Raphael Stevens

Bitcoin and other cryptocurrencies fell sharply as investors dump risk assets. A crypto lending company called Celsius is pausing withdrawals for its customers, sparking fears of contagion into the broader market.
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Finance carries inherent risks, and while technology can change the way these risks are managed and distributed, it cannot eliminate them, says Bank of England Deputy Governer Jon Cunliffe.
Bitcoin has fallen more than 70% from its record high hit in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to CoinDesk data.
The extension of regulatory framework to encompass crypto “must be grounded in the iron principle of ‘same risk, same regulatory outcome.'”

Regulators need to “get on with the job” of bringing the use of crypto technologies within the “regulatory perimeter,” says Jon Cunliffe, Bank of England’s deputy governor for financial stability.
Speaking at the British High Commissioner’s residence in Singapore on Tuesday, Cunliffe shared insights on the recent “crypto winter,” which refers to a period of falling crypto prices that remain low for an long time.

Finance carries inherent risks, and while technology can change the way risks are managed and distributed, it cannot eliminate them, he added.
“Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse,” said Cunliffe.

Innovators, alongside regulators and other public authorities, have an interest in the development of appropriate regulation and the management of risk.

Jon Cunliffe
Deputy governor, Bank of England

Bitcoin has fallen more than 70% from its record high hit in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to CoinDesk data.
As investors dumped crypto amid a broader sell-off in risk assets, the market cap of crypto fell below $1 trillion, down from $3 trillion at its peak in November.
Cryptocurrencies may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk,” Cunliffe said, but he said he suspects the boundaries between the crypto world and the traditional financial system will “increasingly become blurred.”

“The interesting question for regulators is not what will happen next to the value of crypto assets, but what do we need to do to ensure that … prospective innovation … can happen without giving rise to increasing and potentially systemic risks.”

‘Same risk, same regulatory outcome’

Regulators have increasingly been sounding the alarm about crypto, and Cunliffe said the extension of a regulatory framework to encompass crypto “must be grounded in the iron principle of ‘same risk, same regulatory outcome.'”
“For example, if a stablecoin is being used as a ‘settlement asset’ in transactions … it must be as safe as the other forms of money,” he said.
Stablecoins are a type of cryptocurrency that are supposed to track a real world asset, usually another currency. Many of them attempt to peg themselves one-to-one with the U.S. dollar or another fiat currency. Some of them are backed by real-world assets such as bonds or currencies.
They were designed to offer a sound store of value to minimize price volatility. However, the collapse of terraUSD (UST) — a so-called “algorithmic” stablecoin that’s pegged to the U.S. dollar — sent shockwaves through crypto markets. Unlike other stablecoins, terraUSD was not backed by real assets. Instead, it was governed by an algorithm which attempted to peg it one-to-one with the U.S. dollar. That algorithm failed.

The holders of such stablecoins must have a clear legal claim that enables them to redeem the coin within the day and “in par, with no loss of value” in central or commercial bank money, Cunliffe said.
“Needless to say, such a requirement is a long way from the world of Terra and Luna,” he said, referring to TerraUSD, which plunged as low as 26 cents even though it’s meant to maintain a one-to-one U.S. dollar peg.
Its sister token Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST, also lost nearly all of its value.
“Implicit in our regulatory standards and frameworks are the levels of risk mitigation we have judged necessary. Where we cannot apply regulation in exactly the same way, we must ensure we achieve the same level of risk mitigation.”
He recommended that the activities be halted “if and when for certain crypto related activities this proves not to be possible.”

The Bank of England official said that for the “same risk, same regulatory outcome” approach to be effective, it needs to be carried forward across international standards and incorporated into domestic regulatory regimes.
The U.K. Financial Stability Board will publish a consultation report later this year with recommendations for promoting international consistency in regulatory approaches to non-stablecoin crypto assets, markets and exchanges, he added.
Innovators, regulators and public authorities have an interest in developing appropriate regulation and managing risks, he said.
“It is only within such a framework, that [innovators] can really flourish and that the benefits of technological change can be secured,” Cunliffe added.

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China’s retail sales have lagged ever since the pandemic began in 2020. Locals’ inclination to save, rather than spend or invest, has climbed to its highest in 20 years, according to People’s Bank of China surveys.
Guangdong-based Miniso’s founder and CEO Jack Ye said sales in New York City are growing rapidly, and he plans to open a North America product development center this year.
In the last few years, home appliance companies Midea, Hisense and Haier Smart Home have expanded overseas, where revenue sometimes grows faster than within China.

BEIJING — Some Chinese consumer brands are looking for growth overseas, in markets like the U.S. and Southeast Asia.
Take Miniso, a Guangdong-based seller of toys and household products. Sometimes called China’s Muji, Miniso opened a flagship store in New York City’s SoHo in February.

