A look at the day ahead in U.S. and global markets by Mike Dolan
A renewed surge in long-term Treasury yields is stifling world markets yet again as Federal Reserve officials hang tough on one more rate rise, some $134 billion of new government debt sales hit this week and a government shutdown looms.
The yield spike has supercharged the U.S. dollar worldwide – both a reflection and aggravator of mounting financial stress far and wide.
Despite wariness of Bank of Japan intervention, the dollar/yen exchange rate hit its highest for the year on Tuesday – as did the dollar’s DXY (.DXY) index and the dollar’s rate against the South Korea’s won . Sterling hit a 6-month low.
Treasury tremors continue to reverberate from last week’s upgraded Fed forecasts, its insistence on signalling one more rate rise in the current tightening cycle and an uncompromising ‘higher-for-longer’ mantra.
Short term Fed futures haven’t moved much. All the action is in longer-dated U.S. Treasuries, which may now be repricing the economy’s resilience over multiple years and more persistent inflation pressures.
Ten-year Treasury yields , which have added a whopping 25 basis points in just a week, hit another 16-year high at 4.5660% early on Tuesday. As Deutsche Bank notes, this is historically significant territory as the average of the 10-year yield going back to 1799 is around 4.50%.
Thirty-year bond yields , meantime, have jumped over 30bp in a week to a 12-year high of 4.6840%.
And as an indication of how the long-term sustainable interest rate structure as whole is being re-thought, the 10-year real, inflation-adjusted yield has also leaped 26bp to 2.20% – its highest since 2009.
Significantly, this is shifting the deeply-inverted 2-to-10 year yield gap – which has for more than a year indicated recession ahead but which now looks to be closing that negative spread to its smallest since May.
The latest wobble – which has seen exchange-traded funds in U.S. Treasuries deepen year-to-date losses to more than 6% and losses over three years to more than 20% – comes as another heavy supply of new paper goes up for auction this week.
The Treasury sells $48 billion in two-year notes on Tuesday, $49 billion in five-year paper on Wednesday and $37 billion in seven-year notes on Thursday.
A government shutdown from this weekend is still looming with no budget deal in Congress yet to avert it and Moody’s warning of sovereign credit rating implications.
The Fed seems in no mood to calm the horses.
Minneapolis Fed Bank President Neel Kashkari said on Monday the Fed probably needs to raise borrowing rates further.
“If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off,” Said Kashkari.
Even a typically more dovish Chicago Fed boss Austan Goolsbee sounded hawkish. “The risk of inflation staying higher than where we want it is the bigger risk,” he said, adding the Fed would now have to “play by ear” in conducting policy.
Private sector bankers are starting to brace for the worst, with JP Morgan chief Jamie Dimon reported overnight as warning: “I am not sure if the world is prepared for 7% (Fed rates).”
Even though the European Central Bank seems shier of even higher rates, the higher-for-longer message there too is clear. ECB chief Christine Lagarde said on Monday the central bank can meet its 2% inflation target if record high rates are maintained for “a sufficiently long duration.”
In a thin data diary on Monday, the Dallas Fed’s September manufacturing survey showed a deterioration of activity there this month. The Chicago Fed’s national business poll for August also fell.
And a retreat in energy prices would have soothed some inflation worries, with U.S. crude falling back to $88 per barrel for the first time in almost two weeks,
Nationwide consumer confidence tops the slate on Tuesday.
Despite a late rally in Wall St stocks on Monday, futures are back about 0.5% in the red – as were bourses in Asia and Europe as the end of the third quarter hoves into view on Friday.
China Evergrande (3333.HK) shares slid for a second day, dropping as much as 8% after a unit of the embattled property developer missed an onshore bond repayment.
There was no sign of a breakthrough in the widening U.S. autoworkers labor dispute, seen as inflationary by some due to potential supply outages.
Key developments that should provide more direction to U.S. markets later on Tuesday:
* US Sept consumer confidence, US Aug new home sales, July house prices, Richmond Fed Sept business survey, Dallas Fed Sept service sector survey, Philadelphia Fed Sept services survey
* Federal Reserve Board Governor Michelle Bowman gives pre-recorded remarks to Washington conference
* U.S. Treasury auctions $48 billion of 2-year notes
* U.S. corporate earnings: Costco, Cintas
Reporting by Mike Dolan; Editing by Christina Fincher
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
A man walks past the Chinese and German national flags before a meeting of officials between the respective trade and economy ministries in Beijing, China, November 1, 2016. REUTERS/Thomas Peter/File Photo Acquire Licensing Rights
BERLIN, Sept 20 (Reuters) – German direct investment in China eased in the first half of the year albeit remaining close to its record high in 2022 and increasing as a share of the country’s overall investment abroad, according to official data analysed by the IW institute.
Investment in China dropped to 10.31 billion euros ($11.02 billion) in the first half of 2023 from 12 billion euros in the first half of last year, the IW said in an analysis shared exclusively with Reuters.
