Finance

Shares in Xinhua Trust, a Chinese shadow lender, are selling for rock-bottom prices. The outfit went bankrupt in May, becoming the first Chinese trust to fall in more than two decades. Since then chunks of the firm have been put up for sale on Taobao, an online e-commerce platform, at a 30% discount. Its company cars were recently added to the auction, which has been mandated by a court. A bargain-hunter could snap up Xinhua trademarks for just 12,000 yuan ($1,650). The shadow lender’s demise was an early warning: the same forces that brought it down are now ripping through China’s 21trn yuan trust industry. The country’s economic growth has been weaker than expected, and property developers are caught in an unprecedented wave of defaults and restructurings. China’s trusts, which channel funds from investors to infrastructure, property and other opportunities, are exposed to both developments. Although Xinhua’s bankruptcy has been relatively straightforward, a bigger blow-up may be on the way at Zhongrong, one of the country’s largest trusts, which missed payments to clients in mid-August. Panicked investors fear more firms will be ensnared, and that collapses will lead to further economic problems.During China’s years of strong economic growth, trusts and their investors flourished, with investment products often offering annual returns of 10% or more. Property developers and local governments were willing to pay lofty interest rates, transactions faced less regulatory scrutiny than bank lending and trusts benefited from the widespread perception that investors’ cash was safeguarded by the state in a fashion similar to bank deposits. That perception is now long gone—and as more developers default, it is likely that more shadow banks will be unable to pay out. Zhongrong, which managed about 630bn yuan in trust products at the end of last year, shows how pain has spread from the property industry to the financial system. When Sunac, China’s fifth-largest developer, defaulted last year, local governments began freezing company funds in order to ensure projects were finished. One of the locations where funds were frozen was Wuhan, a city in central China, and the money included investments linked to Zhongrong. Across the industry, about 7% of trust products were invested directly in the property sector at the end of March. Indirect investments via securities push that exposure to as much 30%, reckon analysts at anz, a bank. The risk of contagion is especially high because lending by trusts is ubiquitous and opaque, and because investment in them produces tangled financial ties. Zhongrong’s investors include several listed companies, for instance. Such companies often invest in trusts in order to eke out higher returns. Trusts have meanwhile invested about 4.6trn yuan in equities, bonds and other funds. They have also lent to local-government projects, and now cities and provinces across China are struggling to repay debts, which are estimated to have hit 57trn yuan at the end of 2022. There is another avenue through which trouble may spread. Zhongrong is controlled by a much larger investment manager, called Zhongzhi, which has about 1trn yuan in assets under management across a vast array of divisions. Zhongzhi has also been thrown into a liquidity crisis and has reportedly been unable to pay out the 230bn yuan it owes to some 150,000 wealthy investors. Across the country, similar investment-management firms have millions of customers. Since news of Zhongzhi’s troubles broke, phones have been ringing off the hook as worried clients, many of whom are regular white-collar workers, seek to confirm their savings are safe, reports an executive at another one of these companies.Such links between trusts, local governments and developers, and the possibility of larger financial firms getting in trouble, have spooked investors. Indeed, Zhongrong’s troubles have contributed to the poor performance of the Chinese stockmarket: the csi 300, a benchmark index, is down by more than 6% this month. Interventions by officials, which included a cut to stamp duty on August 27th, have had little impact.Policymakers are painfully aware of the problems faced by trusts. After all, they helped bring many of them into being through attempts to reduce risk. Since 2017 China’s shadow banks have been under intense regulatory scrutiny as part of an attempt to transfer opaque off-balance-sheet lending to banks. The official attack was ramped up in 2020 when the state introduced sharp restrictions on leverage at property developers. As a result of such moves, the issuance of shadow-banking products in the first half of this year was at its weakest in a decade, according to Capital Economics, a research firm. The crackdown has sapped liquidity and confidence from the property market, pushing both developers and trust firms towards default.In the short term, much of the pain will be borne by wealthy investors, as the threshold for putting money into a trust product is usually more than 300,000 yuan. Most cannot even demand their initial investments back, since products usually have terms that prevent investors from withdrawing, sometimes for up to two years. This may prevent a fully fledged financial crisis caused by a run on shadow lenders, and will give the government time to reckon with the mess. Bloomberg, a news service, has reported that China’s banking regulator has already set up a task force to examine the problems at Zhongzhi. Yet, given the vast, shadowy connections such firms have across the economy, government inspectors might not like what they find. ■ More

