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PBoC and finance ministry firms up plans for long-dated bonds to support investment

Chinese authorities have kicked off plans to sell Rmb1tn ($140bn) of long-dated bonds, as Beijing raises spending to stimulate the economy.

The People’s Bank of China has asked brokers for advice on pricing the sale of the first batch of the sovereign bonds, according to two people who received requests.

China’s government announced plans for the bond sale during the annual session of the country’s legislature in March, saying it would support investment in critical areas and reinforce economic momentum in the second quarter amid a lengthy property crisis.

“The bond sale is a critical part of the concerted efforts to support significant, urgent and challenging projects that are essential for the modernisation of the economy,” Liu Sushe, deputy head of the National Development and Reform Commission, said in a public briefing in mid-April.

“These are all projects that have long been intended but not materialised, and requiring a central level drive.”

The sale comes after China’s regional banks piled into long-dated sovereign bonds in the first quarter of this year — driving the cost of government borrowing to record lows — as they sought a haven from volatility in China’s equity and property markets.

China sold similar long-dated bonds in 2020 when Rmb1tn was raised to try to control the Covid-19 pandemic and boost infrastructure investments. The bonds being sold this time are expected to have even longer maturities, as a way of funding long-term projects while alleviating the debt burden of local governments.

The new bonds differ from normal government bonds in that the money raised is for targeted purposes. This is the fourth round of special sovereign bond issuance, after a sale in 1998 to recapitalise state banks and 2007 to set up its sovereign wealth fund.

The sales are expected to improve liquidity in the market for longer-dated Chinese bonds, which investors have historically tended to hold to maturity.

China is trying to move the economy away from a growth model fuelled by investment in property and infrastructure, which has caused the debts held by local governments to balloon.

The bond sale “comes at a crucial time for China to reshape its debt structure”, said Jameson Zuo, a Hong Kong-based director at CSPI Credit Rating Co, referring to Beijing’s strategy of using more central government borrowing while trying to tackle the mountain of local government debt.

“Compared to a global standard, China still has significant room, potentially trillions of yuan worth of bond issuance over the next five to 10 years, to let the central government take up more leverage and boost investments,” Zuo added.

More long-dated bonds are expected to be issued in subsequent years to strengthen important areas such as food security, energy and the manufacturing supply chain, premier Li Qiang said this year.

The first batch of the new bonds to be issued will be for an amount between Rmb80bn and Rmb100bn, according to two people who received requests from the central bank. Most will have 30-year maturities but there will also be some 50-year bonds, they said.

The finance ministry summoned officials from the country’s top commercial banks to a meeting on Monday to arrange the underwriting of the long-dated bonds, according to an internal notice sent to some banks seen by the Financial Times.

On Monday the ministry of finance said the first bonds would be issued on Friday.

Sale plans have been submitted for review to the state council, China’s cabinet, while the finance ministry and National Development and Reform Commission are also involved in co-ordinating the sale.

The PBoC hinted in April that it would also consider buying these bonds on the secondary market when the time is appropriate, which “will give it better control of interbank rates”, Zhi Xiaojia, head of Asia research at Crédit Agricole, said.

Zhi said investors “should have already fully prepared for the pick-up of government bond supply from late Q2 [second quarter]”, after China’s politburo, its top 24-member decision-making body, said in late April that such a sale should start “as soon as possible” to fund stimulus and boost demand.

The PBoC has repeatedly warned this year of the dangers of crowded trades in long-dated bonds, which could leave smaller banks that piled in to bonds this year more vulnerable to interest rate fluctuations, potentially leading to a Silicon Valley Bank-style meltdown.

China’s 30-year bond yield, which moves inversely to prices, has steadied at about 2.5-2.6 per cent, its lowest level in decades, after a sharp drop from more than 3 per cent last year.

The upcoming issuance of bonds will help meet demand and is likely to support the central bank’s aim of raising long-dated yields moderately, said Ming Ming, chief economist at Citic Securities.

However, CSPI’s Zuo said that yields might remain “steady” even after the bond sale, as a shortage of other investable assets would prompt investors to keep buying sovereign bonds.

The central bank, the ministry of finance and the NDRC did not immediately respond to requests for comment.

Chinese Premier Li Qiang said the funds raised will be used to support mega projects and sectors that align with key strategic development aims

China’s finance ministry announced that it will start selling the first batch of a planned 1 trillion yuan ($138.37 billion) worth of ultralong special treasury bonds on Friday, as Beijing looks to provide more support to the world’s second-largest economy.