However, that was still nearly twice as much as the 5.5 billion euros invested in 2019, before the coronavirus pandemic hit. It was also more than twice the 4 billion euros invested on average in the first half of the year over the previous decade.
The data underscores concerns that German firms continue to invest heavily in China despite the government’s pleas for companies to reduce their exposure and its sharp cut in investment guarantees for the country.
Overall German direct investment flows dropped more sharply, to 63 billion euros from 104 billion euros last year, as Europe’s largest economy battled recession.
As a result, investment in China as a share of Germany’s overall investments actually increased to 16.4% in the first half from 11.6% last year and 5.1% in 2019, the IW said.
“The trend towards China remains mostly unchanged also this year,” said IW analyst Juergen Matthes. “Although the German economy is overall investing much less abroad, new direct investments in China remain nearly as high as before.”
Matthes pointed out that most of the investments in China were financed by re-invested profits.
Germany’s government has in recent months urged businesses to reduce their strategic dependencies on China given its view that Asia’s rising superpower is a growing threat to global security.
While there are early signs that German companies are beginning to rethink their China strategy, not least because of the economic slowdown there and new security laws, the data is still unclear.
Some China experts say that is partly due to a divergence between a handful of large companies like Volkswagen (VOWG_p.DE) and BASF (BASFn.DE) that are doubling down on their bet on the country, and the rest that are increasingly cautious and looking to diversify, including elsewhere in Asia.
Matthes pointed out that investments in the rest of Asia as a share of Germany’s overall investments was also rising.
“It is notable that nearly a quarter of German direct investment flows recently went to Asia,” he said.
($1 = 0.9354 euros)
Reporting by Sarah Marsh; Editing by Friederike Heine and Christina Fincher
Our Standards: The Thomson Reuters Trust Principles.
LITTLETON, Colorado, Sept 19 (Reuters) – The deepening debt crisis in China’s construction sector – a key engine of economic growth, investment and employment – may trigger an unexpected climate benefit in the form of reduced emissions from the cement industry.
Cement output and construction are closely correlated, and as China is by far the world’s largest construction market it is also the top cement producer, churning out roughly 2 billion tonnes a year, or over half the world’s total, data from the World Cement Association shows.
The heavy use of coal-fired kilns during manufacturing makes the production of cement a dirty business. China’s cement sector discharged 853 million tonnes of carbon dioxide in 2021, according to the Global Carbon Atlas, nearly six times more than the next largest cement producer, India.
The cement sector accounts for roughly 12% of China’s total carbon emissions, according to Fidelity International, and along with steel is one of the largest greenhouse gas emitters.
But with the property sector grinding to a halt due to spiralling debt worries among major developers, the output and use of cement are likely to contract over the next few months, with commensurate implications for emissions.
HOUSING SLUMP
The property markets account for roughly a quarter of China’s economy, and for years Beijing has used the sector’s substantial heft to influence the direction of the rest of the economy by spurring lending to would-be home buyers and fostering large scale construction projects.
But the big property developers racked up record debt loads in recent years that have forced borrowing levels to slow, stoked concerns among investors, and slowed spending across the economy.
China Evergrande Group, once the second largest developer, defaulted on its debt in late 2021, while top developer Country Garden has drained cash reserves to meet a series of debt payment deadlines in recent months.
Fears of contagion throughout the property industry has spurred households to rein in consumer spending, which has in turn led to deteriorating retail sales and further economic headwinds.
Beijing has stepped in with a slew of measures designed to right the ship, including easing borrowing rules for banks and lowering loan standards for potential home buyers.
But property prices in key markets remain under pressure, which has served to stifle interest among buyers and add to the pressure on investors and owners.
CEMENT CUTS
With construction activity across China slowing, and several major building sites stopped completely while tussles over debt payments among developers continue, cement output is likely to shrink to multi-year lows by the end of 2023.
During the March to August period, the latest data available, total cement output was 11.36 million short tons, down 2 percent from the same period in 2022 and the lowest for that period in at least 10 years, China National Bureau of Statistics data shows.
In addition to curtailing output in response to the bleak domestic demand outlook in the property sector, cement plants may be forced to curb output rates over the winter months as part of annual efforts to cap emissions from industrial zones during the peak season for coal heating.
Some cement producers will likely look to boost exports in an effort to offset lower domestic sales, and in July China’s total cement exports hit their highest since late 2019.
But Chinese firms will face stiff competition from lower-cost counterparts in Vietnam, which are by far the top overall cement exporters and already lifted overall cement shipments by close to 3% in the first half of 2023, data from the Vietnam National Cement Association (VNCA) shows.
Some Chinese firms may be prepared to sell exports at a loss for a spell while they await greater clarity over the domestic demand outlook.
But given the weak state of global construction activity amid high interest rates in most countries, as well as the high level of cement exports from other key producers such as India, Turkey, United Arab Emirates and Indonesia, high-cost Chinese firms may be forced to quickly contract output to match the subdued construction sector.
