By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) -Japan’s top government spokesperson said on Monday the banking system was stable, seeking to reassure markets the country won’t see a contagion from U.S. and European banking sector woes.

Chief Cabinet Secretary Hirokazu Matsuno also welcomed Sunday’s decision by top central banks, including the Bank of Japan (BOJ), to bolster the global flow of cash by expanding an existing swap line to ensure lenders have sufficient dollars needed to operate.

“Each country promptly ramped up efforts as risk-aversive moves were seen in financial markets,” Matsuno told a regular news conference.

“Japan’s financial system is stable as a whole,” he said, adding that authorities were watching financial market moves “with a strong sense of alarm”.

The remarks came after Finance Minister Shunichi Suzuki told reporters on Monday the government would continue to “carefully assess” how a weekend rescue deal for Credit Suisse Group would affect Japan’s financial sector.

Asian stocks struggled to stabilise on Monday as a weekend rescue deal for Credit Suisse and concerted central bank action offered little lasting respite from fears a bigger banking crisis is brewing.

Japanese policymakers have brushed aside the chance of contagion in Japan, saying domestic banks had sufficient capital buffers to absorb losses caused by various external factors including risks from the collapse of U.S. lenders.

But the global market rout complicates incoming BOJ Governor Kazuo Ueda’s task of steering a smooth exit from ultra-low interest rates that have drawn increasing criticism for pushing financial institutions to take on risk in the search for yield.

The BOJ board debated the side-effects of easy policy in March, even as it decided to maintain ultra-low rates, a summary of opinions at the meeting showed on Monday.

In a sign calm was being restored in markets, the BOJ’s market operation to offer dollars – the first to be conducted since Sunday’s central bank announcement – drew no bids on Monday.

Demand for safe-haven debt pushed the yield on the 10-year Japanese government bond (JGB) down 1.5 basis points to 0.255% on Monday, well off the BOJ’s 0.5% cap that had been under attack before the banking sector crisis erupted.

For now, financial authorities in Tokyo see the most likely risk for Japan coming from a deterioration in the U.S. economy that would hurt exports, rather than a direct bank contagion.

“The market turbulence could dampen business sentiment and cloud Japan’s economic outlook,” said one of the officials, a view echoed by another official. Both spoke on condition of anonymity due to the sensitivity of the matter.

Some government officials were not letting their guard down.

“The failure of two U.S. banks spilled over to a Swiss bank in a seemingly unrelated way,” one official said. “There’s a lot of unknowns on how things are spreading, so we’ll need to gather data and monitor the situation,” the official said.

(Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Ritsuko Shimizu, Kentaro Sugiyama and Yoshifumi Takemoto; Editing by Tom Hogue and Jacqueline Wong)

By Clare Jim and Xie Yu

HONG KONG (Reuters) -Embattled developer China Evergrande Group plans to publish on Wednesday an offshore debt restructuring term sheet agreed with a key offshore bondholder group, the firm’s lawyer told a Hong Kong court.

The step paves the way for the world’s most indebted property developer to restructure offshore debt of $22.7 billion, as part of liabilities of more than $300 billion.

Evergrande, which began one of China’s biggest debt restructuring processes early last year, expects to sign a deal with general creditors by the end of March, with the restructuring to take effect from Oct 1, it added on Monday.

The court set the next hearing of a winding-up petition for July 31, when Evergrande is expected to have a more advanced draft of the terms, after its latest timeline secured the petitioner’s agreement not to press immediate demand.

“Legally speaking, they are not formally tied in any way,” the firm’s lawyer said in response to a query from the judge, Linda Chan, whether Evergrande’s restructuring would be dependent on the onshore scheme.

The procedures can be done in parallel, the lawyer added.

Market participants feel any restructuring plan by the firm would first have to get the approval of Chinese authorities, as its huge onshore debt affects many local governments, onshore financial institutions and homebuyers.

Evergrande also expects to release in April and May its overdue financial reports for 2021 and 2022. Trade in its Hong Kong shares has been suspended since last March pending the releases.

Once China’s top-selling developer, Evergrande has been at the centre of a property debt crisis in which multiple developers defaulted on offshore debt obligations over the past few years, forcing many to enter into debt restructuring talks.

Evergrande has been trying to reach agreement with major offshore bondholders on terms including swapping part of its debt into equity in two listed units in Hong Kong, sources have told Reuters.

The two units are Evergrande Property Services Group and Evergrande New Energy Vehicle Group.

In a court hearing last November, Evergrande said it aimed to win creditors’ approval for its debt restructuring proposals by the end of February.

Evergrande is represented by law firm Sidley Austin.