The sale will run from May to November, with an unspecified amount of 30-year treasurys set to be issued Friday, according to an post on the finance ministry’s website. Bonds in the 20- and 50-year tenors will be sold starting May 24 and June 14 respectively.

Chinese Premier Li Qiang announced the bond sale plan in a March government report to lawmakers and said Beijing might continue to conduct sales for “the next few consecutive years.”

He said the funds raised will be used to support mega projects and sectors that align with key strategic development aims, and promote national security.

US shale companies accused of collusion over oil price

Wave of class action lawsuits come after regulators claim the industry conspired to curb production

The US shale oil industry faces a barrage of lawsuits alleging some of the largest companies in the sector colluded to curb output and raise prices, after similar claims were made by US antitrust regulators.

ExxonMobil, Occidental Petroleum and Diamondback Energy are among the companies named in at least 10 class actions alleging they conspired to co-ordinate and constrain shale oil production, which had the effect of raising US retail petrol prices.

The most recent lawsuit was filed on Monday in the district court for New Mexico, just days after the Federal Trade Commission accused Scott Sheffield, the former boss of Pioneer Natural Resources, of trying to collude with Opec to drive up oil prices.

The lawsuits take aim at the industry’s model of capital discipline, in which producers have pivoted from rapidly building up production in response to high prices in recent years in favour of funnelling cash back to investors.

Plaintiffs in New Mexico alleged the group’s collective failure to open the taps as crude prices soared in the wake of Russia’s invasion of Ukraine was a departure “from their historical practice and rational independent self-interest”.

The lawsuits have been thrust into the spotlight by the FTC’s bombshell findings last week, in which it alleged Sheffield attempted to co-ordinate production levels with the Opec cartel and other US producers to “pad Pioneer’s bottom line . . . at the expense of US households and businesses” and barred him from the Exxon board after the close of the companies $60bn merger.

Pioneer, now owned by Exxon, said it disagreed with the FTC’s complaint, which it said “reflects a fundamental misunderstanding of the US and global oil markets” and “misreads the nature and intent of Mr Sheffield’s actions”. In a separate statement, Exxon said the FTC’s allegations regarding Sheffield are “entirely inconsistent with how we do business”.

Six other companies named in the class actions — Permian Resources, Chesapeake Energy, Continental Resources, Diamondback, Hess and EOG — did not respond to requests for comment. Occidental said it believes the claims are “baseless” and it intends “to defend the company vigorously.”

Thomas Burt, partner at Wolf Haldenstein, a law firm representing plaintiffs in the New Mexico case, said he expected more lawsuits to follow. He is representing drivers in Illinois, Colorado, Nevada and Massachusetts, who allege they paid higher prices for petrol because of the conspiracy.

“Not for the first time, people in the oil business made a mess that will take a lot to clean up,” Burt said. “Damages are significant. The class is likely to encompass roughly four years of gasoline sales to two-thirds of American consumers.”

Most of the class actions filed against shale companies predate last week’s FTC decision on Sheffield and have relied mainly on public comments by oil executives and media articles to make their arguments. The FTC action will encourage lawyers to mine evidence unearthed by the agency during its Exxon-Pioneer merger investigation, say legal experts.

Eric Grannon, an antitrust lawyer at White & Case law firm, said the FTC allegations of collusive behaviour in the Exxon-Pioneer order did not carry any legal effect in the class-action lawsuits. But he said it would probably lead to copycat cases and provide some clues for them on where to look for evidence.

“Private class-action lawyers will no doubt try and follow those FTC breadcrumbs in discovery in their own cases,” he said.

This week lawyers representing plaintiffs in the Nevada cases asked a judge to force Pioneer to hand over WhatsApp messages and other communications by Sheffield, some of which are detailed in the FTC order. Pioneer had initially refused this request.

Stuart Gross, an attorney at law firm Gross Klein PC, said: “We now know a consolidated body of evidence exists and that it has been identified and organised. So the defendants will have a hard time arguing that we are not entitled to it.”

Gross is representing commercial fishermen in a class action suit filed in Nevada against the same eight shale oil companies. The case alleges the companies colluded with Opec to artificially raise the price of marine fuel, citing “exclusive dinners” held with members of the cartel, private calls and meetings.