And if that’s the case, the sector’s emissions will come down too, yielding a rare climate benefit to the ongoing property market disruption.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting By Gavin Maguire; Editing by Miral Fahmy
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Zhao Youming, 60, looks at an unfinished residential building where he bought an apartment, at the Gaotie Wellness City complex in Tongchuan, Shaanxi province, China September 12, 2023. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
HONG KONG, Sept 18 (Reuters Breakingviews) – Chinese developers are in trouble. Many are struggling to stay afloat as both financing and sales dry up. Why don’t they simply slash prices and sell down their bloated inventory? Well, they can’t. Restrictions imposed after the last property crisis in 2016 were intended to contain runaway home prices. Those limits endured and are now obstructing a recovery in the world’s second largest economy.
“Guidance” set by local governments helped officials to achieve price stability. Average new home prices in the 70 major cities, per official data, have fluctuated around just 2% on a monthly basis for more than a year even as top developers wrestle to restructure their debt. Evergrande (3333.HK) and Country Garden (2007.HK) alone have combined liabilities worth 3.8 trillion yuan ($524 billion).
Yet the restrictions hid distortions. When the mood was bullish, price caps in major cities were far below what people were willing to pay. Crowds of buyers typically flocked to project launches. Those who were lucky enough to be allocated a new apartment could then flip it for a handsome profit in the limited secondary market.
That’s one reason many Chinese viewed caps as a “subsidy” for prospective homeowners. Fast forward, and these controlled prices are much higher than the perceived market value. Some developers have tried to work around the problem, by offering homebuyers “discounts” including car parking lots or even gold bars. Home sales last year fell 27% to return to 2017 level, per National Bureau of Statistics, and sales this year are on course to be worse.
Scrapping the price caps would be a cleaner fix and officials are weighing up such a move, Reuters reported this month. The Guangzhou government has already quietly abandoned its seven-year-old policy in regulating new home prices, according to Caixin, a financial publication. Hard up developers will be able to start generating much-needed cash if more cities follow. Take Country Garden, it had a 202 million square metre landbank at the end of 2022, including 3,000 projects under construction. How quickly it can monetise some of those assets ultimately depends on how attractive the selling prices are.
A price slump would spur demand but the government would need to brave enormous fallout. Existing owners will be unhappy to see the value of their homes tumble: China’s homeownership rate reached 90% by 2020, and real estate accounts for 70% of household wealth. In a weak economy, it is unclear where an undistorted price will settle. Still, finding the bottom of the market looks crucial to any property market revival.
CONTEXT NEWS
China’s Guangzhou city has cancelled price caps on new residential projects, Caixin reported on Sept. 12. Developers still need to share their planned selling prices with authorities but regulators will no longer provide price guidance, the financial publication said.
Price caps of various kinds were introduced in many Chinese cities from 2016 following the central government’s call for a stable residential market.
Editing by Una Galani and Thomas Shum
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
STOCKHOLM, Sept 15 (Reuters) – For months, Sweden’s government has sought to play down a property crisis that has throttled confidence in the Nordic state, repeating a simple message: While some companies are in trouble, the country is not.
Now Heimstaden Bostad, a $30 billion property investor with swathes of homes from Stockholm to Berlin, is grappling with a multibillion dollar funding crunch, which has rebounded on one of its owners – the country’s biggest pension fund.
That undoubtedly raises the stakes for Sweden, the European nation hardest hit by a global property rout triggered by the steep rise in interest rates last year that abruptly ended a decade of virtually free money.
Sweden is one of Europe’s wealthiest states and the biggest Nordic economy, but it has an Achilles Heel – a property market where banks have lent more than 4 trillion Swedish crowns ($360 billion) to homeowners. Weighed down by these home loans, Swedes are twice as heavily indebted as Germans or Italians.
Earlier this year, the International Monetary Fund flagged Sweden’s historically high household borrowing coupled with debt-driven commercial property firms and their dependence on local banks as a financial stability risk.
The property crisis accelerated this month when pension fund Alecta, which owns a 38% stake in Heimstaden Bostad, said Sweden’s biggest residential landlord needed cash and it may contribute.
Swedbank estimates the current shortfall for Heimstaden Bostad could be roughly 30 billion crowns ($2.7 billion).
Sweden’s financial regulator launched an inquiry into why and how Alecta had invested $4.5 billion in the property giant, in the first place. Its troubled investment accounts for 4% of its funds.
Christian Dreyer, a spokesperson for Heimstaden, said it had made “good progress covering 2024 bond repayments”, and was “not reliant on immediate capital injection for meeting our obligations”.
But he also signaled that the company was open to other support.
GOVT GETS READY
As the property crisis widens, Sweden’s government is readying for action while crossing its fingers that it will not be needed.
