Raphael Stevens

Foreign investors have been flooding into China over the past two weeks. For all but a few, it is their first trip in three years, since the country walled itself off from the outside world in a bid to exclude covid-19. Those who did enter during the height of China’s zero-covid mania spent weeks in quarantine, emerging to find a society under suffocating lockdowns. Unsurprisingly, the value of onshore stocks held by foreigners had fallen by December to $3.2trn yuan ($470m), about 4% of the total mainland market capitalisation—and down from 4.3% a year earlier, according to the most recent official data. Meanwhile, the value of Chinese private-equity deals collapsed by 53% last year compared with the one before, according to Bain & Co, a consultancy. China’s leaders are now asking global investors to forget the past three years. Recent weeks have been spent hosting a reopening party which began with a high-level development forum in Beijing bringing in numerous executives, including Tim Cook of Apple, an American tech firm, and Ray Dalio of Bridgewater, an American investment firm. The festivities finished with the Boao Forum, sometimes called the “Davos of Asia”, on March 31st.Here foreign investors heard Li Qiang, Xi Jinping’s newly promoted deputy, double down on promises of reform and opening. A read-out from the event reminded visitors that “China will open its door even wider to the world,” and that it welcomes investors to “share more of the dividends of China’s opening up and development”.In mid-March Chinese regulators added more than 1,000 mainland-listed companies to a list that foreign investors can access through Stock Connect, which links Hong Kong-based investors to mainland stocks. It is the biggest reform to the system in many years, leaving about 90% of mainland bourses’ market capitalisation open to foreign investors. In their first three weeks, the changes alone ushered in $4bn of inflows. Analysts at Goldman Sachs, a bank, think they will eventually bring in $60bn in overseas capital if foreigners purchase a similar share of these stocks as they have of others in the scheme.Another way foreigners can invest in Chinese firms is if they are listed abroad. Regulators are clarifying how overseas listing will work in future. Starting on March 31st, Chinese companies planning foreign listings must submit paperwork to local regulators within three days of filing for such a listing. “Variable-interest entities”, ownership structures used in most overseas listings to circumvent restrictions on foreign investments, have recently been recognised by authorities after years of ambiguity. Gavekal Dragonomics, a research firm, predicts that these rules will mean more onshore initial public offerings and fewer overseas ones. But, as an investor notes, by making things clear, the rules should reduce the regulatory risks that have dogged overseas listings.How much will Beijing’s charm offensive shift sentiment? The country’s stockmarkets experienced strong inflows in January and Febuary, but the reopening boom has since faded. Foreign investors sold off $26bn in bonds in the first two months of the year. Big improvements in the months to come seem unlikely, says Ashish Agrawal of Barclays, a bank.For many investors, travel to China has not helped shake off deep concerns about the direction of the country. A recent cabinet reshuffle has strengthened Mr Xi’s grip on power. Relations with America are at their lowest ebb in decades. Just as many investors were arriving in Beijing to attend the China Development Forum, Mr Xi was meeting Vladimir Putin in Moscow. Several investors with decades of experience in China say they are concerned by its growing opacity. Analysts outside the country find it increasingly hard to get hold of data that used to be publicly available. Firms that offer company-ownership information can no longer be accessed from overseas. In mid-March bond-pricing data disappeared from feeds provided by vendors. This forced traders in one of the world’s biggest fixed-income markets to frantically swap data via text messages. The suspension ended several days later without explanation, but not before trading volumes crashed by up to 60%. If officials’ promises about improved business conditions are to be believed, investors will need to be able to verify them. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Allowing the bankruptcy of troubled lender Credit Suisse would have crippled Switzerland’s economy and financial center and likely resulted in deposit runs at other banks, Swiss regulator FINMA said Wednesday.  
FINMA and the Swiss central bank brokered UBS’ takeover for embattled Zurich rival Credit Suisse for 3 billion Swiss francs ($3.3 billion), in a deal announced on March 19.
The bankruptcy plan, FINMA CEO Urban Angehrn said in a statement, was “de-prioritised early on due to its high tangible and intangible costs.”