Goldman Sachs said it agreed to sell its personal financial management unit to a competitor named Creative Planning.
The transaction is expected to close in the fourth quarter of this year and “result in a gain” for New York-based Goldman.
The bank declined to disclose the sale price for its PFM business.

David Solomon (centre), Chief Executive Officer of Goldman Sachs during an event attended by Prime Minister Rishi Sunak at the Business Roundtable during his visit to Washington DC in the US on June 8, 2023 in Washington, DC.
Niall Carson | WPA Pool | Getty Images

Goldman Sachs said Monday that it agreed to sell its personal financial management unit to a competitor named Creative Planning.
The transaction is expected to close in the fourth quarter of this year and “result in a gain” for New York-based Goldman. The bank declined to disclose the sale price for its PFM business.

Goldman acquired a team of about 220 financial advisors managing $25 billion in assets in May 2019, when it announced the $750 million acquisition of United Capital Financial Partners. At the time, CEO David Solomon heralded the deal as a way to broaden Goldman’s reach beyond the ultra-rich clientele that is its main strength to those who are merely wealthy, with perhaps a few million dollars to invest.
But amid Solomon’s push to unload or shutter several businesses tied to his ill-fated retail banking plan, the PFM business was deemed too small in the context of Goldman’s larger aspirations in wealth and asset management. Goldman said in February that it only had about 1% of the high net worth market, or those who have between $1 million and $10 million to invest.
“This transaction is progress toward executing the goals and targets we outlined at our investor day in February,” Marc Nachmann, global head of asset and wealth management at Goldman, said Monday in a statement.
The sale “allows us to focus on the execution of our premier ultra-high net worth wealth management and workplace growth strategy” while continuing to support high net worth clients through a strategic partnership with Creative Planning, he said.
Selling the PFM business will help boost profit margins in Goldman’s asset and wealth management division, Jefferies analysts led by Daniel Fannon wrote Monday in a research note.

“With the offloading of Marcus installment loans completed in 2Q23, the GreenSky sale process in motion, and the continued reduction of legacy balance-sheet investments,” the bank is “getting closer to becoming the more durable and profitable business it outlined at investor day,” Fannon wrote.
Creative Planning is a Kansas-based registered investment advisor with more than 2,100 employees and $245 billion in assets under management and advisement. More

European shares traded higher on the final trading week of August, as traders weighed the prospect of higher interest rates from the U.S. Federal Reserve and looked ahead to upcoming economic data later in the week.

European markets

Germany’s DAX 30 was 0.8%, France’s CAC 40 climbed 1.1%, and the Italian FTSE MIB gained 1.1% by 1.40 p.m. London time.

Markets are closed in the U.K. for a public holiday.
It came as investors continued to reflect on a roundup of commentary from the Kansas City Federal Reserve’s annual retreat in Jackson Hole, Wyoming, last week.
The most closely watched speech of the event came from Fed Chair Jerome Powell. The U.S. central bank head said that inflation remains too high and that the Fed is ready to continue hiking interest rates to tame persistently high prices.
While Powell said the Fed could be flexible, he added it still has further to go to fight inflation. “Although inflation has moved down from its peak — a welcome development — it remains too high,” he said in prepared remarks.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

