Finance

In understanding China’s persistent consumption slowdown, analysts are looking at the connection between China’s real estate slump and local governments’ financing.
“Macroeconomic headwinds continue to hinder the revenue-generating power of China’s local governments, particularly as related to taxes and land sales,” said Wenyin Huang, director at S&P Global Ratings.
Often overlooked is that fact that ” investment is creating weak nominal GDP growth outcomes – pressuring the corporate sector to reduce its wage bill and leading to a sharp rise in debt ratios,” Morgan Stanley’s chief Asia economists Chetan Ahya and Robin Xing said in a September report.

Local governments in China are still building highways, bridges and railways, as pictured here in Jiangxi province on Sept. 6, 2024.
Cfoto | Future Publishing | Getty Images

BEIJING — China’s persistent consumption slowdown traces back to the country’s real estate slump, and its deep ties to local government finances — and debt.
The bulk of Chinese household wealth went into real estate in the last two decades, before Beijing began cracking down on developers’ high reliance on debt in 2020.

Now, the values of those properties are falling, and developers have reduced land purchases. That’s cutting significantly into local government revenue, especially at the district and county level, according to S&P Global Ratings analysts.
They predicted that from June of this year, local government finances will take three to five years to recover to a healthy state.
But “delays in revenue recovery could prolong attempts to stabilize debt, which continues to rise,” Wenyin Huang, director at S&P Global Ratings, said in a statement Friday to CNBC.

“Macroeconomic headwinds continue to hinder the revenue-generating power of China’s local governments, particularly as related to taxes and land sales,” she said.
Huang had previously told CNBC that the financial accounts of local governments have suffered from the drop in land sales revenue for at least two or three years, while tax and fee cuts since 2018 have reduced operating revenue by an average of 10% across the country.

This year, local authorities are trying hard to recoup revenue, giving already strained businesses little reason to hire or increase salaries — and adding to consumers’ uncertainty about future income.

Clawing back tax revenue

As officials dig into historical records for potential missteps by businesses and governments, dozens of companies in China disclosed in stock exchange filings this year that they had received notices from local authorities to pay back taxes tied to operations as far back as 1994.
They stated amounts ranging from 10 million yuan to 500 million yuan ($1.41 million to $70.49 million), covering unpaid consumption taxes, undeclared exported goods, late payment fees and other fees.
Even in the relatively affluent eastern province of Zhejiang, NingBo BoHui Chemical Technology said regional tax authorities in March ordered it to repay 300 million yuan ($42.3 million) in revised consumption taxes, as result of a “recategorization” of the aromatics-derivatives extraction equipment it had produced since July 2023.
Jiangsu, Shandong, Shanghai, and Zhejiang — some of China’s top provinces in tax and non-tax revenue generation — see non-tax revenue growth exceeding 15% year-on-year growth in the first half of 2024, S&P’s Huang said. “This reflects the government’s efforts to diversify its revenue streams, particularly as its other major sources of income face increasing challenges.”
The development has caused an uproar online and damaged already fragile business confidence. Since June 2023, the CKGSB Business Conditions Index, a monthly survey of Chinese businesses, has hovered around the 50 level that indicates contraction or expansion. The index fell to 48.6 in August.
Retail sales have only modestly picked up from their slowest levels since the Covid-19 pandemic.
The pressure to recoup taxes from years ago “really shows how desperate they are to find new sources of revenue,” Camille Boullenois, an associate director at Rhodium Group, told CNBC. 
China’s national taxation administration in June acknowledged some local governments had issued such notices but said they were routine measures “in line with law and regulations.”
The administration denied allegations of “nationwide, industrywide, targeted tax inspections,” and said there is no plan to “retrospectively investigate” unpaid taxes. That’s according to CNBC’s translation of Chinese text on the administration’s website.
“Revenue is the key issue that should be improved,” Laura Li, sector lead for S&P Global Ratings’ China infrastructure team, told CNBC earlier this year.
“A lot of government spending is a lot of so-called needed spending,” such as education and civil servant salaries, she said. “They cannot cut down [on it] unlike the expenditure for land development.”

