Raphael Stevens

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    Manhattan median rent remains at record high of nearly $4,400 a month

    Manhattan renters may have reached their “affordability threshold” in August, as median rents remained at record high.
    The median rent in Manhattan in August was $4,370 a month, unchanged from the record high in July, according to brokerage firm Douglas Elliman and research firm Miller Samuel.
    Brokers said supply is low due to a lack of new rental buildings, while buyers who would normally be looking to purchase apartments are choosing to rent for now given high interest rates.

    A “For Rent” sign outside an apartment building in the East Village neighborhood of New York, US, on Tuesday, July 12, 2022.
    Gabby Jones | Bloomberg | Getty Images

    Manhattan renters may have reached their “affordability threshold” in August, as median rents remained at record high, according to a new report.
    The median rent in Manhattan in August was $4,370 a month, unchanged from the record high in July, according to data from brokerage firm Douglas Elliman and the appraisal and research firm Miller Samuel. Average rents also held their record, at $5,552 a month.

    Brokers said supply is low due to a lack of new rental buildings, while buyers who would normally be looking to purchase apartments are choosing to rent for now given high interest rates. August is historically the busiest month for rentals in Manhattan, as families prepare for back-to-school.
    Still, there are signs that Manhattan’s sky-high rents may be peaking. The number of new leases fell 14% in August, marking the second straight month of declines. The drop suggests that while asking rents for new leases are high, renters are balking at the prices. Brokers say many landlords are also choosing to renew their existing leases at slightly higher rents rather than aim for bigger increases with new leases.
    In short, Manhattan renters may have reached their price limit.
    “The market may have entered an affordability threshold,” said Jonathan Miller, CEO of Miller Samuel. “The market seems to be topping out.”
    Apartments are also sitting on the market for a slightly longer period of time, also suggesting a market top. Apartments were on the market for an average of 39 days in August, up from 26 days a year ago.

    “I think landlords are becoming more aggressive in retaining their existing renters out of concern about the broader economy,” Miller said.
    Still, it’s unlikely prices will come down substantially anytime soon. Inventory levels are falling, giving renters few choices. The number of apartments available for rent declined 24% in August compared to July, and the Manhattan overall vacancy rate is only about 2.4%, slightly below the long-term average.
    Many apartments are still seeing bidding wars. About 11% of all leases had a bidding war in August, according to the report. Two-bedroom apartments had the strongest demand, with 13% of two-bedrooms seeing bidding wars. The average rent for a two-bedroom apartment in Manhattan was $6,300 in August.
    While Manhattan is extreme in the price and demand for rentals, rents throughout the country remain strong – and are adding pressure to overall inflation. Shelter costs jumped over 7% over last year in the latest CPI report.
    According to Redfin, the median national rent in August was $2,052, just $2 below the record-high last year. Redfin said many landlords are “starting to throw in one-time concessions as vacancies rise.” More

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    Ford CEO rebuffs UAW leader’s criticisms as strike deadline on Thursday approaches

    Ford CEO Jim Farley rebuffed comments Wednesday night by United Auto Workers President Shawn Fain that the company is not taking bargaining seriously.
    Farley said the company has received “no genuine counteroffer” on its four economic proposals.
    The UAW is simultaneously negotiating separate national contracts ahead of an 11:59 p.m. ET Thursday strike deadline with automakers Ford, General Motors and Stellantis.

    Ford CEO Jim Farley speaks with media after revealing the 2024 Ford F-150 for the Detroit auto show on Sept. 12, 2023.
    Michael Wayland / CNBC

    DETROIT – Ford Motor CEO Jim Farley rebuffed comments by United Auto Workers President Shawn Fain that the company is not taking bargaining seriously ahead of a Thursday night strike deadline, placing blame on the union leader for not showing up to the bargaining table – both figuratively and literally.
    Farley said the company has received “no genuine counteroffer” on its four economic proposals, including the latest offer that Ford is calling the most generous offer ever between the UAW and company. He also said Fain, who is simultaneously negotiating with General Motors and Stellantis, was absent during a Tuesday meeting that he and Ford Chair Bill Ford expected Fain to attend.