China cuts trading duty

In Asia-Pacific, stocks began the week higher, with mainland Chinese and Hong Kong stocks leading gains in the region.
The main event driving the rally in Asia was a stock market policy change from the government. China’s Ministry of Finance on Monday cut the stamp duty on stock trades by half in an effort to boost investment in its stock market. It came after China’s CSI 300 index fell to a nine-month low.
Still, concerns linger among economists over structural issues in China’s economy, such as debt, demographics, and Beijing’s deteriorating relationship with the West.
Within the Chinese market, shares of the world’s most indebted property developer, China Evergrande Group, tumbled 87% as trade resumed after 17 months.
Back in Europe, developments are quiet on the corporate front as the region has wrapped up a busy earnings season.
Swiss bank Credit Suisse, which is now a subsidiary of UBS after a government-facilitated takeover, posted a 3.5 billion Swiss franc ($4 billion) loss, according to a report in the SonntagsZeitung citing insiders at the bank.
Shares of UBS rose about 1% Monday. The bank is set to report earnings on Thursday.
Technology and telecoms stocks were the best-performing sectors in the region, climbing 1.4% and 0.9%, respectively.
Looking at individual stocks, Italian telecoms firm Telecom Italia was the top performer on the Stoxx 600, rising 3.9%.
Later in the week, the U.S. Labor Department is set to release nonfarm payrolls showing the pace of jobs and wage growth, which could guide the Fed on how to proceed with its monetary policy. More

Xpeng G9 SUV is on display during the 20th Shanghai International Automobile Industry Exhibition at the National Exhibition and Convention Center (Shanghai) on April 18, 2023 in Shanghai, China.
VCG | Visual China Group | Getty Images

Check out the companies making headlines before the bell.
Xpeng — U.S.-traded shares of the Chinese electric vehicles company jumped 5% Monday premarket. Xpeng announced it would buy Didi’s smart electric car business in a deal worth $744 million. 

3M — Shares rallied more than 5% after Bloomberg News reported the company tentatively agreed to resolve more than 330,000 lawsuits related to its defective earplugs, The company will pay more than $5.5 billion in the settlement, according to the report.
Mister Car Wash — The car wash stock climbed 5.7% in premarket trading following an upgrade to overweight from neutral by Piper Sandler. The firm said Mister Car Wash has upside potential over the next two years.
CrowdStrike — Shares of the cybersecurity company fell 2.6% in premarket trading after Morgan Stanley downgraded CrowdStrike to equal weight from overweight. The investment firm warned in a note to clients that Crowdstrike’s upcoming earnings report could show slowing revenue growth ahead.
Akero Therapuetics — The biotech company’s shares added 2.2% after UBS initiated Akero with a buy rating and a price target that implies sharp gains ahead. UBS thinks the company’s treatment for non-alcoholic steatohepatitis could create an underappreciated market opportunity worth more than $20 billion. 
Chinese stocks — Alibaba and JD.com rose 1.3% and 1.6%, respectively after the Chinese government said it would reduce a tax on trading, among other measures,  to boost its stock market.

RPT Realty — Shares of the real estate investment trust rallied more than 11% on news RPT is being acquired by Kimco Realty for $2 billion in stock. The deal is expected to close in early 2024. “Approximately 70% of RPT’s portfolio aligns with our key strategic markets,” Kimco CEO Conor Flynn said in a statement.
Abcam — Shares of protein consumables supplier Abcam fell more than 3% after Danaher announced it would acquire the company in a deal valued at around $5.7 billion. Danaher shares gained less than 1%.
Boston Scientific — Boston Scientific jumped 5.5% after the medical device maker announced positive results Sunday for its treatment for patients with atrial fibrillation, or abnormal heartbeats.
— CNBC’s Jesse Pound, Sarah Min and Alexander Harring contributed reporting. More

Chinese electric car company Xpeng said Monday it is buying Didi’s smart electric car development business in an exchange of shares worth $744 million.
With the strategic partnership and new assets from Didi, Xpeng said it plans to develop an electric car for launch next year under a new mass market brand.
Didi itself has tried to develop robotaxis and electric vehicles, amid business setbacks in the last two years.

