Aurelia Butler

Chinese regulators are trying to stamp out panic over rising home loan risks at banks as a wave of homeowners join a country-wide mortgage boycott of unfinished houses.Hundreds of thousands of buyers have halted mortgage payments on more than 200 unfinished property projects in China this week, aggravating a property sector crisis that has dragged down economic growth. The CSI 300 Banks index fell as much as 3.3 per cent on Thursday to its lowest level since March 2020 on signs that the boycott was gaining traction. Bank share performance was mixed on Friday, with some stocks extending losses despite statements intended to reassure investors. The China Securities Regulatory Commission, the country’s top securities watchdog, asked banks to disclose the degree of their mortgage exposure in an attempt to address market concerns, according to two banking sources briefed on the matter. Sixteen listed banks, including state-owned lenders, revealed Rmb2.8bn ($414mn) of loans vulnerable to the mortgage boycott. In co-ordinated filings, the banks emphasised that the loans in question accounted for a small portion of their total outstanding mortgage portfolios, representing less than 0.01 per cent of mortgage liabilities for most of the lenders. Some of the banks did not reveal their numbers. The state-owned Agricultural Bank of China said it held Rmb660mn of overdue loans on unfinished homes, the largest among banks that disclosed their holdings. The smaller Industrial Bank said Rmb384mn of mortgages on unfinished homes had soured, while Ping An Bank revealed Rmb318mn of affected debts.“Defaulting on the mortgage is a desperate move by these home buyers to get the banks’ attention and wrestle with the developers,” said Wang Qi, chief executive at fund manager MegaTrust Investment in Hong Kong.“The biggest challenge for Chinese real estate is consumer confidence. The recent mortgage defaults have only added to the problem,” added Wang. “The government needs to repair the consumer sentiment and business confidence ASAP with more stimulus.”The country’s banking and insurance watchdog said it would step up co-ordination with the central bank and housing regulator to help local governments complete pending real estate developments.“From a positive view, such movement brings banks into negotiations to resume construction,” Jefferies analysts wrote on a note on Thursday. “However, investors are concerned about the spread of mortgage payment snubs simply due to lower property prices, and the impact on property sales, which will further deteriorate developers’ cash flow.”Jefferies estimated that the delayed projects accounted for about 1 per cent of China’s overall banking mortgage balance.

Chinese authorities are expected to hasten to avoid systemic risks to the financial sector or wider economy. “Household financial positions and social stability are regarded as top priorities for policymakers,” said Betty Wang, senior China economist at Australian lender ANZ.Solutions could include guiding banks to support unfinished projects, granting longer grace periods for mortgage payments or exempting mortgage interest, according to a third banking source, who was briefed on a meeting between the People’s Bank of China, housing regulators and banks. More

