Aurelia Butler

A spiraling crisis of stalled projects has dented the confidence of hundreds of thousands of homebuyers, triggering a mortgage boycott across more than 90 cities and warnings of broader systemic risks. The big question now is not if, but how much it will batter the nation’s $56 trillion banking system.In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan ($356 billion), or 6.4% of mortgages, are at risk while Deutsche Bank is warning that at least 7% of home loans are in danger. So far, listed banks have reported just 2.1 billion yuan in delinquent mortgages as directly affected by the boycotts. “Banks are caught in the middle,” said Zhiwu Chen, a professor of finance at the University of Hong Kong Business School. “If they don’t help the developers finish the projects, they would end up losing much more. If they do, that of course would make the government happy, but they add more to their exposure to delayed real estate projects.”Already rattled by headwinds from slowing economic growth, Covid disruptions and record high youth unemployment, Beijing is placing financial and social stability at the top of its priorities. Efforts that have been contemplated so far included a grace period on mortgage payments and a central bank-backed fund to lend financial support to developers. Either way, banks are expected to play an active role in a concerted state bailout. The exposure of Chinese banks to the property sector tops that of any other industry. There were 39 trillion yuan of outstanding mortgages and another 13 trillion yuan of loans to developers at the end of March, according to data from the People’s Bank of China. The real estate market is “the ultimate foundation” for financial stability in China, Teneo Holdings managing director Gabriel Wildau said in a note this month. As authorities move to keep risks in check, lenders with high exposure could come under greater scrutiny. Mortgages accounted for about 34% of total loans at Postal Savings Bank of China Co Ltd (SS:601658) and China Construction Bank (OTC:CICHF) Co (SS:601939) at the end of 2021, above a regulatory cap of 32.5% for the biggest banks. About 7% of outstanding mortgage loans could be impacted if the defaults spread, according to Deutsche Bank analyst Lucia Kwong. That estimate may still be conservative given the limited access to information on the unfinished projects, she said.  To limit the fallout, China could tap into the excess capital and surplus loan provisions at its 10 biggest lenders, which amounts to a combined 4.8 trillion yuan, according to a report by Francis Chan and Kristy Hung, analysts at Bloomberg Intelligence.Local banks — city and rural commercial lenders — could shoulder more responsibility than state peers, based on earlier bailouts and also due to their stronger ties with local governments, though their capital buffers lag far behind industry average. Chinese banks have raised a record amount of capital in the first half from bond sales as they prepare for a potential spike in soured loans.Bad loans at lenders, which amounted to 2.9 trillion yuan at the end of March, are poised to reach new records and further strain an economy that’s expanding at the slowest pace since the onset of the Covid outbreak. While China’s total debt-to-GDP is forecast to climb to a fresh record this year, consumers have been reluctant to take on more leverage. That has ignited a debate over the risk of China falling into a “balance sheet recession,” with households and companies cutting back on spending and investing. Disposable income growth is slowing, further hurting the ability of homebuyers to service their debts. China’s home price weakness had spread to 48 of 70 major cities in June, up from 20 in January. S&P Global forecast home sales could drop as much as 33% this year amid the mortgage boycott, further squeezing the liquidity of distressed developers and leading to more defaults. Some 28 of the top 100 developers by sales have either defaulted on bonds or negotiated debt extensions with creditors over the past year, according to Teneo. Property investments, which drive demand for goods and services that account for about 20% of the nation’s gross domestic product, plunged 9.4% in June.  Bank earnings are at stake. After recording the fastest profit expansion in nearly a decade last year, the nation’s lenders face a challenging 2022 as the government pressures them to support the economy at the cost of earnings. A 10 percentage-point slowdown in real estate investment growth translates into a 28 basis-point increase in overall bad loans, meaning a 17% decline in their 2022 earnings,  Citigroup analysts led by Judy Zhang estimated in a July 19 report. The Hang Seng index of mainland banks has plunged 12% this month. ©2022 Bloomberg L.P. More