(Reporting by Clare Jim and Xie Yu; Editing by Anne Marie Roantree and Clarence Fernandez)

By Engen Tham and Julie Zhu

SHANGHAI/HONG KONG (Reuters) -Credit Suisse told staff its wealth assets are operationally separate from UBS for now, but once they merged clients might want to consider moving some assets to another bank if concentration was a concern, according to an internal memo.

The memo, dated Sunday and seen by Reuters, gave talking points to Credit Suisse staff for client conversations after a historic Swiss-backed acquisition of the troubled bank by UBS Group.

“For now, assets are still legally separated. Once that changes, you (clients) may of course want to consider moving some of your assets to another bank if concentration is a concern,” the memo said.

That response was suggested to Credit Suisse staff if they were asked by clients what they should do if they were also a UBS client and wanted to avoid too much asset concentration, which can be a concern for wealthy customers.

In a package orchestrated by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses.

UBS will become the undisputed global leader in managing money for the wealthy through the takeover of its main rival, triggering some concerns about concentration risks for clients.

Credit Suisse also told staff to inform clients that plans for its investment banking business will be communicated in due course as details of its acquisition by UBS were still being worked out, according to the memo.

“We do not expect there to be any disruption to client services. We are fully focused on ensuring a smooth transition and seamless experience for our valued clients and customers,” a Credit Suisse spokesperson said.

Credit Suisse is also going ahead with its annual Asia Investment Conference in Hong Kong, starting on Tuesday, the spokesperson said, adding the event, however, would now be closed to media.

In a separate memo on Sunday, the bank told employees that its day-to-day operations were unaffected after it agreed to the UBS takeover.

“Our branches and our global offices will remain open, and all colleagues are expected to and should continue to come to work,” Credit Suisse said in the memo sent globally and seen by Reuters.

Reuters reported on Friday, citing sources, that a number of major banks including Societe Generale SA and Deutsche Bank AG were restricting new trades involving Credit Suisse or its securities.

Regarding counterparties having stopped business with Credit Suisse, the bank said in the client talking points memo that it believed the transaction “will help to restore confidence to the financial markets more broadly.”

Market players remain concerned about the next moves at Credit Suisse and the impact on employees, investors and clients.

UBS Chairman Colm Kelleher told a media conference that it would wind down Credit Suisse’s investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of some $7 billion by 2027.

(Reporting by Engen Tham in Shgnghai and Julie Zhu in Hong Kong; Additional reporting by Scott Murdoch in Sydney; Editing by Sumeet Chatterjee, Himani Sarkar and Jamie Freed)

By Svea Herbst-Bayliss and Lawrence Delevingne

NEW YORK/BOSTON (Reuters) – Hedge funds managers and other large investors believe it is far too soon to call an all-clear on turmoil in the global financial sector even after more than a week of financial lifelines, central bank assurances and a massive banking rescue deal.

In the past two weeks, two U.S. banks have collapsed, America’s biggest lenders agreed to deposit $30 billion in another ailing firm, First Republic Bank, Credit Suisse Group AG needed a lifeline and at the end of a frenetic weekend agreed to be taken over by UBS.

Michael A. Rosen, chief investment officer of Santa Monica-based adviser Angeles Investments, said the UBS-Credit Suisse deal eliminated one potential source of instability, but fundamental problems in the banking system remained, mainly tight monetary policy.

“So maybe one hole in the wall has been plugged, but the water’s rising,” he said.

One hedge fund manager described trades in the financial sector as being “all over the map”, with nobody agreeing on anything.

Some breathed a sigh of relief that a competitor stepped in with a rescue offer for Credit Suisse. Others worried that the $3.2 billion UBS will pay is far less than the $9.5 billion Credit Suisse was valued at on Friday, and one investor said the market may not consider this to be a positive.

Many of the roughly one dozen managers contacted on Sunday asked not to be identified because their firms prohibit them from discussing their trades with the media, or they did not want to make their views and positions public.

Others tweeted throughout the day.

Daniel Loeb, chief investment officer of U.S. hedge fund firm Third Point LLC, wrote on Sunday morning that initial news of the UBS offer for Credit Suisse would be “positive for financial system as it preserves the capital structure.”

Later, short seller Jim Chanos tweeted his shock that $17 billion of Credit Suisse bonds would be wiped out, asking “What are the Swiss doing here…?!”

Chanos and Loeb did not respond to emails seeking further comment.

There was also little agreement on how investors would be positioning themselves in smaller U.S. banks, including First Republic.

First Republic’s stock price tumbled 33% on Friday, one day after a handful of the country’s largest banks, including JPMorgan Chase, organized a $30 billion rescue package that was supported by the Federal Reserve and U.S. Treasury.

On Sunday, credit rating agency S&P Global downgraded First Republic’s ratings for the second time in less than a week, lowering its sovereign credit ratings to “B+” from “BB+”. S&P maintained its outlook at “Creditwatch Negative.”