The store’s gross merchandise value — a measure of sales over time — is clocking around $500,000 a month, with $1 million a month likely by December, founder and CEO Jack Ye told CNBC in late June.
More importantly, he said that for directly operated stores in the United States, Miniso’s gross profit margin is well above 50%.
“If we can gain a firm foothold here and create a good business, we will have no problem in the U.S. overall,” Ye said in Mandarin, according to a CNBC translation. His goal is to become the first “$10 and under” retailer worldwide.
Miniso stores began popping up in mainland China nearly 10 years ago, with overseas expansion beginning in 2015 in Singapore. As of March, the company said 37% of its 5,113 stores were overseas.

Faster growth outside China

Like many businesses, Miniso saw sales drop during the pandemic. More than two-thirds of its revenue still comes from China. But in the last several months, data showed a relatively rapid pickup internationally versus domestically, a result of the varying effects of the pandemic.

In the nine months ended March 31, the company said, its China revenue grew by 11% year on year to 5.91 billion yuan, versus 48% growth overseas to 1.86 billion yuan.
China’s retail sales have lagged ever since the pandemic began in 2020. A slump in the housing market hasn’t helped. Locals’ inclination to save, rather than spend or invest, has climbed to its highest in 20 years, according to People’s Bank of China surveys.

“Chinese companies expanding into overseas markets will be a major trend going forward,” said Charlie Chen, head of consumer research at China Renaissance. “China has actually entered a relatively wealthy stage with a relatively high per capita GDP.”
He pointed out that for products like air conditioners, penetration among rural households was 73.8% in 2020 — and even higher at 149.6% in urban areas. China Renaissance expects those penetration rates will increase steadily in the next few years.
“There is very little incremental volume or incremental demand that can be created in China in a short period of time,” Chen said. “For these air conditioner, home appliance companies, where they can get more revenue, it’s overseas.”

Miniso opened its first flagship store in New York City’s SoHo in February 2022.

In Southeast Asia, air conditioners have a household penetration rate of 15%, according to the International Energy Agency.
Home appliance companies Midea, Hisense and Haier Smart Home have pressed into markets outside China over the last several years. Haier even acquired General Electric’s appliance unit for $5.4 billion in 2016. Hisense’s goal is that by 2025, overseas markets will generate half of its total revenue.
Those companies are seeing strong growth overseas, if not faster than in China.
“Definitely if [Chinese companies] want to get into overseas markets, [they] need to build their brand, need to fight with existing competitors,” Chen said. “The cost will not be low. Initially they would not be profitable. But they are investing.”
If Chinese businesses are able to build their brand overseas, they can compete with lower selling prices since they own or work directly with factories in China. That has helped companies like Shein become an international e-commerce giant.

Similarly, Miniso’s Ye said his strategy in the U.S. is combining the company’s supply chain network in China with New York designers’ work — so products can go from designs to store shelves in about three months.
That process could take six months or even a year if the design firm needed to find its own factories, Ye claimed.
“Overseas, what we lack right now are design ideas suitable for locals,” he said. He said Miniso plans to open its North America product development center later this year and is looking for office space in New York.

June expansions

Other Chinese companies have pressed on with overseas expansion despite Covid travel restrictions.
Ant Group, the fintech affiliate of Alibaba, announced in June it launched a digital wholesale bank in Singapore after receiving approval from the Monetary Authority of Singapore.
Also in June, Hong Kong-listed toy company Pop Mart tested U.S. waters by opening its first temporary location near Los Angeles. The company sells sets of collectible toy figures — in unmarked boxes. That means a customer might get a new toy to add to a collection, or the same toy as the customer has already bought.
Like Miniso, Pop Mart stores have become commonplace in Chinese malls. There’s even a Pop Mart store at Universal Beijing Resort.

Localization challenges

It remains to be seen whether recent overseas growth will last for those Chinese companies.
For business or geopolitical reasons, many Chinese businesses haven’t found success abroad. Take ZTE’s failure to expand its smartphone business in America after U.S. sanctions.
Wildly successful companies like short video company TikTok, owned by Beijing-based ByteDance, have come under U.S. government pressure over data security concerns.

Read more about China from CNBC Pro

That’s not to mention the inherent challenge of becoming an efficient international organization. A CNBC report on Chinese tech companies found the business culture at home — which involves heavy use of Mandarin and long hours — often made its way overseas and discouraged local employees from staying.
But whether in electric cars or home appliances, conversations with many Chinese businesses reveal a deep-seated but vague ambition that hasn’t been swayed by the pandemic: to become a global company.
Disclosure: NBCUniversal is the parent company of Universal Studios and CNBC.