Didi launched a free robotaxi service in parts of Shanghai in 2020.
Vcg | Visual China Group | Getty Images

BEIJING — Chinese electric car company Xpeng said Monday it is buying Didi’s smart electric car development business in an exchange of shares worth $744 million.
The Chinese ride-hailing company will become a strategic shareholder of Xpeng, and the two companies are looking to cooperate in marketing, financial and insurance services, charging, robotaxis and international expansion. That’s according to releases from both companies.

Xpeng shares rose more than 13% in Hong Kong trading as of Monday morning.

Stock chart icon

With the strategic partnership and new assets from Didi, Xpeng said it plans to develop an electric car for launch next year under a new mass market brand that will target the 150,000 yuan ($20,580) price range.
Xpeng’s cars typically sell for around 200,000 yuan or more. The new brand, developed under the project name “MONA,” is set to be different from that of Xpeng.

The startup’s deal with Didi comes as many companies look for ways to grab a slice of China’s growing but highly competitive electric car market.
In late July, Xpeng and German auto giant Volkswagen signed a deal to develop two new electric cars for China under the VW brand, that’s set to launch in 2026.

Under the agreement, Volkswagen plans to invest about $700 million in Xpeng for a 4.99% stake.

Still operating at a loss

The deals come as traditional auto giants have the cash that electric car startups lack.
Earlier this month, Xpeng reported second-quarter net loss 2.8 billion yuan ($384.5 million) — a wider loss than analysts expected and the biggest quarterly loss since the company went public three years ago.
Xpeng offers some of the most advanced assisted driving technology available to drivers in China. But the startup’s monthly car deliveries have remained low versus competitors’ such as BYD and Li Auto.
The Didi electric car business — held by a subsidiary called Da Vinci Auto Co. — has also racked up losses. Those for 2022 more than tripled from the prior year to 2.64 billion yuan, according to a Hong Kong stock exchange filing. The unit had net assets of 937 million yuan as of June 30.
Those financial results are set to be consolidated into Xpeng’s financial statements after the initial deal, the filing said.

Read more about electric vehicles, batteries and chips from CNBC Pro

The deal is expected to be completed in stages, with Didi set to receive more shares if the new mass market car brand does well for an expected total 3.25% stake in Xpeng.
Under the agreement, Didi cannot sell the shares for two years after the initial closing of the deal.
The strategic cooperation agreement is set to last for at least five years.
Didi itself has tried to develop robotaxis and electric vehicles, amid business setbacks in the last two years.
The ride-hailing giant delisted from the New York Stock Exchange just months after going public in 2021, and went through a now-concluded government probe. While the stock remains tradeable over-the-counter, plans for an expected Hong Kong listing remain unclear.
— CNBC’s John Rosevear and Arjun Kharpal contributed to this report. More

Southeast Asia’s fourth largest bank said it was facing “technical problems impacting our banking channels.”
Services for cards, ATMs and at bank branches we’re restored almost an hour later.

The rebranded logo of OCBC.

SINGAPORE — Southeast Asia’s fourth largest bank OCBC suffered a short outage on Monday that affected its digital and card banking channels.
At 9.43 a.m. Singapore time, the bank said in a Facebook post that it was facing “technical problems impacting our banking channels.”

About an hour later at 10.37 a.m., OCBC announced that card and branch services were restored, followed by ATM services.
Shares of the Singapore-headquartered lender gained 1.05% in afternoon trade.
In a statement to CNBC, OCBC sought to assure customers there was no security breach.
“We want to assure them that their monies remained safe and customer data was secured throughout. We are investigating the cause of the technical problem and will provide an update as soon as we can,” an OCBC spokesperson said.