    “We’re here, we’re ready to negotiate, but it’s sure hard to negotiate a contract when there’s no one to negotiate with,” Farley told reporters Wednesday night on the sidelines of the Detroit Auto Show. “We have time left, but it’s hard to negotiate when you don’t get any feedback back.”
    Farley’s comments came roughly 24 hours after he told reporters Tuesday that he was optimistic the company could reach a deal with the union.
    Public criticism between the union and an automaker aren’t unprecedented but the amount of detail being released, announced strike plans and simultaneous bargaining certainly are.
    Farley said he didn’t know Fain had received the offer until he was discussing it during a 5 p.m. Facebook Live with union members. He also questioned whether Fain is too busy already “planning strikes or PR events that we can’t get the feedback to make the best offer.”

    UAW President Shawn Fain chairs the 2023 Special Elections Collective Bargaining Convention in Detroit, March 27, 2023.
    Rebecca Cook | Reuters

    A UAW spokesman did not immediately respond for comment regarding Farley’s comments or a letter released on his behalf by the company countering many of Fain’s criticisms.

    The union has argued the companies know their demands. They include: ambitious targets of 40% hourly pay increases, a reduced 32-hour workweek, a shift back to traditional pensions, the elimination of compensation tiers and a restoration of cost-of-living adjustments, among other items.
    Farley declined to directly answer a question about whether he believes the union is bargaining in good faith, which could justify a complaint with the National Labor Relations Board.
    The UAW late last month filed unfair labor practice charges against GM and Stellantis to the NLRB for not bargaining with the union in good faith or a timely manner. It did not file a complaint against Ford.

    As released Wednesday by the union, Ford’s most recent proposal included some of the union’s demands, but not all of them. It included 20% wage increases; a “deficient” restoration of cost-of-living adjustment, reworked profit-sharing formula; 90-day progression for “temp,” or supplemental, workers to become regular employees; and other benefits such as increased vacation days and two-week paid parental leave.
    Fain said Ford and its crosstown rivals rejected the union’s retiree and health-care proposals.
    If the UAW and companies cannot reach a deal by an 11:59 p.m. ET Thursday deadline, Fain said the union will implement targeted strikes at certain plants against the Detroit automakers.
    During his Facebook event, Fain said he believed strikes against the companies are “likely.”
    “To win, we’re likely going to have to take action. Just as we have approached our negotiations differently than we have in the past, we’re preparing to strike these companies in a way they’ve never seen before,” Fain said.
    Here is the full text of Farley’s letter following Fain’s remarks:

    The Ford team continues to put 100% of our energy into reaching an agreement with the UAW that rewards our valued employees and allows the company to invest in the future. If there is a strike, it’s not because Ford didn’t make a great offer. We have and that’s what we can control.
    In fact, we have put four offers on the table starting Aug. 29 and each one has been increasingly generous. We still have not received any genuine counteroffer.
    On Tuesday, Bill Ford and I sat down with the union at the main table for a major offer. As we were walking in the room, we learned President Fain would not be attending. Nevertheless, Bill and I laid out a historically generous offer to the UAW Ford bargaining team because we listened to the UAW demands and we care about our employees. Here are the facts. Ford:
    • Significantly increased our proposal on wage increases;• Offered Cost of Living Adjustments, or COLA;• Fully eliminated wage tiers so all employees can achieve industry-leading wages – and shortened to four from eight years the time it takes hourly employees to reach the top wage;• Increased contributions to in-progression retirement savings;• Protected health care benefits that would continue to rank in the top 1% of all employer sponsored medical plans for lowest employee cost sharing; and• Added more paid time off, with up to five weeks of vacation and 17 paid holidays each year (with the addition of Juneteenth).
    The first we learned President Fain received the offer was on Facebook Live this evening. So again, we are here and ready to reach a deal. We should be working creatively to solve hard problems rather than planning strikes and PR events.
    Please remember that Ford, more than any other company, has bet on the UAW and treated the UAW with respect. We have been incredibly supportive of the union. We have gone well beyond any contract language in adding jobs and investment.
    The future of our industry is at stake. Let’s do everything we can to avert a disastrous outcome.

