Finance

European companies in China are finding it harder to make money in the country as growth slows and overcapacity pressures increase, according to a survey released Friday by the EU Chamber of Commerce in China.
In the metropolis of Shanghai, business members even reported delays in getting paid as it became more difficult to enforce contracts versus the prior year, according to chapter head Carlo D’Andrea.
EU Chamber President Jens Eskelund noted how Beijing’s recent visa-free policy for several EU countries has allowed executives the flexibility to plan China trips one week in advance, instead of two to three months previously.

A robot is producing auto parts on the production line of an auto parts company in Minhou County, Fuzhou, China, on May 7, 2024.
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BEIJING — European companies in China are finding it harder to make money in the country as growth slows and overcapacity pressures increase, according to a survey released Friday by the EU Chamber of Commerce in China.
In the metropolis of Shanghai, business members even reported delays in getting paid as it became more difficult to enforce contracts versus the prior year, according to chapter head Carlo D’Andrea.

“State-owned enterprises, they postponed payments and they are using this in order to get some defacto loans from companies, especially from small, medium enterprise,” D’Andrea said, citing members’ comments.
China’s growth has slowed in recent years amid geopolitical tensions. A slump in the real estate sector, which has close ties to local government finances, has also dragged down the economy.
Only 30% of EU Chamber survey respondents said their profit margins were higher in China than their company’s worldwide average — an eight-year low.

Back in 2016, just 24% of respondents said their profit margins were better in China than they were globally, the report said.
That reflected a crash in the Chinese stock market in the summer of 2015, alongside a slowdown in the real estate market at the time, EU Chamber President Jens Eskelund pointed out to reporters.

He said the current slowdown in Chinese growth had similar cyclical aspects, but there are questions about how long and deep it would be this time.
The Chamber’s latest survey covered 529 respondents and was conducted from mid-January to early February.
This year’s questionnaire included a new question about whether members faced difficulties in transferring dividends back to their headquarters. While more than 70% reported no issues, 4% said they were unable to do so, and about one-fourth said they experienced some difficulties or delays.
It was not immediately clear whether this was due to a new regulatory stance or typical tax audit requirements.

What is happening now is that companies are beginning to realize some of these pressures … are taking on perhaps a more permanent nature.

Jens Eskelund
EU Chamber of Commerce in China, president

China’s economy is now far bigger than it was in 2015 and 2016. Trade tensions with the U.S. have also escalated in recent years, with Beijing doubling down on manufacturing to bolster tech self-sufficiency.
“Our members saw to some extent that their ability to grow and make profit in the Chinese market — [the] correlation with the GDP figure is becoming weaker,” Eskelund said.
“What is important to foreign companies is not necessarily sort of a headline GDP figure, 5.3% or whatever, but the composition of GDP,” he said. “If you have a GDP figure that is growing because more investment is being made into manufacturing capacity, that is not good for foreign companies. But if you have a GDP that is growing because domestic demand is growing, then that is a good thing.”
China’s National Bureau of Statistics is due to release fixed asset investment, industrial production and retail sales for April next Friday.

Overcapacity overhang

China’s emphasis on manufacturing, coupled with modest domestic demand, has led to growing global concerns that overproduction will reduce profit margins.
More than one-third of EU Chamber survey respondents said they observed overcapacity in their industry in the last year, and another 10% expect to see it in the near future.
The civil engineering, construction and automotive industries had the highest share of respondents reporting overcapacity.
More than 70% of respondents said overcapacity in their industry resulted in price drops.
“This is not just European companies whining,” Eskelund said. “This is equally, if not more painful, for Chinese companies.”

Market opening in some industries

Chinese authorities have meanwhile bolstered high-level efforts to attract foreign investment.
Eskelund noted how Beijing’s recent visa-free policy for several EU countries has allowed executives the flexibility to plan China trips one week in advance, instead of two to three months previously.
He added that Beijing’s extension of tax exemption policies has also encouraged more international staff and their families to stay in China.