Stock chart icon More

Shoppers walk by a Nordstrom sign at Westfield San Francisco Centre in San Francisco, May 11, 2023.
Justin Sullivan | Getty Images

Check out the companies making the biggest moves midday:
Nordstrom — The department store retailer sank 7.73% even after topping fiscal second-quarter earnings and revenue expectations. Earnings came in 40 cents ahead of the 44 cents expected by analysts polled by Refinitiv. Sales fell below pre-pandemic levels and Nordstrom stood by its previous full-year outlook bracing for a decline in revenues in the single digits. The company also warned that theft-related losses are at “historical highs.”

Affirm — The buy now, pay later firm saw its shares skyrocket 28.82% after the company reported fiscal fourth-quarter results that topped expectations on the back of higher gross merchandise volume. Affirm also gave strong guidance for the fiscal first quarter, projecting $430 million to $455 million in revenue, versus analysts’ expectations of $430 million.
Hawaiian Electric — The utility stock plunged 18.55% following news that Maui County is suing the company for damages related to the island’s wildfires, which killed more than 100 people. The suit alleges Hawaiian Electric left its power lines energized despite a warning from the National Weather Service that high winds and drought conditions created a high fire risk. The company told NBC News it is disappointed the county chose a litigious path and noted the investigation is still unfolding.
Hasbro — The toy maker’s stock rallied 5.66% after Stifel boosted its price target to $94 from $79 Thursday, implying about 43% upside from Thursday’s close. The Wall Street firm also added it to its top picks list, citing key changes and opportunities within the company. On Tuesday, Bank of America upped its price target to $90 from $85. Shares are up nearly 9% week to date.
Advance Auto Parts — Shares fell 5.64% after the auto parts retailer was dropped from the S&P 500 on Friday.
Workday — The stock gained nearly 5.38% following the enterprise software company’s stronger-than-expected results for the second quarter. Adjusted earnings per share came in at $1.43, topping the $1.26 expected by analysts, per Refinitiv. Revenue was $1.79 billion, versus the $1.77 billion expected.

Intuit — Shares added 4.12% and hit a 52-week high after the software company’s earnings topped expectations. Fiscal fourth-quarter adjusted earnings were $1.65 per share, compared with the $1.44 expected by analysts polled by Refinitiv. Revenue came in at $2.71 billion, beating the $2.64 billion expected. The company also shared stronger-than-expected full-year guidance.
Gap — The retailer added 7.24% after posting mixed quarterly results. Adjusted earnings per share was 34 cents, topping the consensus estimate of 9 cents, per Refinitiv. Gap’s revenue was $3.55 billion, below the $3.57 billion expected.
Marvell Technology — Marvell shed 6.62% despite posting a slight earnings beat. Earnings per share came in at 33 cents for its second quarter, versus the 32 cents expected, according to Refinitiv. Revenue was $1.34 billion, compared with the $1.33 billion consensus estimate.
Ulta Beauty — The beauty retailer’s shares fell 3.69%, reversing earlier gains from its better-than-expected quarterly results. Ulta posted $6.02 in earnings per share on $2.51 billion in revenue in the second quarter. Analysts had forecast $5.85 in earnings per share and $2.51 billion in revenue, according to Refinitiv. The company also raised its full-year guidance.
AMC Entertainment — Shares fell 13.5% after the company converted its preferred equity units into common stock.
Shift4 Payments — The payment company climbed 1.9% following a Morgan Stanley upgrade to equal weight from underweight. The firm said the company has a valuation that now better reflects the business.
— CNBC’s Yun Li, Hakyung Kim, Alex Harring, Samantha Subin and Michael Bloom contributed reporting. More

Maintenance workers in front of a housing development sign near new homes in Fairfax, Virginia, on August 22, 2023.
Andrew Caballero-Reynolds | AFP | Getty Images

Being able to buy a home keeps getting harder.
The National Association of Realtors said earlier this month that its housing affordability index fell during the second quarter to its lowest level on record. The reading came in at 92.7 compared with 101.8 in the first quarter. It’s also well below a 180.4 level reached in 2021.