    Correction: Ford CEO Jim Farley’s comment’s were made Wednesday night. A previous version of this article misstated that timeframe. More

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    The Arm IPO is here, but many ETFs will not be buyers

    is a leading semiconductor intellectual-property supplier, designing chip technology that is used in high-tech gadgets, including most of the world’s mobile phones. The company then licenses that tech out to the industry’s major players and collects royalties. Roughly five chips in every smartphone are based on ARM’s design and that number’s increasing as the mobile Internet continues to grow.One of ARM Holdings’ biggest customers is . The Cupertino, Calif.-based company licenses its processor
    Photo: Chris Ratcliffe | Bloomberg | Getty Images

    IPO and tech enthusiasts are excited about the Arm Holdings Plc initial pubic offering, and with good reason: it’s the first big tech IPO in more than two years.
    A lot is riding on its success. In this case, “success” for investors means demand is high and the price rises in the weeks and months after the IPO.

    Still,  initially the deal will mostly be lacking one natural buyer:  Exchange Traded Funds.
    Arm will be launching its IPO Thursday on the Nasdaq, selling 95.5 million shares at $51, the high end of the expected price range of $47-$51.
    Tech investors increasingly use ETFs to gain exposure to broad tech sectors, and subsectors, like semiconductors.
    However, some investors who would like to get immediate exposure to the Arm IPO through ETFs may be disappointed.
    ETF indexes have inclusion rules
    ETFs are generally a desirable target for corporations to sell stock to because the ownership base skews toward passive and long-term ownership.

    However, this particular IPO highlights several difficulties that even large companies like Arm have in acquiring a broader ownership base through ETFs.
    For the most part, ETFs are backed by indexes. These indexes have rules that must be carefully adhered to in order to qualify for inclusion.
    Unfortunately, partly due to Arm’s own decisions and partly due to the way the major indexes are constructed, ARM initially appears to be ineligible for the largest ETFs.
    Problem #1: Arm is not in the S&P 500
    The largest index provider is S&P Global. To be included in broad technology ETFs like the SPDR Technology ETF (XLK), which tracks the S&P 500 Technology index, a stock must first be in the S&P 500, which Arm is not. 
    The first problem is that Arm is not a U.S. company, it’s British — which generally would exclude it from the S&P indexes.
    “It is unlikely it would be included in the S&P 500 given its domicile is in the UK,” Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, told me. “That would exclude it from inclusion out of the gate.”
    State Street runs a large suite of ETF products that are tied to S&P indexes, including the largest ETF in the world, the SPDR S&P 500 ETF (SPY).
    Howard Silverblatt at S&P Global also noted that S&P requires a stock to have traded for one year and have four consecutive quarters of profitability to be considered for inclusion in the S&P.
    Next problem: a free float below 10% 
    Many tech companies now routinely float very small amounts of stock (10%-15% of the shares outstanding), because restricting supply increases the chance for higher prices. 
    But Arm appears to be particularly parsimonious, floating roughly 9.3% of the company, according to Renaissance Capital. 
    That is another problem for many ETFs, which generally require that a company float 10% or more of the shares to be eligible for inclusion.
    That’s the case with the S&P indexes, Bartolini tells me, as well as the largest semiconductor ETF, the Van Eck Semiconductor ETF (SMH), which also requires a free float of 10% or more. 
    Van Eck CEO Jan Van Eck told CNBC on Monday that his firm was still evaluating whether Arm would be eligible for inclusion in his ETF. 
    Other index firms used by ETFs have float requirements as well. Todd Sohn, who covers ETFs at Strategas, tells me that Vanguard Total U.S. Market (VTI), which uses the CRSP U.S. Total Market Index, also requires a 10% float for fast-track IPOs.
    There are ways to get the float above 10%. First, SoftBank could exercise the greenshoe, an optional over-allotment of stock which could add an additional 15% of shares, which would put them just over a 10% float. 
    When would that happen? “In general, it’s not announced in connection with the pricing, though it can be,” Matt Kennedy from Renaissance Capital told me. “It can also be disclosed a couple days afterward when they announce the closing. Or, at the very latest, a month or so afterward in an 8-K or 10-Q filing.” 
    Another way is simply to sell additional shares after the six-month lockup period expires. 
    Potential ETF buyers: Nasdaq-100 ETF, IPO ETFs 
    There are some potential ETF buyers. 
    For example, Arm may be eligible to enter the Nasdaq-100, the top 100 non- financial stocks in the Nasdaq, because that index has no float or market capitalization requirements. The Nasdaq-100 is reconstituted every December. 
    The Invesco Nasdaq-100 ETF (QQQ) which uses the Nasdaq-100 index as its benchmark, is one of the largest ETFs in the U.S.
    Other ETFs that specialize in buying IPOs are potential Arm holders, but their buying power is relatively small.
    The Renaissance Capital IPO ETF (IPO), a basket of recent IPOs, requires a free float of only 5%, so Arm potentially is eligible for inclusion there.
    However, Nate Geraci of the ETF Store cautioned against trying to play IPOs in this manner.
    “I’m simply not a fan of investors attempting to play IPOs in the first place,” he told me.
    “One of the benefits of being an ETF investor is that you don’t have to worry about company-specific events such as this. Investors should obviously understand what’s going on underneath the hood of any ETF they own, but I would dissuade anyone from buying an ETF simply because it has an allocation to the latest hot IPO.” More