Earlier this year, Karolina Ekholm, Director General of Sweden’s Debt Office, said the government had a light debt load and could afford to borrow more to intervene, addressing the possibility of giving credit guarantees or subsidised loans.
One person familiar with government thinking said that while the state was willing to help in principle, it was conscious of the potential political backlash of supporting companies which had taken big risks.
Heimstaden’s Dreyer said it was examining a “potential recapitalisation from existing shareholders” and was confident it could “mitigate financial risk” in part through bank financing but expressed openness to other forms of support.
“While we’re not dependent on external support, we could consider suitable governmental programs if available,” Dreyer said.
In public, the government has sought to play down the crisis.
“There are potential problems that we must keep close eyes on,” Financial Markets Minister Niklas Wykman told Reuters, shortly before Heimstaden Bostad’s problems became public. “We know that rain and snow is coming. But we have shelters.”
“The government is ready to act to secure financial stability if there should be any threats or turmoil,” he said, cautioning that the problems of individual firms did not mean the wider sector was in trouble.
Sweden is among the first European countries to find itself struggling as interest rates climb because much of its property debt is short-term, making it a harbinger for the wider region, where the rising cost of money has also rocked Germany.
Roughly half of Swedish homeowners have floating-rate mortgages, meaning rate hikes quickly trigger higher bills for them.
Its developers, meanwhile, often relied on shorter-term loans or bonds that have to be replaced with pricier credit.
Heimstaden Bostad and other companies such as struggling SBB (SBBb.ST) grew quickly, in part by selling cheap short-term Eurobonds, which has since become tougher.
“We’ve seen a crazy housing boom. We’re not seeing a bust – yet,” said David Perez, a Sweden Democrat lawmaker. “If interest rates continue to rise and it’s coupled with unemployment, that’s what we are afraid of.”
With interest rates still climbing, analysts such as Marcus Gustavsson of Danske Bank, believe the worst is not yet over.
He reckons that Swedish residential property prices have fallen by roughly 10% and that the property market may only be half way through the rout.
“Until recently Swedes were bidding up the price of homes with funny money,” said Andreas Cervenka, author of “Greedy Sweden”, a book examining inequality driven partly by the housing boom.
“With rising interest rates, that funny money has turned into real money and it is painful.”
($1 = 11.1242 Swedish crowns)
Additional reporting by Simon Johnson and Johan Ahlander in Stockholm, Greta Rosen Fondahn in Gdansk, Chiara Elisei in London; Writing by John O’Donnell; Editing by Hugh Lawson
Our Standards: The Thomson Reuters Trust Principles.
Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
Sept 15 (Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.
Asian markets are set to end the week strongly following risk-friendly moves in the U.S. and Europe on Thursday, although a deluge of top-tier economic data from China on Friday could sour the mood at a stroke.
The latest indicators from the region’s largest economy to be released include house prices, fixed asset investment, retail sales, industrial production and unemployment, all for August.
The annual pace of retail sales and industrial production growth is expected to pick up, but fixed asset investment growth is predicted to slow to a new low of 3.3% going back to the 1990s, if pandemic-related distortions in early 2020 are excluded.
The People’s Bank of China insists it will take “appropriate” steps to support the economy, although a growing number of economists are skeptical Beijing will meet its 5% GDP growth target this year and many are cutting their 2024 outlooks.
The PROC on Thursday announced its second 25-basis point cut to banks’ reserve requirement ratio this year. Unsurprisingly, the move stopped the yuan’s recent mini-revival in its tracks, and pressure on the currency on Friday will probably be to the downside again.
China’s deteriorating trade relations with the West, meanwhile, is a darkening cloud that shows no sign of lifting.
Beijing has hit back at a European Commission probe into China’s electric vehicle subsidies as protectionist, warning it would damage economic relations, and analysts have warned that if the probe results in punitive tariffs, Beijing will take retaliatory action.
However, all that could be parked for another day if investors decide to run with Thursday’s bullish momentum.
It was a case of ‘good news is good news’ for Wall Street as investors welcomed hot U.S. retail sales and accelerating producer prices as a sign of economic resilience rather than fret about the hawkish rate implications.
Coupled with falling euro zone bond yields and implied rates after the European Central Bank’s ‘dovish hike’ – perhaps the central bank’s last in the cycle – risk assets got a shot in the arm, paving the way for a positive open in Asia on Friday.
The big three U.S. indexes rose between 0.8% and 1.0%, European stocks had their best day in six months and the MSCI Asia ex-Japan Index had its best day in 10 days on Thursday. The rise in oil to new 2023 highs and another dollar surge failed to dampen investors’ mood.
Another positive portent for Asian markets on Friday: the VIX gauge of implied S&P 500 equity volatility – Wall Street’s so-called ‘fear index’ – registered its lowest close on Thursday since before the pandemic.