China has escalated its threats over Nancy Pelosi’s potential visit to Taiwan this week and conducted naval exercises across the region, just hours before the US House Speaker was expected to arrive in East Asia. Pelosi’s office announced that a Congressional delegation headed by the Speaker had departed on Sunday for Singapore, Malaysia, South Korea and Japan. The statement did not confirm if or when Pelosi would follow through with her plans also to visit Taiwan, the self-ruled island that Beijing claims is an inalienable part of its sovereign territory. The purpose of the trip, which has further strained fragile China-US ties, is to “reaffirm America’s strong and unshakeable commitment to our allies and friends in the region”, Pelosi’s office said. The six-member delegation includes the heads of the House foreign affairs and armed services committees. Last week, during their first video call since March, Chinese president Xi Jinping told his US counterpart Joe Biden that the US was “playing with fire” by not stopping such visits by American delegations, which the Chinese government regards as “interference by external forces” in its internal affairs. In a Chinese social media post on Saturday, Hu Xijin, an outspoken former state media editor, said “it is OK [for the People’s Liberation Army] to shoot down Pelosi’s plane” if it was escorted to Taiwan by US fighter jets.Thanks for reading FirstFT Asia. Do you have feedback on today’s newsletter? Share it with me at [email protected]. — EmilyFive more stories in the news1. West slows efforts to restrict Russian oil trading European governments have eased back on efforts to curb trade in Russian oil, delaying a plan to shut Moscow out of the vital Lloyd’s of London maritime insurance market and allowing some international shipments amid fears of rising crude prices and tighter global energy supplies.More from the war in Ukraine: President Volodymyr Zelenskyy has urged residents of the country’s easternmost Donetsk region to leave the province as Russia continues its offensive to conquer the area.2. Pakistani officials urge release of probe into donations to Imran Khan’s party Pakistani politicians called for election authorities to release an investigation into former prime minister Imran Khan’s party over the weekend after the Financial Times reported that it allegedly received prohibited donations from foreign citizens and companies. 3. China’s ‘dim sum’ bond sales surge Sales of international renminbi bonds have surged this year as the country’s fixed income investors, starved of decent returns at home, take advantage of new market access to snap up higher-yielding Chinese currency debt offshore. The volume of dim sum bond offerings — renminbi-denominated debt sold in Hong Kong — has risen 145 per cent from a year ago to Rmb126.8bn ($19.3bn).4. Japan’s unvaccinated youth drive record Covid infections The spread of the highly transmissible BA.5 Omicron subvariant has led to a record number of daily cases of Covid in Tokyo and cities across Japan, surpassing 230,000 for the first time last week. People below the age of 30 together accounted for about half of all new cases.

5. Jack Ma plans to give up control of Ant Group The Chinese billionaire is planning to give up control of the financial technology group he co-founded, further delaying plans for an initial public offering. Ant’s IPO suspension in November 2020 set off a broad regulatory crackdown on Chinese tech groups, including billions in fines for Ant’s sister company Alibaba.The day aheadAmerican Chamber of Commerce in Singapore meets with Pelosi The group has said it will be holding an in-person event with US House Speaker Nancy Pelosi this afternoon.China Army Day Today marks the 95th anniversary of founding of the Chinese People’s Liberation Army. President Xi Jinping yesterday attended an anniversary reception held by the Ministry of National DefenseS&P Global manufacturing PMI data Purchasing managers’ index figures for the eurozone, France, Germany, Japan, UK, US are set to be released.What else we’re readingSingapore accelerates pace of executions Singapore’s dogged commitment to capital punishment has highlighted the regressive policies in one of the world’s most liberal economies, critics said. The affluent city-state has drawn wealthy expatriates, but its treatment of foreigners convicted of trafficking even small amounts of drugs exposes a darker side of Singapore, activists said.The Olympic pain barrier beckons again for Japan The city of Sapporo wants to host the 2030 Winter Games despite hard lessons from last year’s sporting festival. Local officials claim they have solid public support, but they have neatly avoided the kind of vote that can risk finding a majority against hosting the Games, writes Leo Lewis. The nightmare that is today’s air travel Air travel is the only form of transport to have gone backwards over the past 20 years, writes Pilita Clark. Trains now go faster. Buses pollute less. Cars are smarter and electric. So are bicycles, ferries and lorries. Flying, on the other hand, is considerably more horrible than it used to be.‘It’s chaos there now’ Last week the low-profile Kuwait Investment Authority was dragged into the spotlight after sacking the head of its London investment arm. FT reporters get inside one of the most powerful and respected sovereign wealth funds that has become riven by internal conflict.Disney after ‘Don’t Say Gay’ Since it was founded, the entertainment giant has catered to the traditional nuclear family, but in the past 30 years it has also become a mecca for LGBT+ people. Disney is contending with arguably the worst publicity crisis in its history over executives’ bungled response to a Florida bill preventing “sexual orientation or gender identity” discussions in schools.GardensAs the threat of an insect apocalypse looms, a new wave of apps and AI wizardry is helping gardeners encourage bees, butterflies and more. Check out these high-tech ways to welcome insects into your garden.