Debate on how to spur growth

A straightforward way to boost revenue is with growth. But as Chinese authorities prioritize efforts to reduce debt levels, it’s been tough to shift policy away from a years-long focus on investment, to growth driven by consumption, analyst reports show.
“What is overlooked is the fact that investment is creating weak nominal GDP growth outcomes —pressuring the corporate sector to reduce its wage bill and leading to a sharp rise in debt ratios,” Morgan Stanley chief Asia economists Chetan Ahya and Robin Xing said in a September report, alongside a team.
“The longer the pivot is delayed, the louder calls will become for easing to prevent a situation where control over inflation and property price expectations is lost,” they said.
The economists pointed out how similar deleveraging efforts from 2012 to 2016 also resulted in a drag on growth, ultimately sending debt-to-GDP ratios higher.
“The same dynamic is playing out in this cycle,” they said. Since 2021, the debt-to-GDP has climbed by almost 30 percentage points to 310% of GDP in the second quarter of 2024 — and is set to climb further to 312% by the end of this year, according to Morgan Stanley.
They added that GDP is expected to rise by 4.5% from a year ago in the third quarter, “moving away” from the official target of around 5% growth.

The ‘grey rhino’ for banks

Major policy changes are tough, especially in China’s rigid state-dominated system.
Underlying the investment-led focus is a complex interconnection of local government-affiliated business entities that have taken on significant levels of debt to fund public infrastructure projects — which often bear limited financial returns.
Known as local government financing vehicles, the sector is a “bigger grey rhino than real estate,” at least for banks, Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said during a webinar last week. “Grey rhino” is a metaphor for high-likelihood and high-impact risks that are being overlooked.
Natixis’ research showed that Chinese banks are more exposed to local government financial vehicle loans than those of real estate developers and mortgages.
“Nobody knows if there is an effective way that can solve this issue quickly,” S&P’s Li said of the LGFV problems.
“What the government’s trying to do is to buy time to solve the most imminent liquidity challenges so that they can still maintain overall stability of the financial system,” she said. “But at the same time the central and local government[s], they don’t have sufficient resources to solve the problem at once.” More

On a recent visit to his hometown of Laixi, in eastern China, Guo Ping received a shock: the local government had sold off a number of state-owned assets, including two reservoirs. The small city’s finances, as well as those in the neighbouring port of Qingdao, were under strain, forcing officials to come up with new sources of revenue. This meant hawking even large bits of regional infrastructure. The sales seemed to be part of what Mr Guo, who asked to use a pseudonym, views as a gradual economic deterioration. More

Retail sales rose by 2.1% in August from a year ago, missing expectations of 2.5% growth among economists polled by Reuters. That was also slower than the 2.7% increase in July.
Industrial production rose by 4.5% in August from a year ago, lagging the 4.8% growth forecast by Reuters. That also marked a slowdown from a 5.1% rise in July.
Fixed asset investment rose by 3.4% for the January to August period, slower than the forecast of 3.5% growth.

Pictured here is a shopping mall in Hangzhou, China, on Sept. 9, 2024.
Nurphoto | Nurphoto | Getty Images

BEIJING — China’s retail sales, industrial production and urban investment in August all grew slower than expected, according to National Bureau of Statistics data released Saturday.
Retail sales rose by 2.1% in August from a year ago, missing expectations of 2.5% growth among economists polled by Reuters. That was also slower than the 2.7% increase in July.

Online sales of physical goods rose by just under 1% in August from a year ago, according to CNBC calculations of official data.
Industrial production rose by 4.5% in August from a year ago, lagging the 4.8% growth forecast by Reuters. That also marked a slowdown from a 5.1% rise in July.
Despite the miss, industrial production still grew faster than retail sales, “reflecting the structural imbalance imbedded in China’s economy, with stronger supply and weaker demand,” said Darius Tang, associate director, corporates, at Fitch Bohua.
The firm expects the Chinese government will likely announce more, gradual stimulus in the fourth quarter to support consumption and real estate, Tang said.

Fixed asset investment rose by 3.4% for the January to August period, slower than the forecast of 3.5% growth.

The urban unemployment rate was 5.3% in August, an uptick from 5.2% in July.
Among fixed asset investment, infrastructure and manufacturing slowed in growth on a year-to-date basis in August, compared to July. Investment in real estate fell by 10.2% for the year through August, the same pace of decline as of July.
National Bureau of Statistics spokesperson Liu Aihua attributed the uptick in unemployment to the impact of graduation season. But she said that stabilizing employment requires more work.
This year, the statistics bureau has been releasing the unemployment rate for people ages 16 to 24 who aren’t in school a few days after the wider jobless release. The youth unemployment rate in July was 17.1%.
“We should be aware that the adverse impacts arising from the changes in the external environment are increasing,” the bureau said in an English-language statement. A “sustained economic recovery is still confronted with multiple difficulties and challenges.”
This weekend, Saturday is a working day in China in exchange for a holiday on Monday. The country is set to celebrate the Mid-Autumn Festival, also known as the Mooncake Festival, from Sunday to Tuesday. The next and final major public holiday in China this year falls in early October.