Here are key developments that could provide more direction to markets on Friday:
– China ‘data dump’ (August)
– Indonesia trade (August)
– New Zealand manufacturing PMI (August)
By Jamie McGeever; Editing by Josie Kao
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LONDON, Sept 13 (Reuters Breakingviews) – Where is Wen Jiabao when you need him? China’s former premier is remembered for his decision to unleash a huge state spending plan after the 2008 financial crisis. Today’s leaders wish they could deploy similar fiscal firepower to kickstart their sputtering economy. The options before President Xi Jinping aren’t great. Yet letting some heavily indebted local governments’ investment arms fail would be better than keeping them on pricey life support or counting on an elusive rebound in consumption.
Wen exited the political stage a decade ago but his legacy lives on, for better and, mostly, for worse. His plan to throw 4 trillion yuan ($555 billion), or about 13% of China’s GDP in 2008, at everything from railroads to airports contributed to a debt overhang that’s still haunting Beijing today. In the 15 years since, China’s debt-to-GDP ratio has doubled to a whopping 280%, with the bulk of liabilities held by local government financial vehicles (LGFVs).
Most of these 3,000-plus entities were created by local governments during the 2008 crisis to skirt a central government ban on direct state borrowing. They were then contracted by regional governments to build public infrastructure, from uneconomical leisure parks and roads to slightly more cost-effective highways, subway stations and high-speed bullet trains. Many also developed land for regional governments before it was sold on to residential developers. Today those vehicles are a ticking time bomb that hampers China’s ability to spend its way out of the current economic doldrums. Economists are busy downgrading the country’s full-year growth to below the official goal of around 5%, which was already seen as modest, because an initial recovery following December’s pandemic reopening quickly faded. China is flirting with deflation as the property sector – which accounts for a quarter of GDP – has sunk and pandemic-scarred consumers and businesses hesitate to spend.
Xi’s dilemmas are compounded by his belief that the traditional stimulus playbook of boosting real estate has run its course. He has frowned at house prices that made Shanghai less affordable than New York and made an example of over-leveraged developers that disrupted the market, such as China Evergrande (3333.HK), which is struggling to restructure some $300 billion in liabilities. He has eased home purchase curbs recently to stabilise property sales, but they are still on course to decline around 10% this year, per Gavekal Dragonomics.
That leaves much of the heavy lifting to fiscal spending. Yet LGFVs’ debt stands in the way. These vehicles had already accumulated 80 trillion yuan of liabilities at the end of 2022, according to analysts at Guosheng Securities. Of that, 54 trillion yuan was interest-bearing, mostly owed to Chinese banks.
The bulk of these debts are separated from local governments’ balance sheets, but Beijing’s decade-long efforts to sever the implicit guarantee between local governments and their LGFVs have been largely unsuccessful. A third of LGFVs didn’t generate positive cash flow last year, according to Guosheng. And 60% of them, holding about 32 trillion yuan of outstanding debt, would struggle to pay interest with their own EBITDA, Citi analysts estimated. Yet local officials remain reluctant to let them default on public markets, for fear that such a shock would shut their regions’ funding access and even trigger a run on government bonds.
Beijing wants to buy time. Its latest move includes a mooted plan to allow local governments to raise 1 trillion yuan in total through bond sales to repay LGFV debt. The Ministry of Finance may also ask banks to extend loans and slash the interest. Zunyi Road and Bridge Construction, a LGFV in China’s Southwestern Guizhou province, set a precedent earlier this year, as its creditor banks agreed to roll over its loans for 20 years and halved interest on them. Xi could also help by letting local governments shuffle their debt into the state’s balance sheet since the central government has a debt-to-GDP ratio of just 20%.
The problem with these measures is that they wouldn’t reduce LGFVs’ pile of debt. A harsher medicine is needed. The shock therapy option for Beijing is to force a fire sale to raise much-needed cash. LGFVs have 133 trillion yuan in total assets, around 60% of which are in land and physical assets such as industrial parks, transport infrastructure and investment properties, according to Guosheng.
Local officials have pushed back at Beijing’s requests to sell, arguing most of these assets are illiquid, according to the Financial Times. But even if the portfolio of land and fixed assets was put up for sale at a massive 80% discount to entice vulture and bad debt investors, that would raise around 16 trillion yuan, enabling the LGFVs to pay back all their outstanding bonds. At a more optimistic 30% discount, the proceeds would jump to 55 trillion yuan, which would cover all outstanding interest-bearing debt.
Even with asset sales, it’s inevitable that some LGFVs, especially in poorer regions, will have to fail. Beijing fears that would break the banks. S&P analysts calculate that about 20 trillion yuan of LGFVs’ loans may be at risk of restructuring. Letting these loans roll over with interest slashed – as in Zunyi’s case – would result in a 5 trillion yuan hit to bank capital, and reduce banks’ average capital adequacy ratio by 2.6 percentage points to 12.6%; that’s still within regulatory requirements.