The writer is co-chief investment officer for Bridgewater AssociatesIt’s been awhile since investors faced a stagflationary environment and there are good odds that this is what they will face over the coming decade.In stagflation, a high level of nominal spending growth cannot be met by the quantity of goods produced, resulting in above-target inflation. Policymakers are not able to simultaneously achieve their inflation and growth targets, forcing them to choose between the two.This choice is acutely difficult in Europe due to the simultaneous weakening in economies: nominal spending is being absorbed by higher energy prices, leaving less real growth, while the decline in the euro is raising the cost of imports. It is being made more difficult in the US by the stubbornly high inflation reports, which persist despite the first round of monetary policy tightening. And there are now early indications that the tightening is beginning to slow growth, perhaps leading to an economic downturn.To understand the investment implications of stagflation, investors must recognise that all assets have biases with respect to economic growth and inflation, either benefiting from or being disadvantaged by each of those forces. It is the net of those relationships to growth and inflation that then determines how an asset would perform.Historically, equities have been the worst-performing asset in stagflationary periods, because they are vulnerable to both falling growth and rising inflation.Other predominantly growth-sensitive assets like credit and real estate also perform poorly. Nominal bonds are closer to flat in such environments. This reflects the cross-cutting influences of falling growth that typically leads to easing and falling rates, weighed against rising inflation expectations which usually put pressure on rates to rise. As rates increase generally, the yields on existing bonds can appear less attractive, pushing prices down.Inflation-linked bonds and gold perform the best, with the former benefiting from both weak growth and rising inflation.How central banks respond is another major determinant of how a stagflationary environment plays out — do they aggressively tighten to contain the inflation and exacerbate the growth problems, or do they remain accommodative to support growth and hope the inflation doesn’t become entrenched?Those decisions directly impact key inputs into the valuation of assets such as discount rates and risk premiums. The former is the rate at which future returns are discounted for time, usually a sovereign bond yield such as US Treasuries. The latter is the extra return demanded by investors for taking on risk.Generally, assets will still perform well if there is only a moderate degree of monetary policy tightening and risk premiums are falling. They will perform particularly poorly if there is a major tightening and risk premiums rise.Within these monetary policy regimes, the relative returns of assets still align with their biases, with index-linked bonds, gold, and commodities giving investors better relative returns regardless of how policymakers respond.But regardless of how the pressures net out across asset classes, most investors would face considerable vulnerabilities in stagflation.To help mitigate this, the most effective moves most investors could make are to shift away from vulnerable equity and equity-like exposure. Take for example, shifting some risk exposure from equities into index-linked bonds — whether accomplished by changing one’s asset allocation or hedging with a derivative of some kind if an investor has access to this.The effect of this can be shown in the Sharpe ratio, a commonly used measure in markets of return against a risk-free benchmark that is adjusted for volatility. Any Sharpe ratio above 1.0 is considered positive. In stagflationary environments, a portfolio shift into index linked bonds from equities has a Sharpe ratio greater than 1.0. In contrast, equities have ratio of -0.72. And the portfolio commonly held by investors of 60 per cent equities, 40 per cent bonds has one of -0.70.Similar benefits could be seen in a shift from equities to gold, or from nominal bonds into index-linked bonds. Such diversification tends to make portfolios more resilient over time but are particularly critical when considering the risks today.There are a variety of ways that stagflation can play out, and any new environment will bring its own unique challenges. But understanding the biases of assets to growth and inflation is a powerful starting point for investors considering how to prepare for a very different world from the one that has buoyed most portfolios in recent decades. More

China’s economy narrowly escaped a contraction in the second quarter as the fallout from President Xi Jinping’s zero-Covid policy stoked expectations that Beijing would inject hundreds of billions of dollars of stimulus to shore up growth. The world’s second-biggest economy expanded 0.4 per cent year on year in the three months to the end of June, below the 1.2 per cent forecast by economists, and down from the 4.8 per cent recorded in the first quarter. The slowdown reflected the hit from a two-month lockdown in Shanghai, which took full effect in April, and illustrated the threat to global growth from Xi’s attempt to eradicate Covid-19 in the world’s main manufacturing hub.The National Bureau of Statistics figures were released at a tense juncture for Xi’s economic planners. Beijing’s battle to eradicate coronavirus outbreaks has relied on months of snap lockdowns and heavy-handed restrictions on mobility, dragging on the pace of China’s economic recovery.The 0.4 per cent result marked China’s second-worst quarterly growth figure in 30 years, following a contraction at the start of the pandemic. With first-half growth at 2.5 per cent, Beijing is expected to miss its target of about 5.5 per cent annual growth for 2022, itself a three-decade low. “These data highlight the unfavourable domestic and external circumstances that, in tandem with the government’s zero-Covid strategy, are squeezing economic activity and emphasise the dire need for short-term policy measures to revive growth,” said Eswar Prasad, economics professor at Cornell University and former head of the IMF’s China division.

