Business
Yuan’s Decline Triggers Fears on Leveraged Bets
BEIJING – The sudden slide of the Chinese currency over the last week has raised fears that the yuan is nearing levels that could trigger an unwinding of billions of dollars in highly leveraged bets on the currency’s appreciation.
Traders and strategists say a portion of the yuan’s recent decline can be attributed to investors looking to get out of trades before losses soar.Daily trading volume in the yuan has exploded recently, tripling to $120 billion a day since 2010, when China allowed trading in its tightly controlled currency. The yuan is now the ninth-most traded currency in the world, according to the Bank for International Settlements, rising from 17th two years ago.
In the past year, trading in derivatives tied to the currency have soared as investors bet on a continued rise in the yuan. According to Deutsche Bank, approximately $250 billion worth of these derivative contracts were traded in 2013, the first year these products took off. Already in 2014, between $80 billion and $100 billion have been traded, the bank says.
The currency, which is also known as the renminbi, is up 33% since 2005. And because the currency is tightly controlled by the Chinese government, volatility is among the lowest in Asia, making the bet seem even less risky.
On Tuesday, the offshore yuan hit 6.1115 against the greenback, sharply up from 6.0984 the day before. Earlier in the day, the currency touched an intraday peak of 6.1250, its highest since it reached 6.1272 on Aug. 22 and the yuan’s biggest daily drop since Jan 28, 2011. China’s stock market suffered its biggest fall in five months, dropping 2.1%, putting its overall decline at 3.5% since the beginning of the year.
Individual investors and small- and medium-size businesses were among the biggest buyers of options that would profit from appreciation in the yuan, currency analysts say. They bought structured investment products that magnified gains but could lead to big losses if the yuan fell below certain levels. The rising yuan coupled with higher interest rates inside China led even more investors to buy yuan, pushing the currency higher.Ju Wang, senior Asian currency strategist at HSBC in Hong Kong, said losses on these products were small so far, but if investors believed they would grow significantly if the currency continued to depreciate, “they might take a mark-to-market loss and unwind contracts. So it all depends on expectations.”
Ms. Wang said that small- and medium-size Chinese exporters have been big buyers of derivatives because they allowed them to hedge against the rising yuan, which makes their goods more expensive to sell overseas and their revenues, which come in foreign currencies, smaller. In many cases, Ms. Wang said, the businesses are losing money in their operations but make profits because of the hedges, which generate a monthly income.
Greg Yu, the Asia ex-Japan head of structuring and solutions group at J.P. Morgan in Hong Kong, said wealthy clients of private banks also bought these products, mostly in Hong Kong, the biggest market for trading in the yuan, and Taiwan. Products designed to profit from the rising yuan are widely advertised by banks in Hong Kong, where bank deposits held in yuan are up by 50% in the last 18 months to 900 billion yuan.
The derivatives that underlie these products are based on the so-called offshore yuan, which trades in Hong Kong and isn’t subject to the strict controls on movements by China’s central bank for yuan that trade in the mainland. While the offshore yuan trades freely, it is broadly tied to the yuan price inside China.
The most popular among the derivative products tied to the yuan is the ‘target redemption forward.” The product is a leveraged bet that pays out every month that the currency keeps rising. But when it falls to a specific level, losses begin to mount quickly.Geoff Kendrick, head of foreign exchange and rates at Morgan Stanley, says that these contracts vary widely in value and in length. He estimates that banks have sold these target redemption-forward products with notional value totaling $350 billion since the beginning of 2013.
He says that if you take the $350 billion notional outstanding and assume the average contract has a year left, then once the yuan passes a specific threshold versus the dollar, every decline of 0.1 yuan against the dollar, would cost buyers approximately $500 million a month. That means roughly $6 billion in losses. The contracts are opaque so there is no way to know exactly what price the yuan needs to hit for the losses to begin, but Mr. Kendrick says a reasonable estimate is from 6.15 to 6.35 yuan to the dollar.
Mr. Kendrick says he believes the Chinese currency’s move will be contained but “we do acknowledge the risk of a volatile move higher in the cross, especially given the large amount of structured product traded over the past few years.”