The stakes are high. Despite Xi’s distaste for propping up the economy through real estate, the danger is that a fire sale of LGFVs’ assets could spark a widespread fall in the value of collateral for bank loans and cause a deeper crisis of confidence. That, in turn, might deal a considerable blow to lenders’ balance sheets and destabilise the financial system.
That said, the banking sector is sitting on 335 trillion yuan of total assets, and bad loans, impairments and provisions will only be an issue once lenders come clean on them. So far, they are not. As of June 2023, Chinese commercial banks claimed that non-performing loans were just 1.6% of all loans. Investors have already priced in more damage and pushed the average valuation of those listed to less than half of book value.
The makeup of China’s growth makes drastic action on LGFVs even more imperative. Unlike in the United States and other Western countries, China’s growth is still driven by investment rather than consumption. Investment as a share of GDP is a lofty 40%, according to Oxford Economics, double that of the United States.
Chinese households have ample savings, having accumulated 17.8 trillion yuan of bank deposits last year alone. But darkening job prospects, a diminishing wealth effect from real estate, and scars from years of pandemic lockdowns have made them extremely reluctant to spend them.
If Xi won’t boost property wholeheartedly and is not able to count on consumers, his efforts to revive China’s growth have to focus on smashing the great wall of local debt.
Follow @ywchen1 on X
CONTEXT NEWS
Global rating agency Moody’s on Sept. 1 revised down its 2024 GDP forecast for China to 4% from 4.5%. It maintained that China’s economy will grow at the rate of 5%, the official government target, in 2023.
China’s monthly economic update for August, including that on industrial output, fixed asset investment, property investment, retail sales and others, will be released on Sept. 15.
Editing by Peter Thal Larsen, Sharon Lam and Aditya Sriwatsav
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
An Airbus A319 can be seen flying 500 feet above the ground while on final approach to land at LaGuardia Airport in New York City, New York, U.S., January 6, 2022. REUTERS/Bryan Woolston Acquire Licensing Rights
BRUSSELS, Sept 4 (Reuters Breakingviews) – Short flights within Europe are frequent flyers on wish lists of things to ban. In the name of cutting carbon dioxide emissions, countries from Germany to Spain are proposing to prevent brief air trips, and lobbyists like Greenpeace say governments should require travellers to choose trains or other ground transport for shorter journeys. But not all short flights are alike, and banning commercial hops makes less sense than targeting private jets.
In 2022 aviation emitted 800 million metric tons of CO2, around 10% of the world’s 8 billion tons of CO2 emitted annually by various means of transport, according to the International Energy Agency. In the same year European Union emissions were around 2.5 billion tons and in the recent past flying has contributed about 4%. But most of that is long-haul flights. A 2022 study of 31 European countries found that flights shorter than 500 km account for 28% of departures, but under 6% of fuel burnt.
Commercial jets do pollute more than ground transit, but they also have advantages that can’t be easily matched. To avoid a disproportionate impact on disabled passengers and others en route to more distant destinations, train services need to catch up first. Denying a short flight to connecting passengers could just send them to their cars, according to KLM CEO Marjan Rintel.
Limiting private jet travel would make a bigger difference, with fewer broad-based disruptions. Private jets have a far bigger impact per passenger on the environment than their flying-bus counterparts: as much as 45 times the amount of emissions per passenger, according to the Institute for Policy Studies. Greenpeace data shows that private jet flights in Europe put out 3.4 million tons of CO2 in 2022, twice 2021 levels, and mostly on flights with a range of less than 750 km.
Short-haul bans are especially beside the point when they look more like industrial policy than climate action. In France, where domestic connections are already prohibited for journeys of under two and a half hours, only three routes were actually banned, with projected savings of just 55,000 tons of carbon dioxide output per year. Shuttering unprofitable routes and prohibiting new competition on those legs acted more like a leg-up for Air France’s business plan, according to Davy transport analyst Stephen Furlong.
In any case, there’s a positive non-climate economic case for short-haul flights. They have allowed upstart carriers like Norwegian Air to challenge legacy airlines and rebuild after the pandemic. Connecting flights also make it possible for Brussels Airlines to serve as a hub for passengers in and out of Africa, a lifeline for countries whose livelihoods depend on travel routes.
There’s a case for phasing out shorter flights over time, and for surcharges like Belgium’s 10 euro tax on flights of less than 500 km. But banning brief mass-transit trips now is a hop too far.
Follow @rebeccawire on X
CONTEXT NEWS
Countries such as France, Spain, Belgium and Germany have enacted or are considering measures to reduce or ban short flights. The European Union’s long-term mobility plan calls for discouraging plane travel where lower-impact alternatives exist.
Direct emissions from aviation accounted for 3.8% of the EU’s total carbon dioxide emissions in 2017, according to the European Commission. Aviation is responsible for 14% of transportation-sector emissions.
Greenpeace research found that the number of European private jet flights jumped from 118,756 in 2020 to 572,806 in 2022, with carbon dioxide emissions going from about 355,000 metric tons to 3.4 million tons over the same period. More than half of 2022 private jet travel was for distances of less than 750 km.