Growth in the world’s second-largest economy has slowed after a disappointing recovery from Covid-19 lockdowns. Policymakers have yet to announce large-scale stimulus, while acknowledging that domestic demand is insufficient.
Other data released in the last week has underscored persistent weakness in consumption.
Imports rose by just 0.5% in August from a year ago, customs data showed, missing expectations. Exports rose by 8.7%, beating expectations.
Beijing’s consumer price index for August also disappointed analysts’ expectations with an increase of 0.6% from a year ago. More

September is historically weak for U.S. stocks.
However, long-term investors likely shouldn’t sell out of the market.
The seasonal weakness was tied to banking and farming practices before the early 1900s. Nowadays, it’s likely entrenched in investor psychology, experts said.

Traders on the New York Stock Exchange floor on Sept. 9, 2024.
Spencer Platt | Getty Images News | Getty Images

September historically hasn’t been kind to stock investors.
Since 1926, U.S. large-cap stocks have lost an average 0.9% in September, according to data from Morningstar Direct.  

September is the only month during that nearly century-long period in which investors experienced an average loss, according to Morningstar. They saw a profit in all other months.

For example, February saw a positive 0.4% return, on average. While that performance is the second-lowest among the 12 months, is still eclipses September’s by 1.3 percentage points. July reigns supreme with an average return of almost 2%.
The monthly weakness also holds true when looking just at more recent periods.
For example, the S&P 500 stock index has lost an average 1.7% in September since 2000 — the worst monthly performance by more than a percentage point, according to FactSet.
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Historically, the last two weeks of September are generally the weakest part of the month, said Abby Yoder, U.S. equity strategist at J.P Morgan Private Bank.
“Starting next week is when it would [tend to get] get a little bit more negative, in terms of seasonality,” Yoder said.

Trying to time the market is a losing bet

Alistair Berg | Digitalvision | Getty Images

Investors holding their money in stocks for the long-term shouldn’t bail, Yoder said.
Trying to time the market is almost always a losing bet, according to financial experts. That’s because it’s impossible to know when good and bad days will occur.
For example, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, according to a Wells Fargo analysis published earlier this year.

Plus, average large-cap U.S. stock returns were positive in September for half the years since 1926, according to Morningstar. Put another way: They were only negative half of the time.
As an illustration, investors who sold out of the market in September 2010 would have foregone a 9% return that month — the best monthly performer that year, according to Morningstar.
“It’s all just random,” said Edward McQuarrie, a professor emeritus at Santa Clara University who studies historical investment returns. “Stocks are volatile.”

Don’t put faith in market maxims

Similarly, investors shouldn’t necessarily accept market maxims as truisms, experts said.
For example, the popular saying “sell in May and go away” would have investors sell out of stocks in May and buy back in November. The thinking: November to April is the best rolling six-month period for stocks.

It’s all just random.

Edward McQuarrie
professor emeritus at Santa Clara University

“History shows this trading theory has flaws,” wrote Fidelity Investments in April. “More often than not, stocks tend to record gains throughout the year, on average. Thus, selling in May generally doesn’t make a lot of sense.”
Since 2000, the S&P 500 saw gains of 1.1% from May to October, on average, over the six-month period, according to FactSet. The stock index gained 4.8% from November to April.

Historical reason for September weakness

There is a historical reason why stocks often fared poorly in September prior to the early 1900s, McQuarrie said.
It ties into 19th century agriculture, banking practices and the scarcity of money, he said.
At the time, New York City had achieved dominance as a powerful banking hub, especially after the Civil War. Deposits flowed to New York from the rest of the country during the year as farmers planted their crops and farmer purchases accumulated in local banks, which couldn’t put the funds to good use locally, McQuarrie said.