Greg Matwejev, director of FX hedge-fund sales at brokerage firm Newedge Group SA in Hong Kong, said most hedge funds in the region were betting on a stronger yuan as well. “It was like free money,” he said. But the fast move downward forced them to sell quickly. “There is still a lot more pain before this trade shows signs of stabilizing. Very few funds are contrarian on this trade and all are seeing red at the moment,” he said.
He said if the yuan falls further, investors will be forced to sell their yuan and buy U.S. dollars, adding that if the currency moves beyond today’s trading levels of 6.12, it “will set off more panic U.S. dollar buying.”
– WALLSTREET JOURNAL
Business
Audit Report Exposes ₦514bn Financial Infractions In NNPCL
The Office of the Auditor-General of the Federation has uncovered financial irregularities amounting to ₦514 billion in the 2021 operations of the Nigerian National Petroleum Company Limited (NNPC Ltd).
The revelations were contained in a comprehensive audit report highlighting non-compliance and internal control weaknesses within Ministries, Departments, and Agencies (MDAs) during the 2021 financial year.
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Breakdown of Infractions
The audit detailed four major financial discrepancies within NNPCL:
“Irregular Deductions: A total of ₦343.64 billion was deducted from domestic crude oil sales at source without proper documentation.
“Sinking Fund Deposits: ₦83.66 billion, categorized as miscellaneous income, was retained in a sinking fund account.
“Unauthorised Refinery Deductions: ₦82.95 billion was deducted from federation revenue purportedly for refinery rehabilitation.
“Unsubstantiated Payments: ₦3.75 billion was flagged for transactions related to petrol sales that lacked proper verification.
The Auditor-General’s report stated that these financial activities violated the 1999 Constitution and the Financial Regulations Act of 2009, underscoring significant lapses in compliance with statutory guidelines.
According to the report, NNPCL generated ₦484.73 billion from domestic crude oil sales in March and May 2021.
However, ₦343.64 billion was deducted for various purposes, including “Value Shortfall,” “Strategic Stock Holding Cost,” and “Pipeline Maintenance.”
The deductions were made unilaterally by NNPCL without adequate documentation or justification.
Additionally, the report flagged ₦50 billion of the net payable amount for May 2021 as unaccounted for, creating a significant gap in the federation’s revenue.
“Audit observed from the review of NNPC SAP payment record for March and May 2021 payments that the sum of ₦484.73bn was the gross amount generated for the sale of domestic crude for the months of March and May 2021.
“The sum of ₦343.64bn from the gross amount was unilaterally deducted from the gross domestic crude sales as NNPC Value shortfall, Strategic Stock Holding Cost, Crude Oil and Products Pipeline Losses, as well as the pipelines maintenance and management costs.
“The details of each of the cost components deducted were not provided for audit review. Hence, the reasons for the deductions could not be justified by the management.”
On the unremitted ₦50 billion from May 2021, the report noted: “In the month of May, the net payable that could have been remitted ought to have been ₦127.075bn, but only the sum of ₦77.075bn was remitted, leaving an unremitted balance of N50bn to the Federation Account, which has remained unaccounted for.”
The report attributed these anomalies to weaknesses in NNPCL’s internal control systems, warning of the risks they pose to public funds.
It read, “The above anomalies could be attributed to weaknesses in the internal control system at NNPC, now NNPC Ltd. This is a potential loss of Federation revenue, diversion of public funds, or misapplication or misappropriation of funds.”
Business
Opayemi Salutes Sanwo-Olu Over Successful Lagos Shopping Festival
The success of the maiden edition of the Lagos Shopping Festival (LSF), Africa’s first 72-hour non-stop commerce and entertainment event has been credited to the Governor of Lagos State, Babajide Sanwo-Olu.
This is the view of Managing Director/Chief Strategist of Chain Reactions Africa Ltd, Israel Jaiye Opayemi, one of the main organisers of the event.