Editing by George Hay and Oliver Taslic
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BEIJING, Sept 4 (Reuters) – Chinese President Xi Jinping’s first major reform plans a decade ago were also his boldest, envisaging a transition to a Western-style free market economy driven by services and consumption by 2020.
The 60-point agenda was meant to fix an obsolete growth model better suited to less developed countries – however, most of those reforms have gone nowhere leaving the economy largely reliant on older policies that have only added to China’s massive debt pile and industrial overcapacity.
The failure to restructure the world’s second-largest economy has raised critical questions about what comes next for China.
While many analysts see a slow drift towards Japan-style stagnation as the most likely outcome, there is also the prospect of a more severe crunch.
“Things always fail slowly until they suddenly break,” said William Hurst, Chong Hua Professor of Chinese Development at University of Cambridge.
“There is a significant risk in the short term of financial crisis or other degree of economic crisis that would carry very substantial social and political costs for the Chinese government. Eventually there’s going to have to be a reckoning.”
China came out of its Maoist planned economy in the 1980s as a largely rural society, badly in need of factories and infrastructure.
By the time the global financial crisis hit in 2008-09, it had already met most of its investment needs for its level of development, economists say.
Since then, the economy quadrupled in nominal terms while overall debt expanded nine times. To keep growth high, China in the 2010s doubled down on infrastructure and property investment, at the expense of household consumption.
That has kept consumer demand weaker as a portion of GDP than in most other countries and concentrated job creation in the construction and industrial sectors, careers increasingly spurned by young university graduates.
The policy focus also bloated China’s property sector to a quarter of economic activity and made local governments so reliant on debt that many now struggle to refinance.
The pandemic, a demographic downturn and geopolitical tensions have exacerbated all these problems to the point that the economy has found it hard to recover this year even as China reopened.
“We’re at a moment when we are seeing some structural shifts, but we should have seen these coming,” said Max Zenglein, chief economist at MERICS, a China studies institute.
“We’re just beginning to be confronted with the reality. We’re in untested territory.”
The end of China’s economic boom will likely hurt commodity exporters and export disinflation around the world. At home, it will threaten living standards for millions of unemployed graduates and many whose wealth is tied up in property, posing social stability risks.
CRISIS VS STAGNATION
Aside from short-term solutions, which would likely only perpetuate debt-fueled investment, economists see three options for China.
One is a swift, painful crisis that writes off debt, curbs excess industrial capacity and deflates the property bubble. Another is a decades-long process in which China winds down these excesses gradually at the expense of growth. The third is switching to a consumer-led model with structural reforms that cause some near-term pain but help it re-emerge faster and stronger.
A crisis could unfold if the massive property market collapses in an uncontrolled way, dragging the financial sector with it.
The other high-stress point is local government debt, estimated by the International Monetary Fund at $9 trillion. China promised in July to come up with a “basket of measures” to address municipal debt risks, without detailing.
Logan Wright, a partner at Rhodium Group, says Beijing has to decide which portion of that debt to rescue, as the amount is too large to provide full guarantees of repayment, which the market currently regards as implicit.
“Crisis is going to occur in China when government credibility falters,” he said.
“When all of a sudden funding is cut off for the remaining investments that seem subject to market risk, that’s a huge moment of uncertainty in China’s financial markets.”
But given state control of many developers and banks and a tight capital account that limits outflows into assets abroad, that is a low risk scenario, many economists say.
Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, expects there would be plenty of buyers if Beijing consolidates debt given limited investment alternatives.
“I am more in the slow growth camp,” she said. “The more debt is piled up for projects that are not productive, the lower the return on assets, particularly public investment, and that really means that China cannot grow its way out.”
Avoiding a crisis by extending the adjustment period, however, has its own stability risks with youth unemployment topping 21% and around 70% of household wealth invested in property.
“One of China’s biggest success stories, building a strong middle class, is also becoming its biggest vulnerability,” said MERICS’ Zenglein. “If you look at it from the perspective of a younger person, you are now at risk of being the first post-reform generation whose economic wellbeing might hit a wall. If the message is tighten up your belts and roll up your sleeves, that’s going to be kind of a hard sell.”
REFORMS, THIS TIME?
The third path, actively switching to a new model, is considered very unlikely, based on what happened to Xi’s 60-point programme.
Those plans have barely been mentioned since 2015 when a capital outflows scare sent stocks and the yuan tumbling and engendered an official aversion to potentially disruptive reforms, analysts say.
China has since backed away from major financial market liberalisation while plans to rein in state behemoths and introduce universal social welfare never quite materialised.
“Right now is a time in which there’s a potential for the train to change direction to a new model, and I think there’s appetite to do that,” said Hurst.
“But at the same time there’s a great fear of the short-term political and social risk, especially of provoking an economic crisis.”