Harvard version of a RoboBee, which is being developed to pollinate plants © National Science Foundation More

Hello and welcome to the working week. Today I’m stepping in for Jonathan Moules, who is off on holiday. This week, the Conservative leadership contest caravan moves from parliament to the membership in the country. Ballots are expected to land on the doormats of 150,000 Tory party members in the next few days, while the finalists Liz Truss and Rishi Sunak will go head to head in another televised debate on Sky News on Thursday at 8pm. But have Tory members already made their minds up? Polls have shown Truss pulling ahead of the former chancellor among the rank and file. Stephen Bush, who helms the Inside Politics newsletter, warns that Sunak has limited time to close the gap with Truss, as “most Conservative members will vote right away when their ballot papers arrive”. Whoever clinches victory in the leadership race will be inheriting a wave of industrial discontent. Thousands of BT employees will walk out on Monday for the second of two strikes, led by the Communication Workers Union, in a dispute over pay. In response to BT’s £1,500 pay deal offered to staff in April, the CWU said company bosses had “stuck two fingers up” to workers. Dockers at the UK’s biggest container port are also expected to strike in August.Across the Atlantic, Hungary’s prime minister Viktor Orbán will speak at the Conservative Political Action Conference in Dallas, Texas, despite an international backlash following a speech he gave about race that led to the resignation of one of his close aides, who called it “pure Nazi”.Speaking of controversial international trips, Kathrin Hille reports that China is pulling out all the stops — including possibly the military — to dissuade the US House of Representatives Speaker Nancy Pelosi from visiting Taiwan in the next few days. Past the doom and gloom, we can look forward to a weekend of revelry. As well as International Beer Day on Friday, Brighton’s streets will be awash with glitter as one of the UK’s biggest Pride events kicks off. The annual LGBTQ parade will see thousands of people flocking to the south coast of England. And don’t miss the Fire of Love on the big screen, writes our film critic Danny Leigh. Do get in touch — by email [email protected] or on Twitter @georgina.quach. Economic dataThe Bank of England will be in a tight(ening) spot on Thursday as its Monetary Policy Committee weighs up how high to raise interest rates in a bid to bring inflation down to its 2 per cent target. It is currently running at a 40-year high of 9.4 per cent and is expected to climb higher. Governor Andrew Bailey said an increase of half a percentage point — which would be the biggest increase in 27 years — is on the table.The BoE is under pressure to step up inflation-taming efforts after the US Federal Reserve raised its benchmark rate by 0.75 percentage points for the second month in a row on Wednesday. The White House will be trumpeting any good news from US employment figures this week to downplay fears of recession. The economy shrank for a second straight quarter and “core” personal consumption expenditures (PCE) rose 0.6 per cent in June.CompaniesThe August earnings lull is not quite upon us. After last week’s frenzy, things will chill out only a little in the days ahead, says FT corporate commentator Cat Rutter Pooley.The narrative of consumer goods and drinks groups raising sales forecasts on the back of surging inflation has been firmly set ahead of Heineken’s results on Monday and Kellogg’s on Thursday.The windfall profits earned by oil and gas groups have also been a major focus of the earnings season. After Shell racked up $11.5bn in profits in a record quarter, it’s BP’s turn to step into the political storm on Tuesday. The UK has imposed additional taxes on energy companies this year but another round of record profits could increase calls for additional levies.And while the major US banks gave their updates what feels like aeons ago, reports from the European banking sector are still trickling through. HSBC will update on whether lockdowns in China have continued to weigh on its Asian profitability, while Bank of Ireland and Commerzbank both report on Wednesday.Key economic and company reportsHere is a more complete list of what to expect