Posts Tagged ‘U.S. Treasury’

What to Make of Italy’s Astonishing Bond Selloff — Are investors are complacent about the dangers Italy poses

May 30, 2018

Much of Italy’s debt is domestically owned, but the sheer size of Italy’s debt pile means a default would be catastrophic both for its own and Europe’s banks.

Italian two-year bonds had by far their worst day since at least 1989.
Italian two-year bonds had by far their worst day since at least 1989. PHOTO: PIAGGESI/FOTOGRAMMA/ROPI/ZUMA PRESS

Market reporting is prone to hyperbole, but Tuesday’s Italian bond selloff was truly astonishing. Short-dated bonds that can usually be treated as a close proxy for cash turned toxic, and bondholders showed serious panic. Prices fell and yields on short-dated bonds rose as much or more than when the euro was fighting for survival in 2011 and 2012.

The reaction in other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn’t much more than a run-of-the-mill bad day. Portugal’s 2-year bond yield rose 0.23 percentage point and Spain’s was up 0.12 percentage point, both their worst day since early last year. The 10-year U.S. Treasury had its best day in almost two years amid a flight to safety.

By contrast, Italian 2-year bonds had by far their worst day since at least 1989, when Thomson Reuters data starts. The yield leapt more than 1.5 percentage points to 2.4% at the close of European hours, with more selling later.

There are three possible interpretations for why markets outside Italy haven’t sold off more. The first is fundamental: Europe’s weak economies have been transformed since they were threatened by contagion from Greece in the last euro crisis. Ireland is now regarded as a safe “core” country, Spain is growing fast and even Portugal has taken the medicine. Perhaps this time round the trouble can be contained.

Mamma Mia, Here We Go AgainItaly’s 2-year bond had its biggest one-day rise in yield in decades.Source: Thomson Reuters
.Percentage points2000’02’04’06’08’10’12’14’16’18’20-1.25-1.00-0.75-0.50-0.250.000.250.500.751.001.251.501.75

The second is technical: The lack of significant contagion is because investors elsewhere regard the Italian move as overdone, the result of hedge funds and others piling in to sell bonds in a market that became suddenly illiquid. Buyers stayed on the sidelines because a market that has overshot can always overshoot even further in the short run, but the bond yield isn’t a reflection of the real risks to Italy.

The third is the most troubling. Perhaps investors are complacent about the dangers Italy poses, relying on the European elite to once again come up with a way to keep truculent crowd-pleasing politicians under control, as they have so often in the past decade.

Italian bonds are cheaper (have a higher yield) because of the fear that the country will re-denominate its euro bonds into devalued lira, default on them, or both, just as it was for Greece in 2011. Greece, of course, went on to default on its bonds and briefly use capital controls to suspend convertibility of its euros into the euros used in the rest of the region, while no other country followed suit.

It is true that Europe’s weak countries—bar Italy—aren’t as weak as they were in the last crisis. Banks have been recapitalized or restructured, competitiveness improved and current account deficits turned into surpluses. Ireland, Portugal and Spain are all far stronger than they were. Italy, meanwhile, has bumbled along; as Capital Economics’ Chairman Roger Bootle points out, every other country in the region except Italy has become more competitive against Germany since 2011.

Further, Europe has a habit of doing the impossible at the last minute, offering both fiscal and eventually monetary bailouts during the last crisis despite them having previously been deemed impossible and possibly illegal.

Still, it is hard to see how the single currency could survive an Italian exit without other countries following it out the door. The country is the third-biggest borrower in the world, with €2 trillion ($2.33 trillion) of bonds and bills outstanding. Much of its debt is domestically owned, but the sheer size of Italy’s debt pile means a default would be catastrophic both for its own and Europe’s banks. It would also create political fractures that could threaten the European Union, ironic for an organization founded by the Treaty of Rome.

Economic chaos in Italy after a devaluation would be all but guaranteed, and surely hurt growth in the rest of Europe – although such chaos might persuade reluctant euro members that the pain of staying is worthwhile. Even worse from the point of view of markets would be if Italian euro exit went well, encouraging anti-Europeans in other countries to push for a repeat.

More convincing is the idea that Italy’s bond market is exaggerating the panic because it has become so hard to trade. The gap between the yield at which people were willing to buy and sell on the 2-year bond was exceptionally wide at 0.46 percentage point, according to Tradeweb, backing up the idea that liquidity had evaporated. As one hedge-fund manager shorting Italian bonds put it, there has been a “buyer’s strike” because foreigners were unwilling to buy, while domestic investors were scaling back holdings.

The problem with the technical explanation based on liquidity is that it could go either way. If buyers return and the yield falls, all well and good. But often in markets the first panicked move turns out to be right, after a period of consolidation. If the speculators are correct about the danger of the newly installed technocratic government rapidly being replaced by anti-EU populists, bond yields this high or higher might well be justified. That will be the true test of contagion.

Write to James Mackintosh at James.Mackintosh@wsj.com

https://www.wsj.com/articles/what-to-make-of-italys-astonishing-bond-selloff-1527663600

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Pompeo to immediately pursue talks with allies on Iran: U.S. officials

May 10, 2018

Immediately on returning from North Korea on Thursday, Secretary of State Mike Pompeo will embark on talks with allies in Europe, the Middle East and Asia to try to persuade them to press Iran to curb its nuclear and missile programs, U.S. officials said.