The Credit Suisse logo seen displayed on a smartphone and UBS logo on the background.
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Allowing the bankruptcy of troubled lender Credit Suisse would have crippled Switzerland’s economy and financial center and likely resulted in deposit runs at other banks, Swiss regulator FINMA said Wednesday.  
FINMA (the Swiss Financial Market Supervisory Authority) and the Swiss central bank brokered UBS’ takeover for embattled Zurich rival Credit Suisse for 3 billion Swiss francs ($3.3 billion), in a deal announced on March 19. As part of the transaction, the regulator instructed Credit Suisse to write down 16 billion Swiss francs worth of AT1 bonds — widely regarded as higher risk investments — to zero, while entitling equity shareholders to payouts at the stock’s takeover value.

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The bankruptcy plan, FINMA CEO Urban Angehrn said in a statement, was “de-prioritised early on due to its high tangible and intangible costs.” It would have erased the holding company Credit Suisse Group, along with the parent bank Credit Suisse AG and its branches, while retaining the Credit Suisse (Schewiz) AG entity because of its “systemic importance.”
“The parent bank Credit Suisse AG would have gone under – a Swiss bank with total assets of over CHF 350 billion and ongoing business also running into many billions,” Angehrn warned. “It is not difficult to imagine the disastrous impact the bankruptcy of a bank and wealth manager as large as Credit Suisse AG would have had on Switzerland’s financial centre and private banking industry. Many other Swiss banks would probably have faced a run on deposits, as Credit Suisse itself did in the fourth quarter of 2022.”
Angehrn noted that the emergency measure would have rescued Credit Suisse’s payments and lending functions to the Swiss economy, but come at a higher overall cost that dis-aligned with the “principle of proportionality.”
“The damage to the Swiss economy, financial centre and Switzerland’s reputation would have been enormous, with unquantifiable effects on tax revenues and jobs.”
Among FINMA’s other options, the resolution recourse would have downsized Credit Suisse, with the Swiss National Bank supplying liquidity assistance loans backed by a federal default guarantee. The bank’s equity and AT1 bonds would still have been written down to zero, with other bondholders being bailed in. FINMA estimates these measures would have altogether freed up 73 billion Swiss francs of capital, but this liquidity buffer would have heavily eroded investor sentiment.

The merger plan was ultimately preferred both to stabilize Credit Suisse and to prevent an overspill of the crisis into the international banking sector, FINMA argues.
“The current fragile state of the financial markets due to the shift to monetary tightening in 2022, the uncertain economic outlook, the crisis at certain banks in the US and the whole geopolitical backdrop were also relevant to our decision,” Angehrn said. “There was a high probability that the resolution of a global systemically important bank would have led to contagion effects and jeopardised financial stability in Switzerland and globally.”
The failure of Credit Suisse on the recent footsteps of U.S. bank collapses have stoked concerns over the strain testing the banking sector as a result of aggressive central bank interest rate hikes to combat inflation. The European Central Bank and U.S. Federal Reserve nevertheless proceeded with further increases in March.
Angehrn said the regulator has been in recent dialogue with the U.S., but did not experience international pressure in its supervision of Credit Suisse.

‘Too big to fail’ fine print

FINMA’s management of Credit Suisse’s unravelling and union with UBS have drawn intense public scrutiny, forcing the regulator to unprecedented levels of public disclosure, said Marlene Amstad, chair of FINMA’s board of directors.
“In this case, however, there is a particular supervisory need to set out the most important facts and to set rumours and assumptions straight.”
Domestically, Switzerland’s Federal Prosecutor has now opened an investigation into the takeover, looking into potential breaches of the country’s criminal law by government officials, regulators and executives at the two banks, according to Reuters. Several bondholders are studying legal action over the AT1 writedown.
FINMA said its management of the Credit Suisse crisis drew on the “too big to fail” standard developed after the financial crisis, with Switzerland emerging as the “first country to have to deal with the practical application of the second part of the TBTF legislation.” Namely, FINMA tackled a “gone concern,” for which TBTF requirements call for systematically important banks to have sufficient capital so that they might be restructured or liquidated in response to grave financial difficulties.

“For the first time, AT1 buffers were used at a global systemically important bank – they are an essential element in the TBTF legislation,” Amstad noted, adding that a TBTF instrument applying to resolutions or bankruptcies constitutes a drastic last-resort measure created to restrict financial contagion.
“On 19 March, however, we were in a different situation. The authorities would have risked not stopping a looming financial crisis by using the tool of resolution, but rather triggering such a financial crisis.”
Peter V. Kunz, chair in economic law and comparative law at the University of Bern, told CNBC on Wednesday that it was likely the Swiss Parliament will assemble a committee to investigate the relevant authorities’ handling of the rescue deal.