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Stock futures were little changed in overnight trading on Tuesday as investors awaited a key inflation report that is expected to show a fresh high.
Futures on the Dow Jones Industrial Average edged up 18 points. S&P 500 futures and Nasdaq 100 futures were both flat.

The consumer price index, slated for at 8:30 a.m. ET Wednesday, is expected to climb by 8.8% in June on a year-over-year basis, according to Dow Jones’ survey of economists. That would be even higher than May’s 8.6% reading, which was the biggest increase since 1981.
“The market is anticipating that June will be the new peak,” said Lindsey Bell, Ally’s chief markets and money strategist. “The reading is likely to confirm what the jobs report on Friday told us – that the Fed will stick to their aggressive rate tightening timeline.”
The likely hot reading could prompt the central bank to hike another 75 basis points during this month’s meeting. Last month, the Fed raised its benchmark interest rates three-quarters of a percentage point to a range of 1.5%-1.75% in its most aggressive hike since 1994.
“The Fed’s credibility will be tested in coming months with the release of inflation numbers and corporate earnings,” said Andy Sparks, head of portfolio management research at MSCI. “The Fed’s recent aggressive actions to bring down inflation also run the risk of overshooting, pushing an economy that had been showing signs of weakness into a full scale recession.”
Meanwhile, investors will monitor second-quarter corporate earnings as major banks are set to report this week. JPMorgan and Morgan Stanley are slated to post results Thursday before the bell. Delta Air Lines reports before the bell Wednesday.