New York banks would lend funds to stock speculators to earn a return on those deposits. In the early fall, country banks drew down balances in New York to pay farmers for their crops. Speculators had to sell their stock as New York banks redeemed the loans, leading stock prices to fall, McQuarrie said.
“The banking system was very different,” he said. “It was systematic, almost annual and money always got tight in September.”
The cycle ended in the early 20th century with the creation of the Federal Reserve, the U.S. central bank, McQuarrie said.

‘It gets in the psyche’

Golero | E+ | Getty Images

September’s losing streak is somewhat more baffling in modern times, experts said.
Investor psychology is perhaps the most significant factor, they said.
“I think there’s an element of these narratives feeding on themselves,” said Yoder of J.P Morgan. “It’s the same concept as a recession narrative begetting a recession. It gets in the psyche.”
There are likely other contributing elements, she said.
For example, mutual funds generally sell stock to lock in profits and losses for tax purposes — so-called “tax loss harvesting” — near the end of the fiscal year, typically around Oct. 31. Funds often start giving capital-gains tax estimates to investors in October.
Mutual funds seem to be “pulling forward” those tax-oriented stock sales into September more often, Yoder said.

I think there’s an element of these narratives feeding on themselves.

Abby Yoder
U.S. equity strategist at J.P Morgan Private Bank

Investor uncertainty around the outcome of the U.S. presidential election in November and next week’s Federal Reserve policy meeting, during which officials are expected to cut interest rates for the first time since the Covid-19 pandemic began, may exacerbate weakness this September, Yoder said.
“Markets don’t like uncertainty,” she said.
But ultimately, “I don’t think anybody has a good explanation for why the pattern continues, other than the psychological one,” McQuarrie said. More

Hedge fund billionaire John Paulson, who made a name for himself by betting against the housing market during the financial crisis and who is today a prominent supporter of former President Donald Trump, said there could be a collapse in the financial markets and a recession if Vice President Kamala Harris’ proposed tax plans become a reality.
“They want to raise the corporate tax rate from 21 to 28%, they want to raise the capital gains tax from 20% to 39% and then they want to add a tax on unrealized capital gains of 25%,” Paulson said in an interview on CNBC’s “Money Movers” on Friday with Sara Eisen. “I think if they implement those policies, we’ll see a crash in the markets, no question about it.”

The Democratic presidential nominee proposed a 28% tax on long-term capital gains for any household with an annual income of $1 million or more, lower than the 39.6% rate that President Joe Biden laid out in his 2025 fiscal-year budget.
Meanwhile, Harris previously endorsed the tax increases proposed by Biden that include a 25% tax on unrealized gains for households worth at least $100 million, known as the billionaire minimum tax. However, people close to the Harris campaign, including investor Mark Cuban, have said she has no interest in taxing unrealized gains and there are doubts if any such plan could make it through Congress.
Paulson shot to fame and made a fortune after taking a massive bet against mortgage bonds using credit default swaps before the financial crisis. The founder and president of family office Paulson & Co. has been a major donor to Trump’s 2024 presidential campaign, reportedly advising him on the idea of building a U.S. sovereign wealth fund.
The 68-year-old investor believes the economy could quickly tip into a recession as well if the specific plan to tax unrealized gains were to be implemented.
“If the Biden-Harris team does come in, and they were to implement what’s on their platform, which is a tax on unrealized gain, that’s going to cause massive selling of homes, of stocks, of companies, of art and that could … put us immediately into a recession, so hopefully that if they are elected, they won’t pursue that,” he said.

Some Wall Street economists and strategists do believe raising the corporate tax rate from the 21% where Trump lowered them could hit S&P 500 company earnings and weigh on share prices, but none from the major firms have said it would cause a pullback to the magnitude that Paulson is describing.
There is also some concern that Trump’s economic plans would not be as market-friendly as Paulson believes with proposed tariffs reigniting some inflation and more tax cuts expanding the budget deficit.
Paulson, who Trump has reportedly talked about as Treasury secretary in a second administration, said in the CNBC interview he does not believe that tariffs would be inflationary if targeted correctly. The investor also said the lower taxes would spark economic gains that help raise revenues and close the deficit gap.

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Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to family members or beneficiaries without owing estate or gift taxes.
But that benefit is set to expire at the end of 2025.
That means ultra-wealthy investors are considering their inheritances and the trillions of dollars set to pass from older to younger generations in the coming years.