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    India’s property market is ready for take-off

    A visitor does not have to look far for signs of India’s property resurgence. Cranes dot the skylines of Delhi, Hyderabad and other cities. In Bandra, a swish suburb of Mumbai, more than 100 buildings are being redeveloped. Across the country, the number of new projects has hit a level last seen in 2012. Pre-sales by big developers are rising at double-digit rates.Behind the increasingly frenetic activity are all the catalysts you would expect in India: demand from the country’s growing population of well-to-do people, insufficient supply and deterioration of existing buildings in the harsh climate. But if the catalysts have not changed, the underlying structure of the market very much has. Attempts by Narendra Modi’s administration to clean up after a property crash in the mid-2010s seem to be paying off.Before the crash, India’s property industry had a rakish edge. An army of small developers had emerged who were known for sharp suits, Bollywood ties and, beneath their glitz, lots of grit. Stories spread of money derived from padded construction bills and dodgy bankers, along with complicated land purchases routed via family members. Later, court cases provided evidence that such tales might not have been fanciful. As a result of corruption, projects were derailed, people waited years for flats and demand for properties fell.Among the changes introduced by Mr Modi’s government in 2016 were requirements for developers to pay above-market interest rates on deposits for flats in delayed projects, creating an incentive for completion. Diverting deposits for different projects was banned. Financial institutions were pressed to tighten lending and monitoring. The clean-up is far from complete: in the state of Maharashtra, home to Mumbai, officials recently noted that 308 projects involving 60 firms are in some stage of insolvency. But slowly bankruptcies are becoming less common.After a period of stagnation, developers with plausible claims to fulfil projects have seen their valuations soar over the past three years: Delhi Land & Finance from $5.1bn to $15.8bn, Godrej Properties from $3bn to $5.5bn and Oberoi Realty from $2bn to $5bn. Confidence is returning to the broader market, too. Data tracked by Morgan Stanley, a bank, and jll Research, a consultancy, indicate that purchases in the most recent quarter were a fifth higher than the average over the previous year. Activity has been especially strong in Bangalore, Hyderabad, Mumbai and Pune.In the same way a depressed residential market can have a broader impact on a country’s economy—as is supremely evident in China at the moment—the opposite is true as well. The current healthy housing market in India helps explain why growth has remained strong, and the stockmarket registered large gains, despite a slowdown in exports and crucial industries, not least technology. Construction in India employs more than 50m people and comprises 7% of gdp. The property industry is a big customer for cement, steel, glass and white goods, along with credit. Past problems may have rightfully cast the sector in a negative light. Now, much like Mumbai’s towers, it is on the up. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

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    The resumption of student-loan payments will hit American growth