Cosmetics and food and beverage companies have benefited from China’s recent efforts to open its market, he said, noting that a record high of 39% of respondents said the local market was fully open in their industry.
China has restricted the extent to which foreign businesses can own or operate in certain industries. Beijing removes some off-limits categories each year via a “negative list.”

Record high skepticism

However, the EU Chamber and other business organizations have said that China can do much more to implement its 24 measures for improving the environment for foreign companies.
The Chamber’s latest survey found a historically large number of respondents said conditions were worsening:

a record high said they were skeptical about their growth potential in China in the next two years
a record high of respondents expect competitive pressure to intensify
a record share doubt their profitability in China
a record high plan to cut costs this year, primarily by reducing headcount and trimming marketing budgets
a record number of respondents said they missed opportunities in China due to regulatory barriers, the size of which was equal to over half their annual revenue
a record low in expectations that regulatory obstacles will decrease

“When you compare to the previous years we can see that a lot of the concerns actually remain the same regarding the predictability, the visibility of the regulatory environment,” Eskelund said. “These concerns pretty much remain the same.”
“What is happening now is that companies are beginning to realize some of these pressures that we have seen in the local market, whether it’s competition, whether it’s lower demand, that they are taking on perhaps a more permanent nature,” he said. “That is something that is beginning to impact investment decisions and the way the go about thinking about developing the local market.” More

A Consumer Financial Protection Bureau regulation that promised to save Americans billions of dollars in late fees on credit cards faces a last-ditch effort to stave off its implementation.
Led by the U.S. Chamber of Commerce, the industry in March sued the CFPB in federal court to prevent the new rule from taking effect.
A judge in the Northern District of Texas is expected to announce by Friday whether the court will grant the industry’s request for a freeze just days before it was to take effect on Tuesday.

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A Consumer Financial Protection Bureau regulation that promised to save Americans billions of dollars in late fees on credit cards faces a last-ditch effort to stave off its implementation.
Led by the U.S. Chamber of Commerce, the card industry in March sued the CFPB in federal court to prevent the new rule from taking effect.

That effort, which bounced between venues in Texas and Washington, D.C., for weeks, is now about to reach a milestone: a judge in the Northern District of Texas is expected to announce by Friday evening whether the court will grant the industry’s request for a freeze.
That could hold up the regulation, which would slash what most banks can charge in late fees to $8 per incident, just days before it was to take effect on Tuesday.
“We should get some clarity soon about whether the rule is going to be allowed to go into effect,” said Tobin Marcus, lead policy analyst at Wolfe Research.
The credit card regulation is part of President Joe Biden’s broader election-year war against what he deems junk fees.
Big card issuers have steadily raised the cost of late fees since 2010, profiting off users with low credit scores who rack up $138 in fees annually per card on average, according to CFPB Director Rohit Chopra.

New fees, higher rates

As expected, the industry has mounted a campaign to derail the regulations, deeming them a misguided effort that redistributes costs to those who pay their bills on time, and ultimately harms those it purports to benefit by making it more likely for users to fall behind.
Up for grabs is the $10 billion in fees per year that the CFPB estimates the rule would save American families by pushing down late penalties to $8 from a typical $32 per incident.
Card issuers including Capital One and Synchrony have already talked about efforts to offset the revenue hit they would face if the rule takes effect. They could do so by raising interest rates, adding new fees for things like paper statements, or changing who they choose to lend to.
Capital One CEO Richard Fairbank said last month that, if implemented, the CFPB rule would impact his bank’s revenue for a “couple of years” as the company takes “mitigating actions” to raise revenue elsewhere.
“Some of these mitigating actions have already been implemented and are underway,” Fairbank told analysts during the company’s first-quarter earnings call. “We are planning on additional actions once we learn more about where the litigation settles out.”

Trial ahead?