According to Opayemi, though Chain Reactions Africa conceptualised the event, the festival could be rightly described as the Governor’s baby and owes its success to his leadership. “Firstly, the Lagos Shopping Festival could not have come to fruition if the Governor did not buy into our audacious plan when we first presented the idea to him during the Covid-19 pandemic in 2020. Secondly, it was the Governor’s exemplary leadership of the project as its Chief Marketing Officer which attracted the buy-in of key sponsors like Zenith Bank, Tolaram Group, First Bank Plc, and Guinness Nigeria Plc,” Opayemi revealed.
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While the duo of Zenith Bank and First Bank provided their bank on wheel platforms for buyers at the Lagos Shopping Festival, they also supported the Vendors with special Point of Sale Machines with which to process payments from buyers. The banks were also seen marketing their diverse banking products to guests within the shopping arena.
For Tolaram, it was a time to support the citizens and give back to society. Guests at the Lagos Shopping Festival were freely given some of the products of the group such as PowerOil, Indomie and Kellogg’s packaged into goodie bags and given out to prospective buyers at the shopping arena. The Children’s Arena was however activated by Indomie with the children entertained by Santa Claus within a well-equipped arena manned by the Indomie Brands team and the Lagos State Safety Marshalls. The children were daily treated to free Indomie meals daily and given various gifts to go home with.
On its part, Guinness Nigeria came through as the real life of the Nigerian party by organizing product sampling activation for the teeming guests at the festival using brands such as Singleton, Johnnie Walker, Ciroc, Don Royale and Captain Morgan to deliver pleasant experiences to guests aside from Guinness and Malta Guinness.
While unveiling the identity of the festival last month, Governor Babajide Sanwo-Olu had thanked the management of Zenith Bank Plc, Tolaram Africa Group, Guinness Nigeria Plc and First Bank of Nigeria for supporting the idea of a Lagos Shopping Festival, describing it as a value addition on the state’s tourism calendar and the overall efforts to grow the State’s GDP. The Governor further said, “I must specially acknowledge your pioneering sponsorship role. It is easy for a corporate sponsor to jump on the sponsorship band wagon of an already established festival and fund it. But you are supporting the maiden edition of this Lagos Shopping Festival with us. The competition is watching you now. Do not build this brand with us and yield the space for the competition to take over. I do hope you would all commit long term to this brilliant initiative.”
On his part, Girish Sharma, CEO Guinness Nigeria Plc, expressed enthusiasm for the initiative. “Lagos is the commercial heartbeat of Nigeria and Africa’s entertainment capital, and the Lagos Shopping Festival captures its essence. We see opportunities in this initiative because it is a creative fusion of commerce and entertainment. This partnership reflects our dedication to fostering economic opportunities and support the nation’s vibrant entertainment industry.”
A first-of-its-kind, the festival was a convergence of commerce and entertainment, bringing together buyers and sellers in the MSME ecosystem, and hordes of fun-seekers who were entertained with thrilling performances by A-list entertainers, including Adekunle Gold, Wande Coal, Teni, Young Jonn, BNXN, Ayo Maff, SB Live and EmmaOMG. The list also included some of Nigeria’s most sought after DJs such as DJ Neptune, DJ YK Mule, DJ Baddo while Gbenga Adeyinka the 1st and Larry J dished out rib-cracking comedy performances.
Held from 23rd to 25th Day of December 2024, at the iconic Mobolaji Johnson Arena, Onikan Stadium, Lagos, the Lagos Shopping Festival saw thousands of fans throng the main venue and select Lagos malls during the three-day period to bag the latest bargains from local and top global brands.
Business
Naira Depreciates In Parallel Market, Gains In Official FX Market
The Nigerian Naira experienced mixed movements in the foreign exchange markets on Monday, as it depreciated to N1,665 per dollar in the parallel market, down from N1,660 per dollar recorded over the weekend.
In contrast, the official exchange rate saw the Naira appreciate to N1,534.56 per dollar, improving slightly from N1,535 per dollar last Friday, according to data released by the Central Bank of Nigeria (CBN).
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This reflects a marginal gain of 44 kobo in the official Nigerian Foreign Exchange Market (NFEM).
As a result, the gap between the parallel market rate and the NFEM rate widened to N130.44 per dollar, compared to the N125 per dollar margin recorded over the weekend.