    People are mostly pleased by the return of normal life after covid-19. In America, though, borrowers of student loans will miss one aspect of the pandemic. Sitting on $1.6trn of debt owed to the government, they have enjoyed a break from both repayments and interest since March 2020. The holiday is now over. Interest on student loans started to accrue again this month; repayments will resume in October. Given that there are about 43m borrowers, this will drag on the American economy.image: The EconomistExactly how big the drag will be is a matter of debate. In 2017 the Federal Reserve calculated that the average monthly payment on student debt was $393; other estimates put it closer to $250. Cash has already started flooding into the Treasury as some rush to pay off their debts (see chart). Multiplied by all borrowers, the higher average would add up to a total monthly repayment of $17bn, or about 1% of household consumption. Assuming that only part of the repayments comes from savings, that would imply a cut to America’s quarterly annualised growth rate of 0.7 percentage points—or a third of its annualised pace in the first half of this year.Yet such a drag should be viewed as an upper bound. Students in university need not repay loans, reducing the number of borrowers facing an imminent crunch. Other deferrals are also available—such as for those in the armed forces. In 2019 the Fed calculated that three in ten borrowers did not need to make monthly payments.Moreover, the Biden administration has introduced a new repayment plan that expands a previously existing programme for reducing the debt burden on poor Americans. Borrowers making $32,800 a year or less will be exempted from payments. Totted up, analysts at Capital Economics, a consultancy, reckon that the bill to households will work out at $6bn or so a month—closer to shaving off about 0.3 percentage points from America’s growth.Even this drag will be felt when coupled with other looming hits to consumers. At long last Americans are running down savings from the pandemic. The federal government may be on the brink of a temporary shutdown because of political gridlock. And high interest rates are heaping pressure on borrowers: the delinquency rate on credit cards has reached its highest in a decade. For now, America is on track for a robust third quarter, with some indicators even pointing to annualised growth of above 5%. But the resumption of student-loan payments, combined with the other headwinds, may make for a weaker fourth quarter. The median forecast of economists is just 0.6% annualised growth, according to Blue Chip, a survey of estimates.By next year, student-loan payments will drop out of growth calculations, because monthly bills will be part of the baseline. Yet for folk struggling to make payments, the holiday will be difficult to forget. According to Dan Collier of the University of Memphis, who studies the impact of student debt, many borrowers saved money to buy a first home or decided that they could afford to have more children.Although some still cling to hope that the Biden administration may revive a plan to forgive up to $20,000 per borrower after it was blocked by the Supreme Court in June, the political and legal obstacles are formidable. The more likely scenario is that student-debt payments will proceed much as they did before the pandemic: month after month, for years, until graduates have paid down their tuition costs. Normal life is such a drag. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

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    UAW barrels toward ‘likely’ strikes against auto companies. Here are the latest details

    UAW President Shawn Fain said Ford has offered a 20% increase over four years of a deal, followed by GM at 18% and Stellantis at 17.5%.
    Union members are on track to strike after the 11:59 p.m. ET deadline Thursday.

    UAW President Shawn Fain addresses union members during a Solidarity Sunday rally in Warren, Michigan, Aug. 20, 2023
    Michael Wayland / CNBC

    DETROIT — The United Auto Workers and Detroit automakers remain far apart ahead of the union “likely” strategically striking the companies after an 11:59 p.m. ET Thursday deadline, UAW President Shawn Fain said Wednesday night.
    The outspoken union leader laid out significant details of current proposals between the UAW and General Motors, Ford Motor and Stellantis regarding wage increases, cost-of-living adjustments, bonuses and job security.

    Fain also laid out general plans about how the union expects to strategically strike the Detroit automakers, if necessary. He said the strike will start at a limited number of locations, followed by others, if required.
    “If the companies continue to bargain in bad faith … then our strikes are going to continue to grow … We’re going to hit where we need to hit,” Fain said Wednesday during a Facebook Live event.
    Fain also said “an all-out strike is still a possibility.” He added if there are strikes, the union will not negotiate Friday, instead they will hold a 4 p.m. rally in Detroit with U.S. Sen. Bernie Sanders, the progressive lawmaker from Vermont.
    Fain referred to the union’s plans as a “stand-up strike,” a nod to historic “sit-down” strikes by the UAW.
    “I’ll tell you this, I’m at peace with a decision to strike if we have to because I know that we’re on the right side of this battle,” Fain said after discussing his faith in religion and the union. “It’s a battle of the working class against the rich; the haves versus the have-nots; the billionaire class against everybody else.”