Image may contain: 1 person, closeup

Reuters

The open question is whether the allies, and above all Iran, will agree to resume full-fledged talks having just seen the United States withdraw from the 2015 Iran nuclear deal and renege on its promises under the landmark arms control accord.

The U.S. hope is that Iran will be dragged to the table by the resumption of U.S. sanctions – and possibly the imposition of more – which would penalize European and other companies and likely cripple Iran’s oil-driven economy.

A senior State Department official said discussions with Britain, France and Germany, as well as Japan, Iraq and Israel on next steps had already taken place since U.S. President Donald Trump on Tuesday pulled out of the nuclear pact.

Image result for mike pompeo, 3 freed americans, photos

“There will be an effort to go out globally and talk to our partners around the world who share our interests. That is the first stage,” a senior State Department official said of plans for talks by Pompeo and his chief Iran negotiator, Brian Hook.

“The composition of what happens when we sit down with the Iranians is several stages out,” the official said, adding that talks would focus on how to raise pressure on Iran “in a way that is constructive and conducive to bringing them to the negotiating table.”

Trump’s decision opens the door to greater U.S. confrontation with Tehran and strains relations with America’s closest allies, current and former diplomats said.

Washington has given grace periods of 90 days to six months for companies to wind down their trade with Iran. Some allies, like France, will push for exemptions from U.S. sanctions to protect their companies.

Even though companies can seek U.S. Treasury licenses to continue operating in Iran beyond the deadlines, the threat of U.S. sanctions will likely force them out, experts say.

NEW DEAL?

Companies will also have to assess whether they could face revived secondary sanctions, which would target sectors of the Iranian economy, including energy, petrochemicals, shipping, financial and banking, experts say.

“The goal is ultimately to reach a point where we sit down with the Iranians and negotiate a new deal, but I don’t think we’re at that point today, or will be tomorrow,” the State Department official said.

“The ultimate goal is to lay the groundwork for getting everyone back to the table and negotiating a new deal.”

Several U.S. officials have acknowledged there is no “Plan B” if Washington cannot win the support of allies – and Iran – to negotiate a new expanded agreement, which would end Iran’s nuclear program, restrain its ballistic missiles program, and curb its support for groups in Syria, Lebanon, Yemen and Iraq.

“The goal is to prevent Iran from ever developing or acquiring a nuclear weapon and the detail beyond that is something we are going to have to flesh out,” the official added.

William Peek, deputy U.S. assistant secretary for the bureau of Near Eastern Affairs at the State Department, denied the pressure campaign aimed to force regime change in Iran.

“No, we are trying to change the regime’s behavior,” he told reporters on a conference call, adding that Washington would use diplomacy to convince allies to follow the U.S. sanctions lead.

Peek acknowledged there are some “diplomatically tactical disagreements” with Europeans, but said those differences could be overcome. “This is something where we cajole, we urge, we prod, which have proven effective,” he added.

While the parties were unable to agree on a supplemental pact to the 2015 nuclear deal, the senior official said a new round of talks would “pick up all of the work” done so far.

Reporting by Lesley Wroughton; Editing by Robert Birsel

As Bond Traders Struggle to Bust 3%, Morgan Stanley Sees a Rally

April 23, 2018

By Brian Chappatta

  • Psychological level matters as momentum hangs in the balance
  • Hornbach sees test of 2.7% if 3% holds, but 3.25% if breached

It turns out there were plenty of buyers of 10-year Treasuries at a 3 percent yield . Well, 2.996 percent, to be exact.

The inability to break through that key psychological level makes all the difference to Morgan Stanley on calling the next move in the world’s biggest bond market.

 Image result for Matthew Hornbach, photos

The latest failure to breach 3 percent, should it last, portends a rally back to 2.7 percent, according to strategists led by Matthew Hornbach. Of course, it’s not too late for the selloff to intensify, and the yield could reach 3.25 percent once past the 3 percent hurdle, they said. Ten-year Treasuries traded at a 2.97 percent yield at about 11:15 a.m. in New York.

“A lot of investors that we speak with, when I ask them ‘Where would you want to enter the market and start to buy Treasuries?’ you’re typically hearing numbers like 3 percent on the 10-year, 3.25 percent on the 30-year,” Hornbach, global head of interest-rate strategy at Morgan Stanley, said in an interview at Bloomberg’s New York headquarters. Because those are such “common numbers,” they can drive momentum up or down, he said.

Fixed-income fund managers have been focused on the 3 percent level to gauge whether the three-decade bull market in bonds is at an end, and to assess how much a glut of supply from the U.S. Treasury will weigh on investors.

For the chartwatchers wondering what might come next, 3.05 percent is on strategists’ minds. It’s the highest intraday level since 2011, set on Jan. 2, 2014. Once past that mark, there’s no obvious support, if you’re looking to seven years ago for guidance. That year, the 10-year yield fell from as high as 3.766 percent to as low as 1.67 percent as the U.S. credit downgrade rocked markets.

For now, just as investors like Pacific Investment Management Co. anticipated, enough buyers showed up around 3 percent to keep yields in check. Barclays Plc strategists said they’re sticking with their recommendation to buy at 2.9 percent (or higher, as the case may be) with a target of 2.7 percent.

The next few sessions will be critical for gauging the momentum in Treasuries. Relative-strength index analysis signals 10-year notes are the most oversold in two months, a sharp departure from earlier in April, when they appeared the most overbought since September.