Like some other observers, Wolfe Research’s Marcus believes the Chamber of Commerce is likely to prevail in its efforts to hold off the rule, either via the Northern District of Texas or through the 5th Circuit Court of Appeals. If granted, a preliminary injunction could hold up the rule until the dispute is settled, possibly through a lengthy trial.
The industry group, which includes Washington, D.C.-based trade associations like the American Bankers Association and the Consumer Bankers Association, filed its lawsuit in Texas because it is widely viewed as a friendlier venue for corporations, Marcus said.
“I would be very surprised if [Texas Judge Mark T.] Pittman denies that injunction on the merits,” he said. “One way or another, I think implementation is going to be blocked before the rule is supposed to go into effect.”
The CFPB declined to comment, and the Chamber of Commerce didn’t immediately respond to a request for comment.

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Spanish bank BBVA caught markets by surprise after it announced a rare hostile takeover bid for domestic rival Banco Sabadell.
It comes shortly after a separate 12 billion euro ($12.87 billion) offer from BBVA to Sabadell’s board was rejected earlier in the week.
David Benamou, chief investment officer at Axiom, said BBVA’s takeover offer for Sabadell was reflective of “a very strange situation indeed.”

A logo outside the Banco Sabadell SA offices at the Banc Sabadell Tower in Barcelona, Spain, on Wednesday, May 1, 2024.
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Spanish bank BBVA caught markets by surprise on Thursday after it announced a rare hostile takeover bid for domestic rival Banco Sabadell, with one investment firm describing the situation as “very strange.”
The move comes shortly after a separate 12 billion euro ($12.87 billion) takeover offer from BBVA to Sabadell’s board was rejected earlier in the week.

The board said Monday that BBVA’s initial bid “significantly undervalues” the bank’s growth prospects, adding that its standalone strategy will create superior value. It reiterated this position on Thursday as BBVA took its all-share offer directly to the bank’s shareholders.
BBVA said its takeover offer has the same financial terms as the merger offered to Sabadell’s board. It characterized the proposal — which would create Spain’s second-largest financial institution if successful — as “extraordinarily attractive.”
“We are presenting to Banco Sabadell’s shareholders an extraordinarily attractive offer to create a bank with greater scale in one of our most important markets,” BBVA Chair Carlos Torres Vila said in a statement.
“Together we will have a greater positive impact in the geographies where we operate, with an additional €5 billion loan capacity per year in Spain.”
Shares of BBVA fell 6% at around midday London time on Thursday, while Sabadell’s stock price rose more than 3%.

‘Not so easy’

Hostile takeover bids are not common in the European banking sector and BBVA’s decision to proceed in this way has taken many by surprise.
Carlo Messina, CEO of Italy’s biggest bank Intesa Sanpaolo, told CNBC on Wednesday that there were significant challenges to domestic consolidation within the region’s banking sector.
He said it was difficult to complete a “friendly transaction” in the current market environment, whereas proceeding with a hostile takeover bid was also “not so easy to do.”

David Benamou, chief investment officer at Axiom, said BBVA’s offer for Sabadell was reflective of “a very strange situation indeed.”
Speaking to CNBC’s “Squawk Box Europe” on Thursday, Benamou said the proposed offer “makes sense” from Sabadell shareholders’ point of view and, in his opinion, was likely to go through. He cited the fact that BBVA’s offer represents a 30% premium over the closing price of both banks as of April 29th.
“It echoes to the recent discussions in Switzerland with the consolidation of Credit Suisse by UBS and all the worries about financial stability,” he added.
“I think the execution of the transaction might be rather difficult, although you can argue it is the same geography, the culture is theoretically very close as opposed to a cross-border merger.”
Benamou said a burgeoning trend of consolidation among European banks was a logical one, particularly because many regional lenders are “very small” compared to their U.S. peers.

Signage outside a Banco Bilbao Vizcaya Argentaria SA (BBVA), right, and a Banco Sabadell SA, left, bank branch in Barcelona, Spain, on Wednesday, May 1, 2024.
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Spain’s Economy Ministry said in a statement that the government rejects BBVA’s hostile takeover bid for Sabadell, “both in form and substance.”
The ministry also warned that the proposed deal “introduces potential harmful effects on the Spanish financial system.” More

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