Dimensions | E+ | Getty Images

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
The tightening presidential race has touched off a wave of tax planning by ultra-wealthy investors, especially given fears of a higher estate tax, according to advisors and tax attorneys.

The scheduled “sunset” of a generous provision in the estate tax next year has taken on new urgency as the odds of a divided government or Democratic president have increased, tax experts say. Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to family members or beneficiaries without owing estate or gift taxes.
The benefit is scheduled to expire at the end of 2025 along with the other individual provisions of the 2017 Tax Cuts and Jobs Act. If it expires, the estate and gift tax exemption will fall by about half. Individuals will only be able to gift about $6 million to $7 million, and that rises to $12 million to $14 million for couples. Any assets transferred above those amounts will be subject to the 40% transfer tax.

Wealth advisors and tax attorneys said expectations of a Republican sweep in the first half of the year led many wealthy Americans to take a wait-and-see approach, since former President Donald Trump wants to extend the 2017 tax cuts for individuals.
Vice President Kamala Harris has advocated higher taxes for those those making more than $400,000.
With Harris and Trump essentially tied in the polls, the odds have increased that the estate tax benefits will expire — either through gridlock or tax hikes.

“There is a little increased urgency now,” said Pam Lucina, chief fiduciary officer for Northern Trust and head of its trust and advisory practice. “Some people have been holding off until now.”
The sunset of the exemption, and the response by the wealthy, has broad ripple effects on inheritances and the trillions of dollars set to pass from older to younger generations in the coming years. More than $84 trillion is expected to be transferred to younger generations in the coming decades, and the estate tax “cliff” is set to accelerate many of those gifts this year and next.
The biggest question facing wealthy families is how much to give, and when, in advance of any estate tax change. If they do nothing, and the estate exemption drops, they risk owing taxes on estates over $14 million if they die. On the other hand, if they give away the maximum now, and the estate tax provisions are extended, they may wind up with “givers’ remorse” — which comes when donors gave away money unnecessarily due to fears of tax changes that never happened.
“With givers’ remorse, we want to make sure clients look at the different scenarios,” Lucina said. “Will they need a lifestyle change? If it’s an irrevocable gift, can they afford it?”
Advisors say clients should make sure their gift decisions are driven as much by family dynamics and personalities as they are by taxes. While giving the maximum of $27.22 million may make sense today from a tax perspective, it may not always make sense from a family perspective.
“The first thing we do is separate out those individuals who were going to make the gift anyway from those who have never done it and are only motivated to do it now because of the sunset,” said Mark Parthemer, chief wealth strategist and regional director of Florida for Glenmede. “While it may be a once-in-a-lifetime opportunity as it relates to the exemption, it’s not the only thing. We want individuals to have peace of mind regardless of how it plays out.”
Parthemer said today’s wealthy parents and grandparents need to make sure they are psychologically comfortable making large gifts.
“They’re asking ‘What if I live so long I outlive my money,'” Parthemer said. “We can do the math and figure out what makes sense. But there is also a psychological component to that. As people age, a lot of us become more concerned about our financial independence, regardless of whether the math tells us we’re independent or not.”

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Some families may also fear their kids aren’t ready for such large amounts. Wealthy families who planned to make big gifts years from now are feeling pressure from the tax change to go ahead with it now.
“Especially with families with younger children, a primary concern is having donors’ remorse,” said Ann Bjerke, head of the advanced planning group at UBS.
Advisors say families can structure their gifts to be flexible — gifting to a spouse first, for instance, before it goes to the kids. Or setting up trusts that trickle out the money over time and reduce the changes of “sudden wealth syndrome” for kids.
For families that plan to take advantage of the estate tax window, however, the time is now. It can take months to draft and file transfers. During a similar tax cliff in 2010, so many families rushed to process gifts and set up trusts that attorneys became overwhelmed and many clients were left stranded. Advisors say today’s gifters face the same risk if they wait until after the election.
“We’re already seeing some attorneys start to turn away new clients,” Lucina said.
Another risk with rushing is trouble with the IRS. Parthemer said the IRS recently unwound a strategy used by one couple, where the husband used his exemption to gift his kids money and gave his wife funds to regift using her own exemption.
“Both gifts were attributed to the wealthy spouse, triggering a gift tax,” he said. “You need to have time to measure twice and cut once, as they say.”
While advisors and tax attorneys said their wealthy clients are also calling them about other tax proposals in the campaign — from higher capital gains and corporate taxes to taxing unrealized gains — the estate tax sunset is far and away the most pressing and likely change.
“In the past month, inquiries have accelerated over the [estate exemption],” Bjerke said. “A lot of people were sitting on the sidelines waiting to implement their wealth-planning strategies. Now, more people are executing.”