The key indicator to watch will be the 10-year breakeven inflation rate, Hornbach said. It exceeded 2.19 percentage points Monday, up from 2.05 percentage points earlier this month. That suggests investors are starting to expect price growth that exceeds the Federal Reserve’s 2 percent target. To be sure, some of the inflationary pressure may subside, with the Bloomberg Commodity Index falling three straight sessions, after reaching the highest since 2015 last week.

If the breakeven rate continues to climb without the 10-year Treasury yield breaking 3 percent, that would likely signal a rally ahead, Hornbach said. Already, fed funds futures are pricing in more than two additional Fed rate hikes by year-end as inflation expectations firm.

“Momentum in Fed policy has a lot to do with people’s forward-looking rate expectations,” Hornbach said. “It’s one of these psychological phenomena where we look at what happened to us yesterday, and we think the next three years of our lives are going to be dictated by that.”

“Pushing above 3 percent would be a great opportunity for investors to put money to work,” he said on Bloomberg TV.

— With assistance by Ivan Levingston

Bloomberg

https://www.bloomberg.com/news/articles/2018-04-23/as-bond-traders-struggle-to-bust-3-morgan-stanley-sees-a-rally

Tesla bonds trouble is a warning for risk, credit — anxiety is rising

March 29, 2018

Image result for elon musk

Elon Musk

  • Tesla’s bond blowout is not symptomatic of wider problems in the credit markets but it does come as anxiety is rising over risk assets and in some parts of the credit world.
  • While the moves in credit market represent some risk aversion, analysts say it’s more smoke than fire at this point.
  • Libor, the rate at which banks lend to each other, has been creeping up and has in the past represented credit risk. But analysts say the move is largely technical.
Options traders are pumping the brakes on Tesla  

Tesla’s bond yields blew out to record highs Wednesday on the electric car maker’s own set of problems, but analysts say it highlights signs of worry that have been creeping across markets.

Analysts pointed to the explosion of volatility in stocks, where the Nasdaq has had 2 percent moves in four of the past five sessions. High yield and investment grade corporate bond spreads have widened, and investors have rushed back into Treasurys, driving yields lower. At the same time, Libor, a barometer of credit fear during the financial crisis, is ticking higher.

All of this comes as the markets approach the end of the quarter, which could be exacerbating moves. While analysts say there may be more smoke than fire, the swings in the stock market are creating anxiety across markets. Issues like Tesla don’t help.

Flat Tire, flat market concept

Getty Images

“Tesla’s still a poster child for speculation in this bull market. If people are going to have a more discerning eye on Tesla, they’re going to have a discerning eye on a lot of other credits,” said Peter Boockvar, chief market analyst at Bleakley Financial.

Boockvar said there has been a widening in high-yield spreads since early February, but only to about 355. They had been as wide as 840 basis points when oil prices fell in 2015 and 2016, creating havoc for energy company bonds. Spreads are the difference between the yield on the high-yield corporate index and the comparable Treasury yields.

Tesla 2025 bond

Tesla bonds were downgraded by Moody’s to B3 from B2, which also changed the outlook to negative from stable due to the significant shortfall in the company’s Model 3 production rate. The 2025 Tesla bond was yielding around 7.7 percent Wednesday, up from 6.80 percent Tuesday. Yields move opposite price. Tesla stock plunged 7.7 percent Wednesday.

Andrew Brenner of National Alliance said Tesla’s bond is not indicative of problems for other issuers, but there is a bit of concern around credit.

“It’s a signal for other risk assets that you have to be aware of the cash flows of the companies you’re buying,” said Brenner. “While Elon Musk may be taking us to Mars and everywhere else, he still has to come up with cash.”

The widening of spreads between corporates and Treasury yields is no where near fire alarm levels of past years, but it is a creep up in recent weeks that analysts have been monitoring.

“I think it’s indicative of a greater risk aversion,” said Boockvar.

The move is evident in LQD, the iShares 10+ Investment Grade Corporate ETF and HYG, the iShares iBoxx $ High Yield Corporate Bond ETF, both of which have declined since the start of February. LQD was slightly higher Wednesday, while HYG was lower.

“What it means is there’s a lot more volatility going on in the corporate space. People are taking money off the table. People are a little more concerned about risk assets. If you look at an options adjusted spread for investment grade [corporate debt] at the beginning of the month it was 88, today it’s 102. It’s widened 14 points,” Brenner said.

On Wednesday, Treasury yields at the long end moved lower, with the 10-year back to 2.77 percent, after breaking the key support at 2.80 percent Tuesday.

Ian Lyngen, head of U.S. Treasury strategy at BMO, said the move is reflecting the fading of optimism and the volatility in stock prices. But the move in Libor has been nagging at markets, even though it is being dismissed as technical.

“It’s the spread between Libor and OIS which people care about because that implies there’s a certain amount of risk in the credit system. The divergence between Libor and the implied fed rate has increased dramatically,” he said. “It affects a lot of corporate borrowing. It’s the reference floating rate for everything.”

Libor is the London interbank offered rate, the level at which banks lend to each other.

Brenner said at the beginning of the year, 3-month Libor was at 1.69, and it’s moved out 61 basis points since then. “We’ve only had one Fed rate hike. It’s moved out by 61 and you only have a 25 basis point hike,” he said. “Corporations have $2 trillion of Libor-based floating rate debt, so that’s costing them money.”

Analysts have said the move in Libor, however, is not sending the alarms it did when it shot up sharply during the financial crisis. They blame the jump in Libor on two factors: A much higher amount of short-term Treasury issuance and the fact that U.S. companies are bringing their overseas cash home, some of which was held short term securities.