A reading of 100 signals that families earning the median income have the amount of money needed to buy a median-priced home. A reading below points to insufficient median family income to buy a home. The data goes back to 1986.
Incredibly, housing is now less affordable than it was prior to the Great Financial Crisis — when a complete breakdown in lending standards led to a frenzy of speculation that ended in a 33% peak-to-trough decline in housing prices (based on the S&P Case-Shiller 20-City home price index) from July 2006 to April 2009.
Should this make us nervous? 

Arrows pointing outwards

The decline in housing affordability has obviously been highly influenced by the huge increase in mortgage rates, which are now around 7.2%, according to data from Freddie Mac. That’s compared to an average of 4% from the end of the Great Recession in 2009 until the end of 2021. 

In fact, current mortgage rates are nearly triple the level they were at the end of 2020 and beginning of 2021 — when they bottomed out at around 2.7%. Not coincidentally, the first quarter of 2021 turned out to the be peak in housing affordability. 
Since then, housing prices are up 28% despite the massive increase in interest rates. Median household income, which is currently growing at roughly the pre-Covid rate, has not grown nearly fast enough to offset the spike in mortgage rates and the increase in housing prices. The consequence has been the massive drop in housing affordability to new lows. 
I know all the arguments.
A Wall Street Journal article on Wednesday entitled “How High a Rate Can Housing Take?” by Justin Lahart read: “On Wednesday, the National Association of Realtors reported that there were just 980,000 existing single-family homes for sale last month. That was the fewest during the month of July—normally a time of year when a lot of homes are on the block—on record stretching back to 1982.”
Housing prices remain elevated because there is an extreme lack of supply. Inventories of homes for sale are very low because nobody wants to move and give up their 3% mortgage. The trend toward “work-from-home” is another factor causing homeowners to remain in place and therefore suppressing housing inventory. 
It will take years to bring housing supply back in line with demand because new home construction has been insufficient since the great financial crisis. Lending standards have improved dramatically since before the GFC. 
The typical homeowner has much more equity than in the past. Interest rates should start coming down next year as it becomes clearer than inflation is on a sustainable path lower to the Federal Reserve’s 2% target. And so on. 
All of this is likely true. But still, housing affordability is as low as it’s been since at least 1986. Many prospective first-time buyers are at risk of getting locked out of the market forever if something doesn’t change. 
Can insufficient supply alone keep housing prices elevated in the face of such a big increase in borrowing costs? Is it realistic to think everyone will remain in place indefinitely just to keep their low mortgage rate, thereby preventing a flood of supply hitting the market? Will political pressure on the Fed compel the central bank to cut rates more quickly, thereby improving affordability? 
These are all important questions, and I don’t have all the answers. My suspicion is that some combination of labor market softening, tighter bank lending standards, capital markets volatility and rising mortgage rates will bring an end to the Fed’s interest rate hikes sooner rather than later. Since as long as I can remember, the Fed has always chosen the path of least pain, and I don’t think this time will be any different. 
If this means the Fed will implicitly adopt an inflation target above 2% for a short period, then I think that’s what is likely to happen. But ultimately, I continue to believe that the Fed’s interest-rate hikes to date will prove more than enough to slow the economy, reduce inflation to target and potentially induce a recession. 
The “long and variable lag” has proven longer than expected, in no small part because homeowners wisely locked in super-low mortgage rates when they had the chance. But fixed-rate mortgages won’t be enough to nullify the impact of 525 basis points of interest-rate hikes in a historically short period of time. 
Given its importance to the wider economy, a robust housing market will likely be a precondition to achieving a relatively seamless transition to long-term economic expansion. The housing affordability crunch is, and looks to continue to be, a risk factor that could not only hold back the economy’s growth potential but also cause a financial crisis if left unchecked. So, add another ball to the Fed’s juggling act. More