    Key demands from the union have included 40% hourly pay increases, a reduced 32-hour workweek, a shift back to traditional pensions, the elimination of compensation tiers and a restoration of cost-of-living adjustments, among other items.
    Ford CEO Jim Farley, in a lengthy statement released by the company, criticized several of Fain’s statements, saying the automaker has not “received any genuine counteroffer” to the last proposal from the union.
    He also said Fain missed a Tuesday meeting that he and Ford Chair Bill Ford believed the union chief would be attending. Farley defended the company’s recent proposals, saying “if there is a strike, it’s not because Ford didn’t make a great offer.”
    Stellantis did not immediately respond for comment on Fain’s remarks.
    GM issued a blanket statement that the company continues to bargain with the union and “have presented additional strong offers.”
    “This includes historic guaranteed annual wage increases, investments in our U.S. manufacturing plants to provide opportunities for all, and shortening the time for in-progression employees to reach maximum wages,” GM said in an emailed statement.
    Here’s where things stand on key issues, according to Fain.

    Wages

    Fain said Ford has offered a 20% increase over the four years of the deal, followed by GM at 18% and Stellantis at 17.5%.
    Such increases would easily be record wins for the union in modern times, but Fain said they are not adequate because they pale in comparison to the roughly 40% pay increases commanded by the Detroit automaker CEOs.
    “We are seeing movement from the companies, but they’re still not willing to agree on the kinds of raise that will make up for inflation on top of decades of falling wages, and their proposals don’t reflect the massive profits that we’ve generated [for them],” he said.

    Tiers

    Ending tiers, or in-progression pay, where members are paid differently based on seniority, has been a top priority of the union for years.
    Fain said each of the automakers has proposed cutting an eight-year grow-in period to top wages that are currently at more than $32 an hour to four years.

    COLA

    Fain has demanded a return to cost-of-living adjustments, or COLA, which increase wages to keep pace with inflation. 
    Fain said all companies have made “deficient COLA” proposals that either include lump sum payments, limit the amounts, or only kick in at certain levels that the union finds inadequate.
    Ford has proposed a return to a COLA formula used in the past, which Fain said would provide estimated wage protection of less than $1 over the term of the contract; proposals from GM and Stellantis would provide no protection, he said.

    Profit-sharing

    The UAW wanted to enhance profit-sharing payments to provide workers $2 for every $1 million a company spends on share buybacks, special dividends and increases to normal dividends.
    Fain said the Detroit automakers have each offered “concessionary profit-sharing” formulas that lower the current standards, which are based on a company’s North American profits.
    The union said Ford’s formula would have resulted in 21% smaller checks over the last two years; GM’s would have resulted in 28% smaller checks over the last year; and Stellantis would like to base payments on “an unknown internal company attendance calculation.”
    Profit-sharing was implemented in recent years as a way for the companies to “reward” members in good times but not have to pay as hefty of bonuses when the companies were not doing well.

    Temps

    Ending the use of temporary workers, who can be paid lower wages and have no job security, is another long-standing UAW priority. Fain said that Ford has agreed to convert all current temporary workers with 90 days of continuous service to full-time workers, with full benefits, in the tiered progression.
    Fain said GM has offered “inadequate” benefits and “meager” wage increases for temps and that Stellantis’ proposal provides no path at all to full-time status.

    Job security

    The UAW has proposed what it calls a “Working Families Protection Program,” under which employees at a shuttered factory would be paid by the automakers to do local community-service work. All three automakers rejected the proposal, Fain said. Stellantis went further, proposing a unilateral right to close and sell 18 facilities, including factories and parts depots, he said.

    Work-life balance

    The UAW has demanded more time off for workers, with more paid vacation and holidays and extended parental leave. All three of the automakers agreed to make Juneteenth an official holiday, Fain said, but only Ford went further, proposing two weeks of parental leave.

    Retirees

    The UAW has demanded a “significant” increase to pay for retired workers. All three automakers rejected any increases, Fain said.
    This is a developing story. Check back for updates. More

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    What is shadow banking? Unpacking the risks for China

    Shadow banking — a term coined in the U.S. in 2007 — refers to financial services offered outside the formal banking system, which is highly regulated.
    China’s property sector, an estimated one-fourth of the economy, lies at the intersection of shadow banking, local government finances and household assets.
    Today, Beijing’s problem is it needs to offset a crackdown on shadow banking and real estate developer debt with other kinds of economic support.