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In recent years government debt seemed to matter less and less even as countries borrowed more and more. Falling interest rates made debts cheap to service even as they grew to levels that would have seemed dangerous a generation before. The pandemic put both trends into overdrive: the rich world borrowed 10.5% of its gdp in 2020 and another 7.3% in 2021, even as long-term bond yields plunged. Now central banks are raising interest rates to fight inflation and debt is becoming more burdensome. Our calculations show that government budgets will feel a squeeze far more quickly than is commonly understood. In May America’s budget officials raised by a third the forecast cumulative interest bill between 2023 and 2027, to 2.1% of gdp. That is lower than forecast before the pandemic, but it is already an underestimate. Officials optimistically assumed the federal funds rate would peak at 2.6% in 2024, but markets now expect the rate to exceed 3% in July 2023. In the euro zone, as interest rates have risen, the premium indebted countries like Italy must pay to borrow has gone up, reflecting the danger that their debts may eventually become too onerous to service. Britain’s officials forecast in March that its government would spend 3.3% of its gdp servicing its national debt in 2022-23, the highest share since 1988-89. For a given cost of borrowing, three main factors determine the cost of servicing legacy debts. Two are straightforward: the level of debt, and the proportion of it whose value is pegged to inflation or prevailing interest rates. Britain’s debt-service costs have risen so sharply, for example, because an astonishing one-quarter of its debt is inflation-linked.The third factor is more complex: the maturity of the debt. When governments issue long-dated bonds, they lock in the prevailing interest rate. In 2020 America’s Treasury issued about $200bn-worth of 30-year debt at yields of less than 1.5%, for example. The more long-dated debt, the longer it takes for budgets to take a hit when rates rise. The most common measure of this protection, the weighted average maturity (wam) of debt, can be a source of comfort. Britain, in particular, has a lot of long-dated bonds: the wam of its bonds and treasury bills is about 15 years.But measures of maturity can mislead. The wam can be skewed upwards by a small number of very long-dated bonds. Issuing 40-year debt instead of 20-year debt raises the wam but does not change the speed with which rising interest rates affect budgets over the next few years. The Office for Budget Responsibility (obr), Britain’s fiscal watchdog, has suggested an alternative measure. Suppose you line up every pound (or dollar) a government has borrowed by the date on which the debt matures. Halfway along you would find the median maturity—the date by which half the government’s borrowing would need to be refinanced at higher rates. Call it the interest-rate half-life. Though Britain’s wam is 15 years, its interest-rate half-life is lower, at about 10 years.There is another complication. Central banks in the rich world have implemented huge quantitative-easing programmes (qe), under which they have bought trillions of dollars worth of government bonds. To do so they have minted fresh electronic money, known as central-bank reserves. These reserves carry a floating rate of interest, the adjustment of which is the main tool of monetary policy. When rates rise, the cost to central banks of paying interest on the ocean of reserves created under qe rises immediately. Raising interest rates thus reduces central-bank profits. And because those profits typically flow straight into government coffers, taxpayers suffer.The effect of qe is therefore the same as if governments had replaced vast amounts of debt for which the interest rate was locked in with debt carrying a floating rate. For most of the history of qe this refinancing operation has been highly profitable, because bond markets repeatedly forecast interest rates would rise sooner than they did. From 2010 to 2021 the Fed remitted over $1trn to America’s Treasury. qe has been particularly lucrative for central banks in euro zone countries whose long-term debt is risky and therefore carries a high yield. National central banks such as the Bank of Italy carry out most of the ecb’s qe locally, bearing the default risk and earning the yield on the bonds of their respective home states, while also paying their share of the ecb’s interest costs. Earning the yield on Italian government debt while paying out much less in interest on reserves helped the Bank of Italy to remit profits worth 0.4% of gdp to the government in 2020.As short-term rates rise, profits from qe will gradually dry up, and could even turn negative. In May the Federal Reserve Bank of New York, which manages the Fed’s qe portfolio, projected that interest rates one percentage point above what was expected by market participants in March would be enough to turn the portfolio’s net income negative for a short time—a scenario that today looks likely. Another percentage point on interest rates would lead to negative net income for two to three years. A full accounting of interest-rate sensitivity must thus adjust for the holdings of central banks, treating the associated debt as carrying a floating rate of interest. Refreshing the obr’s calculations, we find that qe reduces Britain’s interest-rate half-life to just two years, meaning 50% of Britain’s government liabilities will roll on to new interest rates by late-2024. We have also replicated the exercise for bonds and bills issued by governments in America, France, Italy and Japan (see chart). For France and Italy the interest-rate half-life is an estimate. The central banks involved disclose which bonds they hold, and the wam of their holdings, but do not reveal how much they have bought of each bond issuance. Our calculations assume they hold a flat proportion of each bond’s outstanding value (which in both cases produces a portfolio whose wam roughly matches the disclosure).In every case, the interest-rate half-life is much lower than the reassuring wam. Most striking are the results for Japan and Italy, which have the highest debts. Because the Bank of Japan has replaced nearly half the Japanese bond market with its reserves, the interest-rate half-life is vanishingly short. Thankfully inflation in Japan is only 2.5% and expected to fall. There is little pressure to raise interest rates. The same cannot be said for the euro zone, where the ecb is projected to raise rates rapidly so as to tame inflation. It is often noted that Italy’s huge debts of over 150% of gdp at least carry a wam of over seven years. But Italy will in fact inherit higher funding costs quickly because its interest-rate half-life is little more than two years. Were the ecb’s policy rates to reach 3%, the Bank of Italy’s share of the interest costs would immediately rise by an annual 1.2% of gdp. Every one percentage point increase in the financing costs on the €462bn of debt (net of central banks’ estimated holdings) coming due by July 2024 would cost the government another 0.3% of gdp annually. Is there any way for indebted countries to avoid higher interest costs? It might seem tempting to unwind qe faster, by selling bonds (rather than waiting for them to mature, as several central banks are currently doing). But selling bonds would cause central banks to book capital losses, because rising yields have eroded the value of their bondholdings. At the end of March the Fed’s unaudited financial statements showed an unrealised capital mark-down of $458bn on its qe portfolio since the start of the year; Paul Kupiec and Alex Pollock of the American Enterprise Institute, a think-tank, estimate that the hole has since grown to about $540bn.Another option is to find a way for central banks to avoid paying interest on reserves. A recent report by Frank Van Lerven and Dominic Caddick of the New Economics Foundation, a British think-tank, calls for central banks to pay interest on only a sliver of reserves that affects their decision making, rather than the whole lot. The ecb and the Bank of Japan already have such a “tiered” system. It was designed to protect commercial banks from the negative interest rates they have imposed in recent years.Using tiering to avoid paying banks interest while their funding costs went up would be a tax in disguise. Banks, considered together, have no choice but to hold the reserves qe has force-fed into the system. Compelling them to do it for free would simply “transfer the costs [of qe] to the banking sector,” Sir Paul Tucker, a former Deputy Governor of the Bank of England, told a parliamentary inquiry in 2021. It would be a form of financial repression which may impair banks’ ability to lend. A third option is to tolerate high inflation rather than raise rates. Despite rising interest costs, many countries’ debt-to-gdp ratios will fall this year as inflation eats into the real value of their debts. Many prominent economists have argued that an inflation target of 3% or 4% would be better than one of 2%. For now the idea is pie-in-the-sky. Central banks are too worried about their credibility to switch targets, and with good reason: break your promises on inflation once and people may wonder if you will do it again. But because making the switch would deliver a one-time fiscal windfall at the expense of long-term bondholders, and because inflation can be painful to get down, it could eventually appeal to indebted governments.Whether it is banks, taxpayers or bondholders, somebody has to pay the bills that are now falling due. Rising interest costs will further squeeze government budgets already under pressure from higher energy costs, rising defence spending, ageing populations, slowing growth and the need to decarbonise. With inflation high, it is also a bad time to let deficits grow—a path that might force central banks to raise rates even more. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More