“There’s more competition for some of this shorter dated issuance. That went for bills, or commercial paper, and there’s less demand for it because what were typically investors in those types of securities or paper, namely these firms that were investing their offshore earnings are no longer doing that to the extent they were,” said Jon Duensing, head of corporate credit at Amundi Smith Breeden.

“It’s an decrease in demand matched up with an increase in supply that’s pushed up the cost of money in short term funding markets. Traditionally, investors have looked to those short term funding markets as for signs of stress in the financial markets. I think you could call a supply demand imbalance a little bit of stress. It’s not like bank A doesn’t trust bank B,” he said.

How Hong Kong Makes Evading North Korea Sanctions Easier

March 17, 2018

The city presents itself as one of the world’s easiest places to do business—which goes for front companies, too

According to Hong Kong records, the sole shareholder and director of a company whose tanker Japan suspects of violating North Korean sanctions is Tang Yun Hui, and his address is this two-story farmhouse in a remote Chinese village. Mr. Tang says he is a sailor who has never heard of the company or owned a ship.
According to Hong Kong records, the sole shareholder and director of a company whose tanker Japan suspects of violating North Korean sanctions is Tang Yun Hui, and his address is this two-story farmhouse in a remote Chinese village. Mr. Tang says he is a sailor who has never heard of the company or owned a ship. PHOTO: JAMES T. AREDDY/THE WALL STREET JOURNAL
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In late February, Japan’s government released photographs of a tanker it said it strongly suspects was making a transfer, likely of oil, to a North Korean ship in violation of international sanctions.

The tanker’s owner, Ha Fa Trade International Co., is registered to an address in Hong Kong’s Wan Chai district. But the company can’t be found there. Instead, the cluttered 23rd-floor office belongs to an agency that helps businesses register with the authorities, with scant information on their ultimate owners.

This isn’t an accident or an oversight: Hong Kong has positioned itself as one of the world’s easiest places to do business, allowing companies to register with minimal documentation in as little as a day.

U.S. and United Nations experts say this is making the city a hub for North Korean front companies—and the U.S. wants Hong Kong to crack down. A U.N. Panel of Experts report made public on Friday describes registration middlemen like Hong Kong’s as a “key vulnerability” allowing North Koreans to defy sanctions intended to starve the country’s nuclear and missile programs of funds.

Of the nine companies outside North Korea that the U.S. sanctioned in February for working on Pyongyang’s behalf, two are based in China, one each in Panama and Singapore—and five in Hong Kong. Attempts to track down three of those five firms led to a maze of secretarial agencies.

A military parade in Pyongyang, North Korea, last month; the country has been subject to increasingly strict international sanctions meant to stop its nuclear-weapons and missile programs.
A military parade in Pyongyang, North Korea, last month; the country has been subject to increasingly strict international sanctions meant to stop its nuclear-weapons and missile programs. PHOTO: ASSOCIATED PRESS

Experts say front companies allow North Koreans and their agents, many of whom are in China, to obfuscate their identities and operate without revealing their Pyongyang ties.

“Those who start front companies are very skilled at taking advantage of Hong Kong’s business-friendly regulatory and financial environment,” said Wendy Wysong, who heads law firm Clifford Chance’s anticorruption and trade-controls practice in Asia.

Hong Kong put new regulations into effect this month that aim to make money laundering more difficult, including stricter client-verification guidelines for company service agencies.

The city “has a robust and efficient supervision system in place,” a Hong Kong government spokesman said, and was “looking into cases in which Hong Kong-registered companies are alleged to be involved” in evading sanctions.

North Korea boasts about its nuclear weapons program by releasing photos and videos of its missiles. But in them are tiny clues to their true capability. A team of U.S. analysts, working outside the government, shows how they decode these images to determine when North Korea is bluffing – and when it is showing true power. Photo: North Korea State Media

Lawyers in Hong Kong who advise banks on sanctions enforcement say that while the new regulations are a step in the right direction, they won’t solve many of the problems the U.N. panel identified.

Even under the new rules, registering a company in Hong Kong typically requires merely filling in a form with such basic information as founding shareholders’ addresses and the director’s national-identity-document numbers. The company’s listed director can be its sole shareholder, and needn’t live in Hong Kong. Corporate-service agencies take care of the rest, and the whole process can be done online.

Agencies advertise such services as “24-hour express incorporation” and “shelf companies”—entities that have already been created and can be purchased by emailing copies of basic identity documents to the agency.

Above, the Xin Yuan 18, which Japanese authorities say belongs to Hong Kong-registered Ha Fa Trade International; below, photos released by the Japanese government showing what it suspects was an illicit transfer, likely of oil, from the Xin Yuan 18 to a sanctioned North Korean vessel, the Chon Ma San, in late February.
Above, the Xin Yuan 18, which Japanese authorities say belongs to Hong Kong-registered Ha Fa Trade International; below, photos released by the Japanese government showing what it suspects was an illicit transfer, likely of oil, from the Xin Yuan 18 to a sanctioned North Korean vessel, the Chon Ma San, in late February. ILLUSTRATION: MINISTRY OF DEFENSE, JAPAN

How Hong Kong Makes Evading North Korea Sanctions Easier
ILLUSTRATION: MINISTRY OF DEFENSE, JAPAN

One North Korean technique, experts say, is to use agencies to establish a front company that opens a bank account, does a deal and then shuts down—leaving nobody for enforcers to find.