    Pictured here are models of a real estate development in 2005 in Shanghai, as China’s property boom was gathering steam.
    China Photos | Getty Images News | Getty Images

    BEIJING — China’s real estate problems have again drawn attention to the world of shadow banking and the risks it poses to the economy.
    Shadow banking — a term coined in the U.S. in 2007 — refers to financial services offered outside the formal banking system, which is highly regulated.

    In contrast, shadow bank institutions can lend money to more entities with greater ease, but those loans aren’t backstopped in the same way a traditional bank’s are. That means sudden and widespread demand for payment can have a domino effect.
    On top of that, limited regulatory oversight of shadow banking makes it hard to know the actual scale of debt – and risk to the economy.
    In China, the government has sought in the last few years to limit the rapid growth of such non-bank debt.

    Developers were able to borrow liberally from shadow banks, bypassing limits on borrowing for land purchases.

    Logan Wright
    Center for Strategic and International Studies

    What makes the country’s situation different is the dominance of the state. The largest banks are state-owned, making it harder for non-state-owned businesses to tap traditional banks for financing.
    The state-dominated financial system has also meant that until recently, participants borrowed and lent money under the assumption the state would always be there to provide support — an implicit guarantee.

    Estimates of the size of shadow banking in China vary widely, but range in the trillions of U.S. dollars.

    Shadow banking and real estate

    China’s property sector, an estimated one-fourth of the economy, lies at the intersection of shadow banking, local government finances and household assets.
    Real estate companies bought land from local governments, which needed the revenue and the economic benefits of regional development. People in China rushed at the opportunity to buy their own home — or speculate on property – as prices skyrocketed over the last two decades.

    “Developers were able to borrow liberally from shadow banks, bypassing limits on borrowing for land purchases,” Logan Wright, Center for Strategic and International Studies’ Trustee Chair in Chinese Business and Economics, said in an April report.
    “As a result, land prices continued rising, with developers then pushing up housing costs to maintain margins.”
    According to Wright, Beijing’s recent restrictions on shadow banking pushed the always aggressive developers to turn to other sources of financing to repay existing shadow bank loans. He noted that meant developers started relying more on pre-sales of apartments to homebuyers — via mortgages — and slowing construction to save costs.

    The deleveraging campaign that China’s leadership launched in 2016 to reduce systemic financial risks is the only logical starting point to explain how China’s structural economic slowdown began

    Logan Wright
    CSIS Trustee Chair in Chinese Business and Economics

    Then the government cracked down on developers in earnest in August 2020 by setting limits on debt levels.
    After decades of rapid growth, Chinese property giants such as Evergrande and Country Garden have successively struggled to repay debt. Their cash flows have dried up, largely due to falling home sales.
    Almost simultaneously, news surfaced about trust fund Zhongrong’s inability to repay investors on some products. The fund had lent money to developers.

    Hiding money in trust funds

    It’s becoming clear that at least a few of the struggling real estate companies had kept some debt off the books.
    “Recent disclosures have raised questions about the lax controls and aggressive accounting practices of developers during the boom years,” S&P Global Ratings said in late August.
    This summer, property developer Shimao revealed it owed far more debt than previously disclosed — unbeknownst to its former auditor PricewaterhouseCoopers, the S&P report pointed out. PwC resigned as Shimao’s auditor in March 2022.
    “Some of those funds, those hidden debt were provided by the trust companies,” Edward Chan, a director at S&P Global Ratings, told CNBC in a phone interview.
    “These trust companies were basically part of the shadow banking system in China.”

    Trust funds sell investment products, typically to wealthier households.
    As of end March, about 7.4% of trust funds’ value in China was exposed to real estate, the equivalent of about 1.13 trillion yuan ($159.15 billion), according to China Trustee Associations data cited by Nomura.
    They estimate the actual level of developers’ borrowings from trust companies is more than three times greater — at 3.8 trillion yuan as of the end of June.
    “Some trust products that were invested in the property sector may not have disclosed the actual use of funds or intentionally made this information less transparent to circumvent financial regulations,” the Nomura report said.