in terms of company reports and economic data this week.MondayEU, monthly unemployment figuresEurozone, France, Germany, Japan, UK, US: S&P Global manufacturing purchasing managers’ index (PMI) dataGermany, retail trade figuresUS, construction spending figuresResults: Erste Group Bank HY, GlobalData HY, Heineken HY, HSBC HY, Pearson H1, Pinterest Q2TuesdayAustralia, Reserve Bank of Australia holds monthly rate-setting meetingUK, Nationwide monthly house price index, and quarterly insolvency figuresResults: Airbnb Q2, BP Q2, Direct Line Insurance Group HY, Fresnillo HY, Greggs HY, JetBlue Airways Q2, Man Group HY, Mitsubishi Q2, PayPal Q2, Prudential Financial Q2, Starbucks Q3, Uber Technologies Q2WednesdayEU, July retail sales figuresFrance, Germany, Italy, UK, US: S&P Global services PMI dataIndia, the Reserve Bank of India holds monthly rate-setting meeting Italy, monthly retail sales figuresUS, monthly employment dataResults: AXA HY, Bank of Ireland HY, BMW HY, Commerzbank Q2, eBay Q2, Hugo Boss Q2, Infineon Technologies Q3, Just Eat HY, Moderna Q2, Nintendo Q1, Nomura Holdings Q1, Taylor Wimpey HY, Telecom Italia Q2, Veolia HY, Yum Brands Q2ThursdayECB, monthly economic bulletinInvestec holds annual general meeting Tesla holds annual shareholder meeting UK, Bank of England’s monetary policy committee rate-setting meetingUS, June international trade in goods and services figures Results: Alibaba Q2, Bayer Q2, ConocoPhillips Q2, Eli Lilly and Co Q2, Kellogg Q2, Lyft Q2, Next Q2 trading update, Nippon Steel Q1, Novo Nordisk Q2, Paramount Q2, Pirelli Q2, Rolls-Royce HY, Serco Group HY, SoftBank Group Q1, Toyota Q1FridayCanada, July unemployment figuresUK, Halifax monthly house price indexUS, July unemployment and US Federal Reserve consumer credit figuresResults: Capita Group HY, Deutsche Postbank Q2, Suzuki Motor Corp Q1World eventsFinally, here is a rundown of other events and milestones this week. MondayChina, anniversary of the founding of the Chinese People’s Liberation ArmyCook Island, parliamentary electionsGermany, country has pledged to stop buying Russian coal from todayHungary, country will stop exporting fossil fuels to neighbouring countries from todayJamaica, Emancipation Day celebrates the day African slaves in British colonies were granted freedom from slaverySwitzerland, National Day public holidayUK, St Andrew’s Day bank holiday in Scotland. BT and Openreach union members set to strike for 24 hours in a dispute over pay. The first strike took place on Friday.TuesdayAustralia, Tennis player and 2022 Wimbledon finalist Nick Kyrgios appears in court in Canberra charged with common assaultWednesdayNiger, Independence Day holidayThursdayChina, Qixi Festival celebrates the annual meeting of the cowherd and weaver girl in Chinese mythologyUS, the four-day Conservative Political Action Conference (CPAC) begins in TexasFridayJapan, anime fans gather for the three-day World Cosplay SummitRussia, Turkish president Recep Tayyip Erdoğan will meet Russian premier Vladimir Putin in Sochi UK, about 150,000 Conservative party members are due to receive their ballots by today to begin voting for a new leader, and hence the new British prime minister. Brighton and Hove Pride festival weekend beginsSaturdayBolivia, Independence Day holidayJamaica, Independence Day Japan, 77th annual memorial event for Hiroshima atomic bomb victimsSundayIvory Coast, Independence Day holiday More

The writer is chief economist at the Inter-American Development BankBurdened with inflation, the impact of Russia’s invasion of Ukraine and the fallout from the pandemic, the region of Latin America and the Caribbean is at a critical juncture. Without reforms, it could return to a lacklustre pre-pandemic growth rate of around 2.5 per cent, with higher poverty, inequality and political polarisation. Yet critics who fault governments for policies that exacerbate inequalities and throttle investment miss a vital consideration: the lack of trust among the region’s citizens. Governments that focus on building trust can improve the odds of successful reforms.With a few exceptions, trust is falling everywhere. Worldwide, between 1985 and 2020, those who believe that most people can be trusted fell from 38 to 26 per cent, according to the Integrated Values Survey. Our research indicates that Latin America and the