Many of the agencies operate one-room, one-person offices in Hong Kong to serve as postal addresses for dozens of client companies. The episode of the oil tanker cited by Japan last month shows how hard it is to peel back the layers.

The tanker, the Xin Yuan 18, was spotted by a Japanese military aircraft alongside a sanctioned North Korean vessel, the Chon Ma San, in the East China Sea late one February night. A “comprehensive assessment” led Japan to suspect that a ship-to-ship transfer of cargo had occurred, according to Japan’s foreign ministry.

The 23rd-floor office where Ha Fa Trade is registered belongs to an agency called Yirenjiaren Registration Secretary Ltd. A woman working there said she couldn’t confirm whether Ha Fa Trade is a client. A representative at the agency’s main office in Shenzhen, China, said Ha Fa Trade didn’t come to the agency directly and is a client of a different agency that uses the same Hong Kong office as its address.

A representative for that agency, Fei Long International Business Co., said it had been approached to register Ha Fa Trade in Hong Kong by yet another company-service agent identified only as Liao. There was no response to repeated requests for comment left for that agent through Fei Long.

Documents obtained from Hong Kong’s company registry list Tang Yun Hui as Ha Fa Trade’s director and only shareholder. The documents show the company’s address in the remote village of Yaoxing in China’s Hubei province, but provide no phone number or email address.

Ha Fa Trade is registered in Hong Kong’s Wan Chai district, but the address actually belongs to an agency that provides registration services.
Ha Fa Trade is registered in Hong Kong’s Wan Chai district, but the address actually belongs to an agency that provides registration services. PHOTO: BILLY H.C. KWOK/BLOOMBERG NEWS

The address corresponds to a two-story house—empty on a recent visit—with broken glass and overripe cabbages in the yard. Reached by phone, using a mobile-phone number provided by another village resident, Mr. Tang said he is an “ordinary sailor” and knows nothing about Ha Fa Trade or Xin Yuan 18.

“I’ve worked on so many ships and never heard of that one,” he said. Told of the company documents, he expressed surprise: “How could they have my signature?”

The Chinese identification-card number on the documents is his, the 32-year-old Mr. Tang said, and the address is that of the farmhouse where he grew up.

The ID card has been out of his hands numerous times, Mr. Tang said, including in 2016 when he lost his wallet disembarking from a ship in Shanghai and during many Chinese port calls, when a ship’s third mate holds it to fill out paperwork.

Mr. Tang said he earns $8,000 to $9,500 a year as a sailor on Chinese ships and has never owned a ship, visited Hong Kong or been associated with North Korean trade. He said repeatedly he had not.

It wouldn’t be convenient to meet in person, he added: “I’m in the middle of the sea.”

The back of the farmhouse, which Mr. Tang says was his boyhood home.
The back of the farmhouse, which Mr. Tang says was his boyhood home. PHOTO: JAMES T. AREDDY/THE WALL STREET JOURNAL

An official who answered the phone at North Korea’s consulate in Hong Kong declined to comment for this article.

To curb money laundering, the new Hong Kong regulations require companies to keep a registry of the people that ultimately own them or have significant control. These registries, though, are available only to Hong Kong authorities, not to the public or to banks trying to check companies for North Korean links.

The U.N. report says an alleged North Korean military-equipment supplier, Glocom, established a web of front companies, including in Hong Kong, and used them to make payments and move money to other North Korea-controlled entities.

To pay an associate in Singapore, according to the report, a North Korean representative would transfer money from China to the account of a Hong Kong front company, which would then transfer it to the associate’s Singapore account. The Singapore bank would see only the receipts from the Hong Kong company.

Glocom didn’t respond to emailed questions.

During a Hong Kong visit in January, Sigal Mandelker, the U.S. Treasury’s undersecretary for terrorism and financial intelligence, urged leaders “to send a strong message that Hong Kong is not going to be a place where companies find any kind of safe harbor to facilitate front-company, shell-company activity.”

Write to Niharika Mandhana at niharika.mandhana@wsj.com, James T. Areddy at james.areddy@wsj.com and Michael R. Gordon at michael.gordon@wsj.com

Appeared in the March 17, 2018, print edition as ‘North Korea Uses Hong Kong as Hub.’

Pakistan, Seeing New Pressure from the West, Moves Against a Militant Group

February 15, 2018

Islamabad hopes to avoid international terror financing watchlist as it seeks access to international financial markets

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JuD says it rejects ‘misleading and malicious assertions’ by the US State and Treasury departments [File-EPA]

Pakistan is hoping to head off an attempt by the Trump administration to exert further pressure over terrorism by putting the country on a global terror financing watch list, according to a senior Pakistani official.

Miftah Ismail, adviser to the country’s prime minister and Pakistan’s de facto finance minister, said that the country had in recent days undertaken a wide-ranging crackdown on the Jamaat-ud-Dawa group, which also is known as JuD and is blamed by the United Nations for the 2008 attack on the Indian city of Mumbai, which killed 166 people.

Washington has pressed Pakistan to take action against Islamist militants on its soil, and blamed the country for giving sanctuary to Afghan insurgents, announcing last month that it is withholding $2 billion in security assistance.

The international Financial Action Task Force, meeting in Paris next week, will consider a proposal by the U.S., co-sponsored by the U.K. and other Western governments, to put Pakistan on a list of countries that don’t comply with international regulations to squeeze financing of terrorist groups, said Mr. Ismail.