    Economic consequences 

    Banks in China also used trust companies to hide the true level of risk on their balance sheets, while making money by lending to restricted borrowers — such as property developers and local governments, said Wright from CSIS.
    He estimated shadow banking represented nearly one third of all lending in China from 2012 to 2016 — and that after Beijing’s crackdown on the sector, China’s credit growth was cut in half.
    Today, Beijing’s problem is it needs to offset a crackdown on shadow banking and real estate developer debt with other kinds of economic support.

    “The deleveraging campaign that China’s leadership launched in 2016 to reduce systemic financial risks is the only logical starting point to explain how China’s structural economic slowdown began,” Wright said.
    “China’s economic growth over the next 5 to 10 years will depend upon how successfully and efficiently the financial system can shift its resources away from property-related lending and local government investment projects toward more productive private sector firms,” he said.
    “Otherwise, China’s economic growth rates will continue to slow over the next decade to 2 percent or below.” More

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    Delta will make it harder to get into airport lounges, changes rules to earn elite status

    Delta earlier this year increased entry requirements to its airport clubs but has now taken additional measures.
    The new rules will cut unlimited access to the clubs for certain American Express credit card holders.
    Delta is also setting new requirements to earn elite status, solely based on customer spending.

    Delta’s new SkyClub at John F. Kennedy International Airport in New York.
    Leslie Josephs/CNBC

    Delta Air Lines is changing how customers can earn elite frequent flyer status and is making it harder for many American Express cardholders to get into the carrier’s airport lounges, the latest reality check for air travel’s era of mass luxury.
    Starting Jan. 1, customers will earn Delta Medallion status solely based on their spending, instead of a combination of dollars spent with the carrier and flights. The new model is similar to one that American Airlines adopted earlier this year.

    Major airlines have continually raised the requirements to earn status as customer spending at the airline and on co-branded credit cards has surged in recent years, swelling the ranks of these high-paying customers. Elite status can come with a variety of perks, from early boarding to upgrades to first class and lounge access.
    “We want customers to be able to receive status with activity beyond just air travel,” Dwight James, Delta’s senior vice president of customer engagement and loyalty, told CNBC.
    Next year, Delta customers will earn 1 Medallion Qualifying Dollar for every $1 they spend on Delta flights, car rentals, hotels and vacation packages booked through the airline.
    The ratio isn’t 1:1 for dollars spent through co-branded American Express cards. Delta SkyMiles Reserve and Reserve Business American Express card members earn 1 Medallion Qualifying Dollar for every $10 spent on the card, while Delta SkyMiles Platinum and Platinum Business American Express Card Members earn 1 Medallion Qualifying Dollar for every $20 spent.
    Here are the new status requirements:

    Silver Medallion – 6,000 MQDs
    Gold Medallion – 12,000 MQDs
    Platinum Medallion – 18,000 MQDs
    Diamond Medallion – 35,000 MQDs

    Raising the bar on Sky Club entry

    Delta is limiting access to its popular Sky Club airport lounges through certain American Express credit cards after grappling with overcrowding at some of them, drawing complaints from travelers.
    Instead of the current unlimited visits, starting Feb. 1, 2025, American Express Platinum and Platinum Business cardholders will get six visits a year, unless they spend $75,000 on the card in a calendar year.
    Meanwhile, Delta SkyMiles Reserve and Reserve Business cardholders will get 10 Sky Club visits a year, a limit they can skirt by also spending $75,000 in a year.
    Delta’s SkyMiles Platinum and Platinum Business American Express cards will no longer get club access through the cards itself, although customers can enter by buying a club membership or if they have elite status with Delta that allows them to pick a club membership as a perk.
    “Some of the changes that we’re making ensures that we’re taking care of our most premium customers with our most premium assets, one of those being the Sky Club,” James said. He said the changes were made in conjunction with American Express.
    The airline last year announced several changes to crack down on overcrowding at the clubs, including barring employees from using them when flying standby with company travel privileges, even if they had qualifying credit cards. It also raised prices for club memberships for regular customers.
    Delta and its competitors are racing to build bigger and more modern lounges to accommodate customers. United Airlines, for example, on Wednesday opened a 35,000 square-foot club at its hub at Denver International Airport, the largest in its network, after opening a 24,000 square-foot club at the airport earlier this summer. More