Caribbean is in a league of its own. Only about one in 10 people in this region trust their fellow citizens. Fewer than one in three trust their government.When I was head of Chile’s banking regulatory agency, I experienced how hard it is to build trust and how quickly it can be lost. In 2015, the competition authority uncovered a price fixing scandal between two of the country’s largest paper mills. I sounded the alarm that action was needed to restore trust and stop possible contagion to a bank with the same shareholders as one of the colluding companies.We isolated our banking system from any fallout, but this scandal, among others, fed the anger and frustration that many citizens felt towards the privileged and powerful. It was one of several triggers of protests that would rock Chile later.The effects of mistrust are pervasive. Reluctance to pay taxes means the region’s tax intake is about 13 percentage points of GDP lower than in OECD countries. The shadow economy is bigger by almost 20 percentage points of GDP. Individuals and companies do not trust others to pay their taxes, starving governments of much-needed funds. Informality is higher when companies and workers do not believe that others comply with government regulations. Consequently, nearly 60 per cent of workers in the region work in informal firms, which are less productive and offer fewer benefits to employees. Our surveys reveal many company owners do not trust others. They prefer to hire family members and have difficulties growing their businesses.Mistrust distorts what citizens want from government. Most believe public officials cannot be trusted to efficiently invest in the public interest. Corruption scandals deepen scepticism. People prefer programmes that provide money-in-hand now, such as cash transfers and subsidies. As a result, governments struggle with longer-term policies that boost growth, such as pension, labour and fiscal reforms, support for research and development, openness to trade and infrastructure spending.What can be done? Governments can help citizens be more informed. They can make it easier to find out about their tax and spending decisions, and about who pays taxes. They can be more transparent about how they regulate and how regulation affects citizens’ welfare. They can also empower people by strengthening public institutions such as the courts, police and the antitrust agency.For example, budget transparency — minimal in many Latin American and Caribbean states — can inform citizens about how their hard-earned taxes are used. Encouragingly, Argentina, Colombia, Barbados and nine other regional countries have set up or are setting up electronic platforms to help citizens monitor infrastructure projects. This serves to improve spending efficiency.Governments must dispel erroneous ideas that thrive in a vacuum of information and fill it with accurate, verifiable facts. The city of Buenos Aires published dozens of goals on its website, from installing security cameras in the streets to improving infrastructure for people with disabilities and helping them track progress. Programmes like this can foster trust in government.The solution to low growth, inequality and weakening support for democracy is to make trust an explicit objective of public policy. The potential pay-off is greater public support for reforms. It is about more than bringing people out of the informal economy and connecting them with the global one. It is about giving the region the opportunity to unleash its people’s entrepreneurial spirit, putting it on a path to higher productivity and inclusive growth.  More

Perched on a cliff on the Amalfi Coast, overlooking the azure waters of the Mediterranean, the Hotel San Pietro Positano is having its best year as pandemic-weary travellers, especially Americans, flock to Italy.The hotel, charging an average rate of €1,800 per night for a room this summer, noticed a pick-up in April and is fully booked until mid-October. “For two years, nobody was able to come,” co-owner Vito Cinque said. “Now everybody does.” The eurozone’s tourism boom, aided by the single currency’s fall against the dollar, is one bright spot in a region that economists are increasingly concerned will fall into recession over the second half of this year. Figures out on Friday showed the currency area’s