International capitals likely to seek ‘safe haven’ in China amid Western bank crisis

International capitals likely to seek ‘safe haven’ in China amid Western bank crisis March 21 2023

The unfolding bank crisis in the US and Europe as well as the highly controversial handling of the crisis has hit international investors’ confidence in the Western financial system and shaken US’ financial hegemony, experts said on Tuesday, noting that more international capital is likely to flee from Western markets and to Asia, including the Hong Kong Special Administrative Region (HKSAR).

Since the bank meltdowns in the US and Europe, there have already been growing discussions of international capital rushing to the HKSAR and Singapore. A Bloomberg report on Tuesday said as “some of the ultra-high-net-worth individuals and their family offices will look beyond the default option of using its rescuer UBS Group AG for all their wealth management needs… Asia is an obvious destination,” specifically pointing to Singapore and the HKSAR.

The HKSAR is also set to host the Wealth for Good summit on Friday, which, according to media reports, is aimed at attracting global billionaires.

While Switzerland aims to halt its banking crisis through UBS’ rescue merger of the embattled Credit Suisse, it is causing turmoil in the bond market after Additional Tier 1 (AT1) debt worth 16 billion Swiss francs ($17 billion) become worthless as part of the deal.

AT1, also known as “contingent convertibles,” are relatively risky investments that can be converted into equity or written down completely if a bank gets into trouble.

However, equity investments are usually classed as secondary to AT1 bonds, and the surprising move has angered such bondholders.

The Swiss authorities’ brutal move sparked concerns about AT1 bond investment and the larger credit market as a whole, which will make it increasingly hard for lenders to increase capital by issuing AT1 bonds, Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Tuesday.

It also represents the biggest loss inflicted on AT1 bondholders since these instruments were developed after the 2008 financial crisis, according to media reports. The decision by Swiss authorities to wipe out Credit Suisse’s AT1 bonds could reduce demand for this type of bond in the long term, Reuters reported on Tuesday, citing a Goldman Sachs strategist.

The UBS buyout of Credit Suisse only temporarily quells the banking crisis in Europe, but it’s a wake-up call for the financial system in the continent, Zhao Yongsheng, a professor at the Institute of Regional and International Studies at the University of International Business and Economics in Beijing, told the Global Times.

Risks persist in Europe’s banking sector amid loosened restrictions, the growing emphasis on profits and other problems, Zhao said.

In sign of lingering fears, Credit Suisse shares plunged 53 percent to less than $1 on Monday. The woes of First Republic Bank in the US continue to mount as a $30 billion infusion by a group of large US banks failed to rescue the beleaguered bank.

First Republic stock fell 47 percent to a record low on Monday, and trading in its shares was halted several times for volatility on the same day.

A recent study revealed that nearly 200 banks in the US could fail on the heels of Silicon Valley Bank due to increasing interest rates and potential depositors’ withdrawals.

A larger financial crisis will be inevitable if Switzerland and the European continent don’t change their profit- and market-oriented American-style finance to restore Europe-style finance that is more focused on regulation and prudence, Zhao noted.

“The operations of Chinese banks are stable and such a crisis is unlikely to occur in China,” Dong said, noting that China has strict regulations of its banks, while the entry threshold in the banking sector is very high and the total number of banks is under strict control.

“The bank crisis triggered by Silicon Valley Bank’s collapse, along with US’ weaponization of the US dollar since outbreak of the Russia-Ukraine conflict, has dealt a blow to international investors’ confidence in the dollar, dollar-denominated bonds as well as the US Federal Reserve, and has shaken US financial hegemony,” he said.

More international capital will flee from the US to buy gold and yuan-denominated assets, Dong said. “China’s financial market will become a ‘safe haven’ for investors who seek security amid the growing global bank crisis, as the Chinese financial market is increasingly open and the country’s strong economic rebound will bring more certainty.”

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