus benchmark one-year lending rate of 4.35%.

China’s short-term money market rates have been falling more quickly in recent months due to the central bank’s cash injections.

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WeWork’s on-again off-again IPO delayed again

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People walk out of the co-working space WeWork in the Williamsburg neighborhood of Brooklyn in New York.

Spencer Platt | Getty Images

After a series of setbacks on the road to an initial public offering, the parent company of real estate start-up WeWork is delaying the move, sources told CNBC Monday.

However, no plans have been set on how long it’s delayed for, the sources said.

The move comes days after the We Company, WeWork’s parent company, announced sweeping corporate governance changes in an amended S-1 filing made public Friday.

The company is expected to decide on Monday evening whether it will proceed with the IPO this week, sources told Reuters requesting anonymity because the matter is confidential. The sources also told Reuters the We Company is considering delaying its initial public offering until October at the earliest, concerned that its stock market debut would be snubbed by many investors, people familiar with the matter said on Monday.

The Wall Street Journal first reported on the potential IPO delay.

On Friday, We Co. announced plans to curb CEO and founder Adam Neumann’s voting power. The company said it changed its high-vote stock from 20 votes per share to 10 votes per share.

The company also eliminated a key provision that would have allowed Neumann’s wife, Rebekah, to lead the search for his successor should he ever become permanently disabled or deceased. Instead, WeWork’s board would pick a successor.

In addition to the power struggle at the company, the last $47 billion valuation for the real estate start-up was being slashed by $20 billion or even lower. SoftBank, WeWork’s biggest outside investor, was also reportedly pushing to shelve the IPO.

WeWork previously said it will list its shares on the Nasdaq under the ticker “WE.”

WeWork did not immediately respond to a CNBC request for comment.

CNBC’s Leslie Picker and Reuters contributed to this report.

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Saudi Arabia has to explain how its oil assets in Abqaiq were attacked, says ex-US diplomat

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Smoke billows from an Aramco oil facility in Abqaiq after drone attacks sparked fires at two Saudi Aramco oil facilities.

AFP | Getty Images

Saudi Arabia has “a great deal of explaining to do” on how it could not defend its “most critical” oil facility from drone attacks at the weekend, said Gary Grappo, former U.S. ambassador to Oman.

The Kingdom spent an estimated $67.6 billion on arms in 2018, according to Stockholm International Peace Research Institute. Saudi Arabia was just behind the U.S. and China in terms of defense spending, Grappo told CNBC’s “Squawk Box” on Tuesday.

“I think the Saudi leadership has a great deal of explaining to do that a country that ranks third in terms of total defense spending … was not able to defend its most critical, and I can’t underscore that enough, its most critical oil facility from these kinds of attacks,” said Grappo, who was previously in senior positions at the U.S. embassies in Riyadh, Saudi Arabia, and Baghdad, Iraq.

Saudi Arabia is one of the world’s largest oil exporters, and damage to its oil facilities ignited fears of supply disruption around the world.

It’s a bit alarming that these folks got through … they were exquisitely precise, they knew exactly what to hit, they hit it perfectly,

Bob McNally

Rapidan Energy Group

Oil prices jumped after the Saturday attack on Saudi Aramco’s oil processing facility at Abqaiq and the nearby Khurais oil field. That knocked out 5.7 million barrels of daily crude oil production — which is more than half of Saudi Arabia’s global daily exports and over 5% of the world’s daily crude production.

The U.S. and Saudi Arabia have blamed Iran for the attacks.

“We’re talking about drones. Now, drones are not so easily detectable but, nevertheless, they had to be able to see that this was a strong possibility given the previous attacks they’ve experienced in previous oil facility, airports and elsewhere,” said the former diplomat who is now a distinguished fellow at the University of Denver.

Saturday’s attack was not the first time that the Abqaiq oil processing plant was targeted. In 2006, security guards blocked an attempted attack by al-Qaida militants on the facility.

Bob McNally, founder and president of consultancy Rapidan Energy Group, said he was “disappointed, but not surprised” by the attack. He said he had expected Riyadh to “raise defenses,” especially after al-Qaida’s previous attempt to attack its facilities.

“It’s a bit alarming that these folks got through. We looked at those photos that were released by the Trump administration — they were exquisitely precise, they knew exactly what to hit, they hit it perfectly,” he told CNBC’s “Squawk Box” on Tuesday.

“For all we know, they could come back. So, no grounds for complacency, in my view.”

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Hong Kong digital banks launch may face delays due to protests

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From left, the flags of the Hong Kong Stock Exchange, China and Hong Kong are seen flapping in the wind on May 6, 2019.

Anthony Wallace | AFP | Getty Images

The launch of new online-only banks in Hong Kong is expected to be delayed in part due to anti-government protests in the city, people with direct knowledge of the matter said.

Most of the eight newly licensed digital banks in Hong Kong, including joint ventures involving Standard Chartered and Bank of China Hong Kong, had aimed to begin operating before the end of 2019.

But as protests stretch into a fourth month, the new banks, seen triggering the biggest shake-up to Hong Kong’s retail banking sector in years, will now launch early in 2020, the people told Reuters.

A delay would be the latest sign of the damage being wrought on the Asian financial hub’s economy due to the political turmoil that erupted in June.

Some of these so-called virtual banks had aimed to launch brand promotion campaigns as early as this month, but these plans have now been put off, the people said, on condition of anonymity given the sensitivity of the matter.

“This form of banking service is mainly aimed at the youth, millennials, and many of them are out on the street these days joining the protests,” a senior executive at a licence winner said.

“It will be difficult to launch a brand campaign around them and attract their interest when their priority is clearly not having another bank account,” said the executive, declining to be named as he was not authorized to talk to media.

More than 100 days of sometimes violent protests were sparked by a bill that would have drawn the semi-autonomous Chinese territory closer to the mainland Chinese legal system. The bill was withdrawn earlier this month, but the protests have since broadened into calls for universal suffrage.

Virtual banking permits

Hong Kong awarded virtual banking licences to three groups in March — joint ventures led by StanChart and BOC Hong Kong, and a subsidiary of the international arm of Chinese online insurer ZhongAn Online P&C Insurance.

The banks intended to launch services in six-to-nine months, the Hong Kong Monetary Authority (HKMA) said at that time.

Five more licences were issued later to joint ventures led by smartphone maker Xiaomi and Tencent, and a unit of Ant Financial among others.

HKMA said starting six-to-nine months after authorization was “not a rigid requirement”, but services were expected to be rolled out to the public in the fourth quarter at the earliest based on the virtual banks’ latest indications.

StanChart said its virtual bank joint venture was working towards a launch in early 2020. Livi VB Ltd, the virtual banking joint venture led by BOC Hong Kong, said it was working towards the launch in the near future. ZhongAn declined to comment.

A spokeswoman for the Xiaomi-led joint venture said the virtual banking business was in the preparation stage, while Ant said that work for its bank was progressing smoothly. Tencent led-Fusion bank did not respond to a request for comment.

Soft launch

A couple of the licence winners could still ‘soft launch’ in 2019, restricting services to staff and their families ahead of a full launch, the people said.

The virtual banks plan to offer savings accounts, credit cards, personal loans and travel insurance, and will try to take market share from HSBC, StanChart and some Chinese lenders who currently dominate retail banking in Hong Kong.

The launch delay is also partly due to the time required to build technology infrastructure, compliance and customer acquisition processes, and hire staff, the people said.

“This is about building a new bank from ground zero, with regulatory standards that are similar to traditional banks,” one person said.

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