Wedded bliss

The takeover has reined in Credit Suisse’s independent troubles but heightens the risks posed by the bolstered scale of the new UBS-led entity spawned by the merger. The regulator downplayed these dangers in the context of UBS’ historical heft.
“As a proportion of Switzerland’s GDP, UBS will actually only be half the size it was before 2008, even after the merger with CS,” Angehrn said, describing UBS as a “robustly capitalised and well-organised bank” whose strategic plans are “well-founded” and which will face growing regulatory requirements following the completion of the takeover.

“In Switzerland’s ‘too big to fail’ regime, banks’ capital requirements grow progressively with a bank’s size. In other words a bank that is double the size has to hold more than double the capital. After an appropriate transition period, these higher capital requirements will apply to the new UBS. FINMA will monitor and enforce these capital requirements. ”
The FINMA comments come on the same day as a UBS annual general meeting, where investors are turning to the bank — and returning CEO Sergio Ermotti — for guidance on next steps following the takeover.
Credit Suisse held its own AGM on Tuesday, whereby Axel Lehmann, who was re-elected as bank chairman later in the session, told shareholders he was “truly sorry” for the bank’s collapse.
— CNBC’s Elliot Smith and Hannah Ward-Glenton contributed to this report. More

During the famous More

When swiss regulators announced ubs would rescue Credit Suisse from the brink of collapse on March 19th, the troubled bank’s shareholders seemed lucky to avoid a total loss on their investment. Yet if any of the 1,700 who entered Zurich’s Hallenstadion on April 4th for the firm’s final annual general meeting were relieved, they did not show it. Tickets to the historic event were cheap: the terms of the rescue deal, which was agreed without a shareholder vote, valued Credit Suisse’s shares at a mere SFr0.76 ($0.84). Opening eulogies were delivered by Axel Lehmann, the firm’s chairman, and Ulrich Körner, its chief executive. Votes to award bosses extra pay and absolve them of blame for actions taken during the past financial year were scrapped, along with the bank’s dividend. Five members of the board did not seek re-election. The remaining seven have the unenviable task of guiding the bank through its twilight months before the deal closes later this year. Although Glass Lewis, a proxy adviser, and Norges Bank, a big shareholder, opposed Mr Lehmann’s re-election, he was spared the boot in the shareholder vote. The arena transformed into a court when shareholders took their turn to speak. Some owners counselled Mr Lehmann on the many failures of his bank’s recent history. Others were inconsolable. One “joked” that he had neglected to bring his gun. Another wondered if the firm’s bosses might have been crucified for their actions in the Middle Ages. A man graced the podium with a fistful of empty walnut shells. Younger attendees wandered the rows with bags of chocolate, wearing branded t-shirts destined for the ghoulish financial-disaster-memorabilia market.Unsurprisingly, no representative from Saudi National Bank, Credit Suisse’s largest shareholder, took to the lectern. The chaos of recent months has slashed the value of its SFr1.4bn investment by four-fifths and scuppered the career of its chairman, whose inelegant comments about the bank on March 15th contributed to the ensuing loss of confidence. Instead, a sea of largely Swiss shareholders shook their heads in unison. Swiss owners represent 87% of Credit Suisse’s total, even if they hold a tenth of shares. Many are furious at the death of the 167-year-old institution. One poll found that more than three-quarters of Swiss people, mourning a national champion and angry at the level of state support, want the deal undone. Discomfort might grow as ubs begins an integration process likely to claim thousands of jobs. Legal wrangles will not help: on April 2nd Switzerland’s federal prosecutor announced a probe into the activity of those involved in the deal; the next day, lawyers representing holders of Credit Suisse’s Additional-Tier 1 bonds announced possible litigation to recover the losses they sustained. Bosses at ubs, which is due to hold its own meeting on April 5th, will have taken note of the mood. If nothing else, they will ponder the deterrent effect of the occasional public drubbing for managers. For Credit Suisse, holding its first in-person meeting in four years, it came too late. ■ More