U.S. officials wouldn’t confirm that it had proposed Pakistan for the terror financing watch list, saying the process was confidential.

But the Treasury and other top Trump administration officials aired their concerns about Pakistan’s oversight of terror financing.

“The international community’s longstanding concerns about ongoing deficiencies in Pakistan’s implementation of its anti-money-laundering/counterterrorism finance regime are well documented,” a Treasury spokesman said in a statement.

A British official briefed on the matter echoed the sentiment. “It is important that Pakistan follows through on its FATF and UNSCR commitments to tackle the threat from terrorist groups,” the official said. “Whilst we recognize that Pakistan has suffered at the hands of terrorism, it has not made sufficient progress against the recommendations in FATF reports.”

Pakistan has seized some 200 properties belonging to JuD, including schools, religious seminaries, clinics and mosques. The government has taken over the group’s sprawling campus outside Lahore and, under a law passed this week, banned the group, said Mr. Ismail. The authorities also have seized more than 200 ambulances run by the group’s charity arm, he said.

“We’re taken the wind out of the sails of this proposal,” Mr. Ismail said, adding that the proposal focused on JuD. “We’ve basically done away with these organizations.”

In a statement, JuD said the government was closing down the group’s operations to please the U.S. and India. “This action has also affected thousands of poor people getting help from these institutions,” the group said.

It was unclear whether the Pakistan action, aimed at making Islamabad comply with U.N. Security Council resolutions, would satisfy Washington and the other sponsors of the nomination. Even if it doesn’t assuage them, Pakistan hopes to get enough support from other countries to block the nomination.

It wasn’t immediately apparent if JuD’s headquarters in Lahore, Pakistan’s second largest city, was still functional. The group’s leader, Hafiz Saeed, who was released by a Pakistani court from house arrest last year, lives in Lahore. JuD’s new political arm has taken part in a series of by-elections in recent months.

Being put on the FATF watch list likely would complicate the country’s ability to access international financial markets, add further scrutiny to international banking transactions, and create more red tape for Pakistan’s exporters. Pakistan was on the watch list from 2012 to 2015.

Greater damage would likely occur to the country’s reputation, as it seeks to attract foreign investment and project an image of a more “normal” country, said experts.

Washington’s concern over JuD, which targets India, is separate from its demand from Pakistan for action against the Taliban and the Haqqani network, which fight in Afghanistan. President Donald Trump has voiced his frustration over Pakistan, saying they “give safe haven to the terrorists we hunt in Afghanistan.”

Islamabad denies that there are any sanctuaries for militants on its territory and says that it has taken action against all groups “without discrimination”.

U.S. Director of National Intelligence Dan Coats told U.S. lawmakers Tuesday that Pakistan’s recent operations against the Taliban and related groups operating within the country weren’t adequate.

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FBI Director Christopher Wray (from left), CIA Director Mike Pompeo, Director of National Intelligence Dan Coats, Defense Intelligence Agency Director Lt. Gen. Robert Ashley, NSA Director Adm. Michael Rogers and National Geospatial-Intelligence Agency Director Robert Cardillo testify before the Senate intelligence committee on Tuesday.

Chip Somodevilla/Getty Images

“The actions taken thus far do not reflect a significant escalation of pressure against these groups, and are unlikely to have a lasting effect,” Mr. Coats told the Senate Intelligence Committee. “Pakistan-based militant groups continue to take advantage of their safe haven to conduct attacks in India and Afghanistan, including U.S. interests therein.”

Last month, the Trump administration levied new sanctions against several Taliban financiers who the U.S. Treasury said have been fundraising in Pakistan.

Write to Saeed Shah at saeed.shah@wsj.com, Ian Talley at ian.talley@wsj.com and Dion Nissenbaum at dion.nissenbaum@wsj.com

 
 https://www.wsj.com/articles/pakistan-seeing-new-pressure-from-the-west-moves-against-a-militant-group-1518660767

Treasury’s Mnuchin says Russian oligarch report to lead to sanctions

January 30, 2018

Reuters

WASHINGTON (Reuters) – The Trump administration will seek to impose sanctions in connection with a U.S. government report identifying Russian oligarchs who are close to the Kremlin, Treasury Secretary Steven Mnuchin said on Tuesday

 Image result for Steven Mnuchin, photos

U.S. Treasury Secretary Steven Mnuchin testifies to the Senate Banking, Housing and Urban Affairs Committee on “The Financial Stability Oversight Council Annual Report to Congress” on Capitol Hill in Washington, U.S., January 30, 2018. REUTERS/Joshua Roberts

In testimony before the Senate Banking Committee, Mnuchin said while the administration has not levied sanctions under a new law designed to punish Moscow for alleged meddling in the 2016 U.S. election, it viewed the report as an initial step.

“This should in no way be interpreted as we’re not putting sanctions on any of the people in that report,” Mnuchin told lawmakers.

“There will be sanctions that come out of this report,” he said, adding that it could happen as soon as next month.

Late on Monday, the Treasury Department named major Russian businessmen, including the heads of the country’s two biggest banks, metals magnates and the boss of the state gas monopoly on a list of oligarchs close to the Kremlin.

Mnuchin said there was a classified component to the report, which was mandated by the law passed by Congress in July.

Democrats have criticized the Trump administration for failing to impose new sanctions on Russia. The State Department has said it was not yet seeking sanctions as the new law was already acting as a deterrent.