“Opec members are open about their cartel behaviour, confident that sovereign immunity will protect them from answering for it in US courts. These US oil companies enjoy no such protection and will be held to account,” Gross said.

The class actions allege the shale companies violated the Sherman Act — a federal law designed to promote competition by prohibiting companies from colluding or merging to form a monopoly — as well as state antitrust and consumer protection laws.

But legal experts said the allegations levelled at Sheffield in the FTC order had not been tested in court and it was not yet known whether the agency would refer the matter to the Department of Justice for further investigation.

Grannon said it was far from clear that the statements gathered by the FTC are evidence of collusion. “A unilateral statement by an executive, even to their competitors, that it’s in their common interest to raise prices or cut output is not a violation of the antitrust laws. It’s only a violation if there’s agreement,” he said.

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New leaders say steady returns sector offers provide best fit for ‘permanent capital’ of Reimann family

JAB Holding, the biggest investor in Krispy Kreme, Pret A Manger and Coty, is overhauling its investment strategy to start an insurance business in a dramatic pivot for the consumer and food empire whose portfolio has struggled in recent years.

The company will announce on Monday that it has hired Anant Bhalla, a US-based insurance veteran who will become its chief investment officer and a senior partner, to build its new insurance platform.

The strategy shift comes months after JAB abruptly replaced its longtime chief executive Olivier Goudet, a former Mars executive who spearheaded a $50bn deal spree that transformed JAB into the owner of some of the best-known consumer brands.

JAB’s new leaders told the Financial Times that the steady returns generated by insurance assets were now the best fit for what it describes as the permanent capital of Germany’s billionaire Reimann family, whose wealth is managed through the group.

“We have got a clear mandate to diversify and scale our portfolio with our shareholders’ patient capital,” said Joachim Creus, who replaced Goudet as JAB chief executive. “We are thinking very long-term, for generations of the family. We are fiduciaries for the family.”

Bhalla said: “It’s the permanent capital from their shareholder, which is the right owner of insurance for generations to come.”

The new CIO has been a pioneer in aggressively investing cheap capital from policyholder premiums in private assets to generate outsized returns. He was most recently chief executive of American Equity Investment Life, which was just acquired by Brookfield for $4bn.

JAB says it is better positioned than other private capital competitors to become an owner of an integrated insurance and asset management company.

Creus said: “We believe that this is for us fundamentally a much better fit because we are long-term patient capital, where private equity, by definition, they are thinking five, six, seven years, and that doesn’t really fit with the insurance idea.”

Investment houses pushing into the insurance business have attracted the attention of regulators, who have warned about the dangers of mixing potentially riskier investment strategies with the savings of pensioners.

For JAB, the insurance push is the latest evolution of an investment holding company set up by German executive Peter Harf who has shepherded the fortune of the intensely private Reimann family since 1980.

Over that time, the 78-year-old Harf has taken the family’s wealth, emanating from its origins in a Mittelstand chemicals business that owned stakes in Reckitt Benckiser and Coty, into a conglomerate with a sprawling portfolio.

JAB now manages about $50bn of assets, of which about $33bn is attributed to the Reimanns. Its investments include large stakes in well-known brands including sandwich chain Pret A Manger, drinks giant Keurig Dr Pepper, coffee group JDE Peet’s and beauty group Coty. It will look to sell down its portfolio as it shifts focus.

“If you look back 12 years ago, we were basically a family office with a couple of assets, large assets . . . a very, very concentrated portfolio,” said Frank Engelen, JAB’s new chief financial officer. “The portfolio has been diversified in consumer goods and services.”

As JAB pursued more aggressive dealmaking in the consumer sector, Harf and Goudet raised a series of private equity funds with third-party capital from sovereign wealth funds, endowments and other rich families to fuel the pace of expansion.

But the transformation has not been smooth. Bart Becht, the former Reckitt Benckiser chief executive, quit JAB in 2019 after disagreeing with his partners over the scale of dealmaking, arguing that the group needed to spend more time improving operations in its portfolio companies.

The spree also led to the firm being overexposed to consumer companies, an issue that became acute during the pandemic. This played a role in the holding company’s decision to diversify into other sectors.

“If you have a big macro headwind like we had in Covid, or the big macro headwind as we have today with coffee, obviously that immediately has a significant impact on the total portfolio return,” said Engelen. “The big benefit of diversifying beyond consumers is that you spread the risk.”