“The situation is not resolving easily,” said one investor who allocates wealthy clients’ capital with hedge funds.

Several fund managers said it felt dangerous to bet on further declines in light of the rescue package, noting that retail investors could band together and support banks like First Republic that were seen as solid enterprises. “This name could easily go meme stock, so there is a fear of being short here,” one manager said.

Investors’ short interest in First Republic was at $190 million, or about 3% of its float, according to data tweeted on Friday by research firm S3 Partners, which said short-sellers had made mark-to-market profits of $537 million on the trade this year and $62 million on Friday alone.

Several investors also said they expect federal regulators to impose new rules for regional banks by tightening lending standards or forcing them to raise capital. With more regulatory pressure ahead, some said that buying stock in these banks after steep price declines might be a tougher call, because their lending activity could shrink.

Investor Ricky Sandler, who runs hedge fund Eminence Capital LP, speculated on Twitter on Friday that an investment bank might be interested in First Republic, which caters to wealthy clients.

Sandler did not respond to a request for additional comment on Sunday. A First Republic spokesman said the bank “is well positioned to manage short-term deposit activity,” given last week’s deposit infusion, as well as cash on hand.

The KBW Bank Index, a proxy for banks, tumbled 11.12% last week, signaling that further turmoil could lie ahead.

Some investors, including a large mutual fund group that also runs a hedge fund, said prospects for banks had gotten progressively worse in recent months given the economic outlook.

“As we thought the country would drop into recession last year, we curbed our banking exposure,” said a senior executive at that group. “That feels like a good call right now.”

(Reporting by Svea Herbst-Bayliss and Carolina Mandl in New York, Lawrence Delevingne in Boston, Nell Mackenzie in London; Editing by Megan Davies and Jamie Freed)

SHANGHAI (Reuters) – China kept its benchmark lending rates unchanged for the seventh straight month in March, as expected, with the economy already benefiting from policy actions taken last week as it recovers from the pandemic.

The need for more imminent monetary easing subsided after the People’s Bank of China (PBOC) said on March 17 it would cut the amount of cash banks must set aside as reserves, market watchers said.

On Monday, the one-year loan prime rate (LPR) was kept at 3.65%, while the five-year LPR was unchanged at 4.30%.

“The necessity and urgency of interest rate cuts in the short term are not very high,” said Bruce Pang, chief economist at Jones Lang Lasalle.

Although the recovery was still gathering pace, China was constrained in easing monetary policy by such factors as the yuan exchange rate and global monetary tightening, he said.

Economists say that if China cuts interest rates as other countries raise them, widening yield differentials will put downward pressure on the yuan and risk capital outflows.

A bout of data in the past two weeks has shown that economic activity picked up in the first two months of 2023 as consumption and infrastructure investment drove recovery from pandemic disruption. That has offset weak global demand and a persistent downturn in China’s property sector.

(Graphic: China lending rates unchanged in March https://www.reuters.com/graphics/CHINA-ECONOMY/LPR/zdpxdqrzwpx/chart.png)

In a Reuters poll conducted last week, all 22 participants predicted no change to either loan prime rate. Such unanimity has been rare in previous surveys.

Xing Zhaopeng, senior China strategist at ANZ, distinguished the central bank’s objectives in managing the LPR, its main tool for promoting or restraining demand, and the reserve requirement ratio (RRR) that it imposes on banks. Last week’s RRR cut had been a reaction to the collapse of two regional U.S. banks this month, he said.

“The central bank’s RRR cut was more of an emergency response to prevent overseas banking crisis from spilling over to China,” Xing said.

SPILLOVER EFFECTS

Xuan Changneng, a deputy governor at the PBOC, said on the weekend that the collapse of Silicon Valley Bank (SVB) had showed how rapid shifts in monetary policy abroad were having spillover effects.

An RRR cut nonetheless also promotes economic growth, so economists thought that last week’s made an LPR cut less likely.

In another move last week to lift demand, the PBOC ramped up medium-term liquidity injections when rolling over maturing policy loans, although it kept the interest rate on those loans unchanged. That rate, called the medium-term lending facility rate, serves as a guide to changes in the LPR.

Some economists still see room for the LPR to fall this year to support lending and lift investor confidence.

UBS expects the PBOC to encourage commercial banks to adjust deposit rates downward, cutting the banks’ funding costs and making some room for the central bank to cut the LPR just a little.

“China’s LPR may be lowered slightly by 10 basis points in the rest of 2023, which could help lower the actual funding cost for the real economy and mortgage rates,” said Wang Tao, UBS’s chief China economist.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgage loans. China last cut both LPRs in August to boost the economy.

(Reporting by Winni Zhou and Brenda Goh; Graphics by Kripa Jayaram; Editing by Himani Sarkar and Bradley Perrett)