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He added that while investment growth had held up “better than expected”, it entailed “a slew of medium-term fiscal and financial risks”.Adding further pressure on Xi’s administration, youth unemployment rose to a record of 19.3 per cent.Thirty-one Chinese cities are under full or partial lockdowns, affecting 247.5mn people in regions accounting for about 17.5 per cent of the country’s economic activity, according to an analysis released this week by Japanese investment bank Nomura. Xi’s administration has consistently said it would prioritise protecting the country from coronavirus outbreaks over the economy. It has blamed the country’s slowdown on the pandemic, the risks of stagflation and monetary tightening globally.

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Fu Linghui, a spokesperson for the NBS, conceded reaching Beijing’s 5.5 per cent growth target this year would now be “challenging”. “Generally speaking, with a series of policies to solidly stabilise the economy achieving notable results, the national economy has overcome the adverse impact of unexpected factors, demonstrating the momentum of a stable recovery,” Fu told reporters on Friday. On a quarter-on-quarter basis, China’s gross domestic product fell 2.6 per cent, compared with a revised 1.4 per cent growth in the first three months of the year and below expectations of a 1.5 per cent contraction, according to a Reuters poll. Retail sales, a critical gauge of sentiment in the world’s biggest consumer market, were down 4.6 per cent in the second quarter after a double-digit fall in April. Consumer spending has lagged behind the wider recovery since the start of the pandemic, in part because of travel restrictions.Industrial production was up 3.9 per cent in June compared with the same period a year earlier. Factory output was up 0.7 per cent for the second quarter.

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Julian Evans-Pritchard, a senior China economist with Capital Economics, said the three-month performance “was even weaker than meets the eye” despite improvements in June.“The statistics bureau claims that output in the second quarter was slightly higher than a year ago,” he said. “That’s implausible even accounting for the strong rebound shown on the monthly data for June . . . This isn’t the first time that the official GDP figures have seemingly understated the extent of an economic downturn.” Fixed asset investment, China’s main measure of capital spending, grew 5.6 per cent last month. Infrastructure investment was 7.1 per cent higher as Beijing increased its stimulus efforts, while real estate investment dropped 5.4 per cent. China’s deeper economic slowdown may prompt looser monetary policy and fiscal stimulus, said analysts, in contrast to developed economies that are raising interest rates to tackle high inflation.But a new phase of credit-fuelled investment risks undercutting attempts to deal with high leverage and bad debts in the property sector, which have raised worries over financial stability. The People’s Bank of China has been reluctant to cut interest rates for fear of capital outflows.

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Despite criticism that the central government is reverting to debt-fuelled and wasteful spending — much of it targeted at large-scale infrastructure, and funded through local governments — Beijing is increasingly desperate to stem the economic slowdown and rising unemployment. The Financial Times reported this week that local governments across China would be allowed to issue an additional Rmb1.5tn ($223bn) worth of bonds this year to boost flagging growth. The spending would be brought forward from next year’s quota.Prasad, however, said “the room for manoeuvre” for monetary policy easing by the People’s Bank of China was narrowing because of rising US interest rates. He also noted risks posed by a “currency-depreciation capital outflow spiral that could be triggered by any broad and aggressive easing of monetary policy”.Additional reporting by Tom Mitchell in Singapore and Jennifer Creery and Andy Lin in Hong Kong More

NUSA DUA, Indonesia (Reuters) – Indonesian Finance Minister Sri Mulyani Indrawati said on Friday failure by G20 finance chiefs meeting in Bali to reach consensus could be catastrophic for low-income countries amid soaring food and energy prices exacerbated by the war in Ukraine. In her opening remarks to the meeting, Sri Mulyani said Indonesia would be an honest broker and find creative solutions to overcome the “triple threat” of surging commodity prices, global inflation and war. More

BEIJING (Reuters) – China has completed 59% of its annual target of new urban jobs, with 6.54 million such jobs created during the January to June period, the ministry of human resources said on Thursday. The nationwide survey-based jobless rate fell to 5.9% in May from 6.1% in April, still above the government’s 2022 target of below 5.5%. The jobless rate for June is due to be released later on Friday. More