JAB has in recent years shifted its focus, investing roughly $5bn into petcare and pet insurance companies beginning in 2019. The pet insurance business, which includes about 20 brands, will eventually be folded into the broader insurance platform.

Alongside moving into the pet sector, JAB has attempted to cash out of some of its older investments with mixed results. Coffee group JDE Peet’s was taken public in 2020 and Krispy Kreme followed the next year.

Both companies have struggled and are down more than 30 per cent from their listing prices. JAB has been attempting to list Panera Bread for years.

Goudet was replaced in November days after JAB’s annual meeting, in a move that blindsided investors and JAB stakeholders, according to multiple people with knowledge of the event.

Alongside failing to properly communicate the departure of senior personnel, at least one of the consumer funds has delivered disappointing returns, one investor told the FT.

Bhalla had been considering his next move since the AEL sale to Brookfield was announced last summer.

He told the FT last month that he was seeking to raise $1bn in equity to fund a “merchant bank” that would then take on $10bn-$15bn in long-dated insurance liabilities and invest some of those funds in alternative assets such as private credit.

Conversations with JAB about investing in the venture started late last year and led to the agreement under which Bhalla will join the group. He will also spearhead a push to raise a series of new, “thematic” funds that external investors will be able to access.

Bhalla had told the FT that areas such as cold storage facilities, private credit and data centres were well-suited to meet the needs of insurance capital.

“I would say look, you have the Berkshire [Hathaway] model and you have the alternatives model. There is a model about long-term compounding equity value versus generating fees to create value,” Engelen said, referring to Warren Buffett’s insurance-centred investment vehicle.

“We are more in the first model, we are absolutely not in the second model.”

Move marks latest effort by Biden administration to protect domestic industry from cheap competition

The Biden administration plans to raise tariffs on Chinese electric vehicle imports from 25 per cent to 100 per cent, as it intensifies efforts ahead of the US election to protect American industry.

The administration is expected to announce the move, and other tariffs on clean energy imports, on Tuesday, according to people familiar with the situation.

The sharp rise in the levies comes amid mounting concern that China could flood the US market with cheap EVs, threatening the American car industry. President Joe Biden has taken several actions in recent months to convince union members in swing states that he will protect jobs.

The Biden administration has for three years been reviewing the tariffs that then president Donald Trump put on imports from China as part of the trade war he launched in 2018. The new EV tariffs will be announced alongside the conclusion of the review, led by the US Trade Representative.

During a visit last month to Pennsylvania — a swing state in November’s election — Biden said he wanted the agency to triple tariffs on Chinese steel and aluminium. USTR also recently opened an investigation into unfair practices in the Chinese shipbuilding industry following a petition from the United Steelworkers union.

But the decision to increase tariffs on EVs comes as the administration becomes particularly concerned that China is moving far ahead in the green industrial sector, including in the production of solar panels.

“The Biden administration is trying to get ahead of the curve and ensure that the US car industry does not suffer the same fate as the US solar industry, which was virtually decimated by unfairly traded Chinese imports,” said Wendy Cutler, a former trade official and vice-president of the Asia Society Policy Institute. 

Cutler said Chinese carmakers had been prepared to swallow the cost of the existing tariffs in an effort to “cripple” their US competitors, but the higher tariffs would make that much harder.

“A quadrupling of this tariff rate, however, would more effectively shield US auto manufacturers from unfairly traded Chinese vehicles before they can gain a foothold in the US market,” Cutler said.

The Biden administration has poured billions of dollars into subsidies for EV and battery production in the US — an effort to spur investment in a domestic clean tech sector as part of a strategy to reindustrialise the rust-belt, slash carbon emissions and break dependence on Chinese supply chains.

In February, Biden also ordered an investigation into whether Chinese “connected vehicles” — a growing category of vehicles connected to the internet that includes EVs — posed a national security risk to the US.

The tariffs are the latest action by the administration that show how Biden is continuing to impose costs on China at the same time that Beijing and Washington pursue efforts to stabilise relations following a summit between the US president and Chinese President Xi Jinping last year.

News of the tariff increase comes after the US and China, the world’s two biggest emitters, said this week they would “intensify” co-operation on climate-related issues, including the rollout of green energy.

The decision to increase tariffs was first reported by Bloomberg.