economy grew by 0.7 per cent between the first and second quarters, a stronger result than the 0.1 per cent economists had forecast and a sharp contrast with US gross domestic product figures for the same period, which showed the world’s largest economy shrank for the second quarter in a row. France, Italy and Spain all posted better than expected numbers as visitors flocking to Mediterranean destinations and enjoying city breaks helped offset the impact of surging energy bills and higher food prices on domestic demand. Mohamed Ichem, who sells macarons at Ladurée near Paris’s Tuileries gardens, said most of his customers are English-speaking. “Tourists spend without counting,” said Ichem. “My biggest order was eight boxes of 54, for over €1,000.”Adama Touré, who manages Le Castiglione — a brasserie minutes away from the Ritz hotel in the French capital’s chic Place Vendôme, said: “Americans are enjoying themselves in every way . . . I just served a plate of caviar to a group of them.”Ignacio de la Torre, chief economist at asset manager Arcano, calculated that about a third of Spain’s second-quarter growth — which came in at 1.1 per cent, against just 0.2 per cent in the first three months of the year — was driven by tourism. María Frontera, president of the hoteliers’ association on the Spanish holiday island of Mallorca, said the occupancy rate reached 93 per cent this month, five percentage points higher than in July 2019, the summer before the pandemic began. “We expect similar levels in August and demand for the autumn is continuing to rise,” she said. But by the time the weather cools European businesses and consumers will face more economic pressure. The war in Ukraine has left the region’s factories, barely recovered from the pandemic, facing fresh supply chain woes. Germany’s more manufacturing-dependent economy stagnated in the second quarter, missing analysts’ expectations of a slight expansion and highlighting how grave the situation is for northern economies that can rely less on hospitality. Russia’s invasion and doubts over Moscow’s willingness to keep gas flowing to Europe has triggered a surge in households’ energy costs, which are up by 40 per cent over the past 12 months, while food costs are up by 10 per cent over the same period, leading to the worst cost of living crisis in decades. Marina Lalli, president of Italy’s National Federation of Travel and Tourism Industries, said resorts catering to more ordinary Italian families were under pressure. “People have to struggle to pay utilities, fuel for their cars and food prices have also increased. [Italians] are deciding either to not go on holiday at all — or, instead of staying 10 days, they are staying a week, or just three days.”Confidence figures out last week from Eurostat, the European Commission’s statistics bureau, show that consumers are more reluctant to make big purchases than at any time since the early months of the pandemic. That pessimism is unlikely to stop the European Central Bank from raising rates further in the autumn, after making their first increase in decades when they increased the benchmark deposit rate by 50 basis points to zero in late July. “We expect the ECB to raise [the rate] by a further 100 basis points by the end of the year to help prevent any rise in inflation expectations as inflation rises even further over coming months,” said Holger Schmieding, economist at Berenberg Bank.Overall, eurozone inflation rose to a fresh record high of 8.9 per cent in the year to July, according to figures on Friday from Eurostat, the European Commission’s statistics bureau. Even the core measure, which strips out the surge in food and energy costs, was up 4 per cent — more than twice the ECB’s 2 per cent goal. As interest rates rise and tourists return home, economists expect the growth figures to worsen — especially if tensions with Moscow intensify. Russian energy firm Gazprom has cut flows through its Nord Stream 1 pipeline, which runs under the Baltic Sea to Europe’s largest economy, to just 20 per cent of capacity — levels that if sustained would trigger a sharp recession in Europe.“This quarter brings good news, but does not tell us much about the underlying health of the economy,” said Gilles Moëc, chief economist at French insurer Axa. “What happens after the summer ends?”  More