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Fitch expects that the Fed will enact cumulative 250 basis points of cuts in 10 moves, spread over 25 months
In Asia, the rating agency expects more cuts in China, while forcasting that the Bank of Japan has more room to raise rates.

Chris Wattie | Reuters

The U.S. Federal Reserve’s easing cycle will be “mild” by historical standards when it starts cutting rates at its September policy meeting, ratings agency Fitch said in a note.
In its global economic outlook report for September, Fitch forecast 25-basis-point cut each at the central bank’s September and December meeting, before it slashes rates by 125 basis points in 2025 and 75 basis points in 2026.

This will add up to a total 250 basis points of cuts in 10 moves across 25 months, Fitch noted, adding that the median cut from peak rates to bottom in previous Fed easing cycles going up to the mid-1950s was 470 basis points, with a median duration of 8 months.
“One reason we expect Fed easing to proceed at a relatively gentle pace is that there is still work to do on inflation,” the report said.
This is because CPI inflation is still above the Fed’s stated inflation target of 2%.
Fitch also pointed out that the recent decline in the core inflation — which excludes prices of food and energy — rate mostly reflected the drop in automobile prices, which may not last.
U.S. inflation in August declined to its lowest level since February 2021, according to a Labor Department report Wednesday.

The consumer price index rose 2.5% year on year in August, coming in lower than the 2.6% expected by Dow Jones and hitting its lowest rate of increase in 3½ years. On a month-on-month basis, inflation rose 0.2% from July.
Core CPI, which excludes volatile food and energy prices, rose 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast.
Fitch also noted that “The inflation challenges faced by the Fed over the past three and a half years are also likely to engender caution among FOMC members. It took far longer than anticipated to tame inflation and gaps have been revealed in central banks’ understanding of what drives inflation.”

Dovish China, hawkish Japan

In Asia, Fitch expects that rate cuts will continue in China, pointing out that the People’s Bank of China’s rate cut in July took market participants by surprise. The PBOC cut the 1-year MLF rate to 2.3% from 2.5% in July.
“[Expected] Fed rate cuts and the recent weakening of the US dollar has opened up some room for the PBOC to cut rates further,” the report said, adding that that deflationary pressures were becoming entrenched in China.
Fitch pointed out that “Producer prices, export prices and house prices are all falling and bond yields have been declining. Core CPI inflation has fallen to just 0.3% and we have lowered our CPI forecasts.”
It now expects China’s inflation rate to bet at 0.5% in 2024, down from 0.8% in its June outlook report.
The ratings agency forecast an additional 10 basis points of cuts in 2024, and another 20 basis points of cuts in 2025 for China.
On the other hand, Fitch noted that “The [Bank of Japan] is bucking the global trend of policy easing and hiked rates more aggressively than we had anticipated in July. This reflects its growing conviction that reflation is now firmly entrenched.”
With core inflation above the BOJ’s target for 23 straight months and companies prepared to grant “ongoing” and “sizable” wages, Fitch said that the situation was quite different from the “lost decade” in the 1990s when wages failed to grow amid persistent deflation.
This plays into the BOJ’s goal of a “virtuous wage-price cycle” — which boosts the BOJ’s confidence that it can continue to raise rates towards neutral settings.
Fitch expects the BOJ’s benchmark policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, adding “we expect the policy rate to reach 1% by end-2026, above consensus. A more hawkish BOJ could continue to have global ramifications.” More

China’s plan to boost consumption by encouraging trade-ins has yet to show significant results since it was announced in late July, businesses said.
“We are not aware of companies that have seen this translate, since the promulgation of the measures, into concrete incentives on the ground in China,” Jens Eskelund, president of the EU Chamber of Commerce in China, told reporters earlier this week.
Several major cities and provinces have only in the last few weeks announced details on how the trade-in program would work for residents.

A banner plays up China’s trade-in policy at a home goods expo in Qingdao, Shandong province, China, on June 1, 2024.
Nurphoto | Nurphoto | Getty Images

BEIJING — China’s plan to boost consumption by encouraging trade-ins has yet to show significant results, several businesses told CNBC.
China in July announced allocation of 300 billion yuan ($41.5 billion) in ultra-long special government bonds to expand its existing trade-in and equipment upgrade policy, in its bid to boost consumption.