Reporting by Pete Schroeder; Editing by Paul Simao

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U.S. Treasury Declines to Label China a Currency Manipulator

October 18, 2017

Nation remains on formal Monitoring List, along with Japan, South Korea, Germany and Switzerland

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The U.S. Treasury again declined to label China a currency manipulator, though it continued to criticize Beijing for its large trade surplus and restrictions on foreign investors.

“Treasury remains concerned by the lack of progress made in reducing the bilateral trade surplus with the United States,” the department said of China in its semiannual report on international exchange rates. “China should take concrete steps to level the playing field for American workers and firms.”

The Treasury Department’s report, released Tuesday, is the document in which Washington could formally criticize Beijing for manipulating the yuan lower in an effort to boost its exports. As a candidate, President Donald Trump said he would label China as a currency manipulator, but this is now the second of the semiannual reports in which his administration has declined to make the designation, a label that may have led to a deepening trade confrontation. The U.S. also is trying to encourage China to work with it in cracking down on trade and finance flows to North Korea.

The U.S. gave China credit for allowing the yuan to rise this year and noted that China’s trade surplus has been narrowing.

The report kept China on the Treasury’s formal Monitoring List, which is what the U.S. uses to place countries on notice that the government considers their currency and other economic policies to be putting the U.S. at unfair disadvantage.

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Since the spring, the Treasury has removed Taiwan from its monitoring list. It has continued to keep Japan, South Korea, Germany and Switzerland on it.

In removing Taiwa n from the watch list, Treasury cited the progress Taiwan has made in reducing the scale of its foreign-exchange interventions.

Placement on the list can trigger sanctions if the countries satisfy three criteria: persistently intervening in currency markets, running a significant trade surplus with the U.S. and running a large current account surplus overall. None of the countries met all three criteria.

The five countries remaining on the watchlist—China, Japan, South Korea, Germany and Switzerland—all trigger some of the criteria.

In blaming China for currency manipulation during his presidential campaign, Donald Trump may have been fighting the last battle: China’s visions are far more potent and complex. Photo: Getty

The report faulted China for running the largest bilateral surplus with the U.S., and faulted Germany, Japan and South Korea for its U.S. surpluses and overall surpluses. Germany now runs the world’s largest current account surplus. Switzerland has a large current account balance and intervened heavily in its exchange markets, but runs a relatively small trade surplus with the U.S.

“The administration remains deeply concerned by the significant imbalances in the global economy,” the report said. “More broadly, current account surpluses in several major trading partners have not only been large but unusually persistent over the last decade.”

The report also added criticism of India, saying that there has been “a notable increase in the scale and persistence of India’s net foreign exchange purchases.”

Although it didn’t formally add India to its monitoring list, it said “Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies.”

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com

https://www.wsj.com/articles/u-s-treasury-declines-to-label-china-a-currency-manipulator-1508284141

China is stumbling hard at acquiring the high-tech chip companies it wants so badly

September 16, 2017
 

September 14, 2017

US president Donald Trump yesterday (Sept. 13) vetoed a Chinese private-equity firm’s proposed $1.3 billion purchase of Lattice Semiconductor, an Oregon-based chip manufacturer.

The deal’s failure marks the latest instance where foreign governments have pushed back against China’s efforts to acquire technology assets in their country, as China invests heavily in hardware and software companies at home and abroad.

The semiconductor industry in particular has been a focus of China’s ambitions, as chips are the brains of nearly every electronic device. But as of 2014, China still imported 90% of its semiconductors. As a result, the country has gone on a spending spree, buying up semiconductor companies all over the world.

Many of these deals have fallen through, however, due to pressure from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency branch of the Treasury that examines foreign purchases of domestic companies and assesses their potential impact on national security. While CFIUS does not “block” deals outright, it can make “recommendations” to both parties involved that the deal ought to be terminated. If necessary, CFIUS will refer cases to the president, who then holds the power to veto the deals—which is what happened with Lattice.

Lattice marks the seventh such major deal that has collapsed since mid-2015, and it’s the second to be vetoed by the US president within that period. This list shows just how badly China is failing at acquiring foreign semiconductor technology.

Micron

The largest attempted Chinese takeover of a US semiconductor maker began in July 2015, when media revealed that Tsinghua Unigroup, a state-affiliated Chinese chipmaker with ties to with Tsinghua University in Beijing, wanted to buy Idaho-based Micron. Tsinghua Unigroup reportedly had put up $23 billion (paywall) to purchase the company.

Micron made it clear it was cold on the deal from the get-go. Just days after Tsinghua Unigroup’s bid hit news outlets, a source at Micron told Reuters the deal was likely not possible as CFIUS would probably recommend against it. In August that year, senator Chuck Schumer, a frequent critic of China, directly called on CFIUS to formally investigatethe potential acquisition.

But the deal didn’t even get that far. Despite reports that Tsinghua’s chairman travelled to the US to talk to Micron, no further details about a deal emerged until November 2016, when Tsinghua confirmed it was not in any talks with the Idaho company.

Had both sides reached an agreement, the deal would have carried historic implications for the US tech industry. Micron to this day remains the last major US-based manufacturer of DRAM flash memory, a critical component in nearly all consumer electronic devices. Its American rivals all ceded ground to competitors in Japan, Korea, and Taiwan.