Additional reporting by Liangping Gao and Kevin Yao; Graphics by Kripa Jayaram; Editing by Marius Zaharia and Sam Holmes
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MUNICH, Sept 1 (Reuters) – It has been a tumultuous year for one prominent German property developer: his efforts to sell his penthouse atop a Nazi-era air raid shelter have stalled, and just weeks ago his firm filed for insolvency.
The one-two punch for the developer, Stefan Hoeglmaier, and his company, Euroboden, mirror the travails of the broader property sector across Europe’s largest economy as it suffers its worst slump in decades.
For years, low interest rates fuelled a global boom, igniting interest in German property, seen as safe and stable as the country.
A sharp rise in rates, and soaring energy and building costs, put an end to the run. That has tipped a string of developers into insolvency, frozen deals and pushed prices down, prompting the industry to appeal to Chancellor Olaf Scholz for help.
“We’re heading for the wall at breakneck speed. The first developers have fallen and more will follow,” said Tillmann Peeters, an insolvency lawyer with FalkenSteg.
Developers’ fortunes, including Euroboden, changed in 2022 when the European Central Bank began to increase rates, making it harder for to borrow and to find buyers for projects.
A statement from Euroboden management said the market environment for the company had “deteriorated quite considerably”.
The health of Germany’s property sector – Europe’s biggest property investment market outside of Britain – is critical, making up roughly a fifth of output and providing one in 10 jobs. New building during the first half of the year nearly halved from the past two years.
In 2010, in the early days of a years-long boom, Hoeglmaier bought a dilapidated aboveground bunker in a posh Munich neighbourhood from the government to convert it into luxury apartments.
He and his partner Oscar Loya – a Eurovision Song Contest star – took for themselves the three-floor penthouse, complete with music room and gold-leaf walls in the toilet.
During the decade that followed, Euroboden completed projects with renowned architects, generated tens of millions of euros in profit, raised millions from investors, and expanded to Berlin and beyond.
The penthouse made the cover of Germany’s Architectural Digest, and the couple hosted “bunker acoustic sessions”, with video clips posted to Loya’s Facebook page.
Loya, who owns stakes in two Euroboden subsidiaries, also serenaded staff at the company’s 20-year anniversary party in 2019.
The property boom came to an abrupt end last year when the speed of interest rate increases caught many in the sector off guard.
Euroboden issued a profit warning in October. Late last year, Hoeglmaier put his penthouse on the market, and Euroboden closed its Frankfurt office.
In late July, Euroboden called a meeting to ask investors to restructure 92 million euros ($100 million) in outstanding bonds, but after they balked at the new conditions, the company cancelled the meeting days later and filed for insolvency.
“It was relatively clear that bondholders would not accept the proposal,” said Daniel Bauer, chief of the SdK association of capital investors that is representing nearly 800 Euroboden investors with 11 million euros in bonds.
The person overseeing the insolvency, Oliver Schartl, said that the case was relatively complex and in an early phase.
Throughout, Euroboden has blamed the pandemic, the war in Ukraine, inflation and interest rates – the same toxic mix that has inflicted pain on the entire industry.
Hoeglmaier declined to be interviewed for this story saying he needed privacy to focus on business, while Loya did not respond to requests for comment.
Euroboden is not an isolated case. Several other German property developers filed for insolvency in recent months.
Duesseldorf-based Gerch, with 4 billion euros of projects, is Germany’s biggest casualty so far.
Property professionals fear the downturn in Germany could prove deeper than the 1990s crash following the dash for property in eastern Germany after the fall of the Berlin wall.
“The rise in building costs, shift away from office working and rising interest rates mean we’ll see many more developers run out of steam,” said Christoph Niering, who chairs the umbrella body for insolvency administrators, VID.
“Most people did not see this crisis coming. It is now surprising how quickly it is unfolding.”
Lenders too were slow to respond.
In 2020, as the property market heated up, the Bundesbank warned the country’s banks, for whom property accounted for about 70% of all domestic loans, of the risks. In August, it warned again that property remained overvalued, despite recent falls, expressing hope, however, that low unemployment meant most borrowers could keep up loan repayments.
Germany and Sweden are the hardest hit on continental Europe by a global property rout that has sucked in homebuilders in China, from Evergrande to Country Garden.
Hoeglmaier’s bunker was originally erected in the early 1940s to shield residents from allied bombs. After the war, nearby grounds served as camps for imprisoned Nazis and then refugees, and local hairdressers and hotels sought permission to post their ads on its bullet-pocked facade.
Since 2005, Germany has sold some 320 bunkers.
The 380-square meter (4,090 square foot) penthouse, which occupies the fifth through seventh floors and includes a rooftop terrace, originally listed for just under 13 million euros. The price dropped to 11 million earlier this year, but it is still one of the most expensive apartments in Germany.
“If interested,” the listing reads “some of the furniture and lamps can be purchased.”
($1 = 0.9198 euros)
Additional reporting by Matthias Inverardi
Editing by Tomasz Janowski
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