Half that amount is aimed at subsidizing trade-ins of cars, home appliances and other bigger-ticket consumer goods, while the rest is for supporting upgrades of large equipment such as elevators. Local governments can use the ultra-long government bonds to subsidize certain purchases by consumers and businesses.
While the targeted move to boost consumption surprised analysts, the measures still require China’s cautious consumer to spend some money up front and have a used product to trade in.
“We are not aware of companies that have seen this translate, since the promulgation of the measures, into concrete incentives on the ground in China,” Jens Eskelund, president of the EU Chamber of Commerce in China, told reporters earlier this week.
“Our encouragement would be that now we focus on execution [for] visible, measurable results,” he said.

The chamber’s analysis found that the central government policy’s total budgeted amount is about 210 yuan ($29.50) per capita. Given that “only a portion of [it] will reach household consumers, it is unlikely that this scheme alone will significantly increase domestic consumption,” organization said in a report published Wednesday.

Analysts are not overly optimistic about the extent to which the trade-in program could support retail sales.
UBS Investment Bank Chief China Economist Tao Wang said in July that the new trade-in program could support the equivalent of about 0.3% of retail sales in 2023.
China’s retail sales for August are due Saturday morning. Retail sales in June rose by 2%, the slowest since the Covid-19 pandemic, while July sales growth saw a modest improvement at 2.7%.
New energy vehicle sales, however, surged by nearly 37% in July despite a drop in overall passenger car sales, according to industry data.
The trade-in policy more than doubled existing subsidies for new energy and traditional fuel-powered vehicle purchases to 20,000 yuan and 15,000 yuan per car, respectively.

Waiting for elevator modernization

In March and April, China had already started to roll out policy broadly supporting equipment upgrades and consumer product trade-ins. Around the measures announced in late July, officials noted 800,000 elevators in China had been used for more than 15 years, and 170,000 of those had been in service for more than 20 years.
Two major foreign elevator companies told CNBC in August they had yet to see specific new orders under the new program for equipment upgrades.
“We are still at the very early stage on this whole program right now,” said Sally Loh, president of China operations for U.S. elevator company Otis. Businesses know about the overall monetary amount, she said, but “as to how much is being allocated to elevators, this hasn’t really been clarified.”
“We do see that definitely there is a lot of interest by the local government to make sure this kind of funding from the central government is being effectively deployed to the residential buildings that most need this replacement,” she said, noting the announced funding “really helps to resolve some of the financing issues that we saw were a big concern for our customers.”
Otis’ new equipment sales fell by double digits in China during the second quarter, according to an earnings release. It did not break out revenue by region.
Finnish elevator Kone said its Greater China revenue fell by more than 15% in the first six months of 2024 year on year to 1.28 billion euros ($1.41 billion), dragged down by the property slump. That was still more than 20% of Kone’s total revenue in the first half.
“Definitely we’re excited about the opportunity. We’ve been excited about it for a long time,” said Ilkka Hara, CFO of Kone. “This is more of a catalyst that will enable many to make the choice.”
“I definitely see opportunity in the future,” he said. “How quickly it materializes, that’s hard to say.”
Hara pointed out that new elevators can save more energy versus older models, and said Kone plans to grow its elevator service business in addition to unit sales.

Secondhand market outlook

Central government policies can take time to get implemented locally. Several major cities and provinces have only in the last few weeks announced details on how the trade-in program would work for residents.
For ATRenew, which operates stores for processing secondhand goods, the ultra-long government bonds program to support trade-ins does not have a short-term impact, said Rex Chen, the company’s CFO.
But he told CNBC the policy supports the longer-term development of the secondhand goods market, and he hopes there will be more government support for building trade-in kiosks in neighborhood communities.
ATRenew focuses on pricing and resale of selected secondhand products — the company claims it became Apple’s global trade-in partner last year.
In specific categories and regions — such as mobile phones and laptops in parts of Guangdong province — trade-in volume did rise this summer, Chen said.
Trade-in orders coming from e-commerce platform JD.com have risen by more than 50% year on year since the new policy was released, according to ATRenew, which did not specify the time frame.
— CNBC’s Sonia Heng contributed to this report. More