Fairchild Semiconductor

In December 2015, state-affiliated conglomerate China Resources Holdings made an unsolicited offer to purchase Fairchild Semiconductor, one of the oldest companies in Silicon Valley. The Chinese investors proposed paying $2.5 billion for the company, equivalent to $21.70 per share, a premium over what rival bidder, US-based On Semiconductor, had offered earlier. The Chinese suitors also offered a $108 million reverse termination fee in the event that CFIUS recommended against the purchase.

Despite the markup and the guarantee, Fairchild refused the offer in February 2016, stating that the deal presented an “unacceptable level of risk” of failing should it ever reach CFIUS. It ended up being sold to On Semiconductor in September 2016.

Lumiled

In March 2015, Dutch electronics giant Philips, which is also listed in the US, announced it intended to sell an 80% stake in Lumiled, a subsidiary that manufactures LEDs (light-emitting diodes), a semiconductor, to a Chinese consortium known as GO Scale Capital for $3.3 billion. In October, however, the company stated in its latest earnings report that CFIUS had “expressed certain unforeseen concerns” towards the deal, which could ultimately kill it.

The bid was dead by January 2016. “I am very disappointed about this outcome as this was a very good deal for both Lumileds and the GO Scale Capital-led consortium,” said Philips CEO Frans van Houten. While LEDs are generally associated with lighting, according to the New York Times, CFIUS held concerns that the gallium nitride used to make the components could also be used by China’s military (paywall). Philips eventually agreed to sell Lumiled to US-based private-equity firm Apollo Global Management in December 2016, at a discounted price of $2 billion.

Western Digital

In September 2015 Tsinghua Unisplendour, owned by the same parent as Tsinghua Unigroup, announced it intended to pay $3.78 billion for a 15% stake in Western Digital, the semiconductor maker best known for its hard-disk drive business. The company told investors it did not expect the deal to be subject to a CFIUS review because the stake was non-controlling. But in February 2016 Tsinghua backed out of the deal(paywall) once it became clear that a probe was indeed forthcoming. The two companies’ relationship didn’t end there, however. In September 2016 Western Digital and Tsinghua Unisplendour announced they had formed a China-based joint venture with Tsinghua as the majority shareholder.

GCS

In March 2016, California-based, Taiwan-listed semiconductor maker GCS announced it was in talks to be purchased by Sanan Optoelectronics, a Chinese maker of LED wafers and solar cells, for $226 million. In August, GCS confirmed that the deal had fallen through due to pressure from CFIUS. The body did not state its specific objections, but they likely stemmed from GCS’s contracts with the US military. Like Western Digital, GCS opted to form a joint venture with its Chinese suitor as an alternative.

Aixtron

In May 2016 China’s Fujian Grand Chip announced it had agreed to buy Germany’s Aixtron, a maker of semiconductor manufacturing equipment, for $752 million. In November, Aixtron announced that CFIUS told both parties there were “unresolved U.S. national security concerns regarding the proposed transaction.” Rather than kill the deal, Aixtron and Fujian Grand Chip said they would appeal the recommendation directly to president Barack Obama—who sided with CFIUS. The White House said that there was “credible evidence” that Fujian Grand Chip “might take action that threatens to impair the national security of the United States.” The process—a CFIUS warning, an appeal to the president, and then a veto–was the same process that led to the collapse of the Lattice deal.

China is stumbling hard at acquiring the high-tech chip companies it wants so badly

Read next: A fund linked to the tech deal Trump just vetoed is an investor in China’s national security

Donald Trump Faults GOP Leadership for Looming Debt Ceiling ‘Mess’

August 24, 2017

Treasury officials have said Congress must raise borrowing limit by the end of September

Image result for Secretary of the Treasury, Steven Mnuchin, with President Trump, photos

Updated Aug. 24, 2017 10:34 a.m. ET

President Donald Trump on Thursday blamed the congressional Republican leadership for what he called the “mess” awaiting lawmakers this fall as they seek to raise the government’s borrowing limit, the latest criticism by the president on members of his own party.

“I requested that Mitch M & Paul R tie the Debt Ceiling legislation into the popular V.A. Bill (which just passed) for easy approval,” Mr. Trump tweeted Thursday morning, referring to Senate Majority Leader Mitch McConnell (R., Ky.) and House Speaker Paul Ryan (R., Wis.) “They didn’t do it so now we have a big deal with Dems holding them up (as usual) on Debt Ceiling approval. Could have been so easy-now a mess!”

Republicans have in the past balked at voting to raise the debt limit, forcing GOP leaders to turn to Democrats for the votes for the must-pass legislation. The debt ceiling increase allows the government to pay the bills stemming from past spending and tax decisions. Republicans need Democratic votes in the Senate to reach the 60-vote threshold to pass a debt ceiling increase.

Spokesmen for Messrs. McConnell and Ryan didn’t immediately respond to requests for comment on Thursday.

Treasury officials have said Congress must raise the government’s borrowing limit at some point near the end of September. If Congress doesn’t raise the debt ceiling to allow new borrowing, the U.S. could default on its debt or miss payments for benefits and salaries.

Republicans earlier in the summer were considering tying an increase in the federal debt limit to a bill extending funding for a program that lets military veterans get medical care outside of Department of Veterans Affairs facilities, people familiar with the idea said.

Write to Rebecca Ballhaus at Rebecca.Ballhaus@wsj.com and Kristina Peterson at kristina.peterson@wsj.com

https://www.wsj.com/articles/donald-trump-faults-gop-leadership-for-looming-debt-ceiling-mess-1503584453

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