Finance

The Biden administration’s long-awaited executive order on U.S. investments in Chinese companies leaves open plenty of questions on how it will be implemented.
Its 45-day public comment period gives U.S. investors significant potential to influence any final regulation, analysts said.
But the industry and political developments mark a shift in the overall risk environment.

The U.S. and Chinese flags hang outside the Goldman Sachs headquarters in New York on Dec. 16, 2008.
Chris Hondros | Getty Images News | Getty Images

BEIJING — The Biden administration’s long-awaited executive order on U.S. investments in Chinese companies leaves open plenty of questions on how it will be implemented.
Its 45-day public comment period gives U.S. investors significant potential to influence any final regulation, analysts said.

“The executive order obviously gives an outline of what the program’s scope is going to be like,” said Brian P. Curran, a partner, global regulatory at law firm Hogan Lovells in Washington, D.C.
“It’s not even a proposed rule. It’s not a final rule.”
U.S. President Joe Biden on Wednesday signed an executive order aimed at restricting U.S. investments into Chinese semiconductor, quantum computing and artificial intelligence companies over national security concerns.
Treasury Secretary Janet Yellen is mostly responsible for determining the details. Her department has published a fact sheet and a lengthy “Advance Notice of Proposed Rulemaking” with specific questions it would like more information on.

Businesses can share information confidentially as needed, according to the advanced notice, which is set to be formally published on Monday. The notice said it is only a means for sharing the Treasury’s initial considerations, and will be followed by draft regulations.

“The final scope of the restriction, to be defined by the Treasury Department after public consultations, including with U.S. investors in China, will be critical for the enforcement of the order,” said Winston Ma, an adjunct professor at NYU Law and a former managing director of CIC.

So what’s banned?

This week’s announcements don’t explicitly prohibit U.S. investments into Chinese businesses, but the documents indicate what policymakers are focused on.
The U.S. transactions potentially covered include:

Acquisition of equity interests such as via mergers and acquisitions, private equity and venture capital;
Greenfield investment;
Joint ventures;
Certain debt financing transactions.

The forthcoming regulations are not set to take effect retroactively, the Treasury said. But the Treasury said it may request information about transactions completed or agreed to since the issuance of the executive order.
“We’ve been advising clients leading up to the issuance of the executive order, it does make sense to look at your exposure to the kinds of transactions that have the potential to be covered by the regime,” Curran said.
Any plans to invest in the sectors named in the public materials should come under additional consideration of the risks and how to manage them, he said.

Here are the sectors of concern:
Semiconductors — Treasury is considering a ban on tech that enables production or improvement of advanced integrated circuits; design, fabrication and packaging capabilities for advanced integrated circuits; and installation, or sale to third-party customers, of certain supercomputers.
Treasury is also considering a notification requirement for transactions involving the design, fabrication and packaging of other integrated circuits.
The U.S. government is concerned about tech that will “underpin military innovations,” the advance notice said.
Quantum computing — Treasury is considering a ban on transactions involving the production of quantum computers, sensors and systems.
However, the Treasury said it is considering not to require investors to notify it of transactions in this sector.
The U.S. government is concerned about quantum information technologies that could “compromise encryption and other cybersecurity controls and jeopardize military communications,” the notice said.
Artificial intelligence — Treasury is considering a ban on U.S. investments into the development of software using AI systems designed for exclusive military, government intelligence or mass-surveillance use.
The Treasury said it may also require U.S. persons to notify it if undertaking transactions involved with AI systems for cybersecurity applications, digital forensics tools, control of robotic systems and facial recognition, among others.
However, the Treasury said its intent is not to touch entities that develop AI systems only for consumer applications and other uses that don’t have national security consequences.

What’s allowed

The Treasury said it expects to exclude certain investments into publicly-traded securities or exchange-traded funds.
The following transactions are not set to be included by forthcoming regulation:

University-to-university research collaborations
Contracts to buy raw materials
Intellectual property licensing
Bank lending and payment processing
Underwriting
Debt rating
Prime brokerage
Global custody
Stock research

What’s next

The Treasury is asking for written comments on its advanced notice by Sept. 28.
The notice includes wide-ranging requests for data into investment trends. It also asked questions about effective threshold requirements and definitions, and details about the resulting burdens for U.S. investors: “If such limitations existed or were required, how might investment firms change how they raise capital from U.S. investors, if at all?”
Among the many other questions, the Treasury is asking for areas within the three overarching categories where U.S. investments into Chinese entities would “provide a strategic benefit to the United States, such that continuing such investment would benefit, and not impair, U.S. national security.”
“There is a lot of opportunity for the public’s comment for what should be covered what should not be covered,” said Anne Salladin, a partner, global regulatory, at Hogan Lovells. “It strikes me as an extraordinarily good opportunity for clients to weigh in on that front.”
“This has been under consideration by the administration for a couple of years now,” she said. “One of the things that’s important is to take [the regulatory process] at a slow speed to understand what the ramifications are for U.S. businesses.”

The kind of law that Biden’s [planning], it’s small but it’s important because once the state starts to meddle with these things it creates more dramatic possibilities.

Jonathan Levy
Professor, University of Chicago

Given the lengthy process, forthcoming regulations aren’t expected to take effect until next year.
However, the niche industry of China-based venture capitalists — which raise funds from U.S. investors to invest in Chinese start-ups, many tech-focused — is already struggling.
Fewer than 300 unique U.S.-based investors have participated in China-based VC deals since 2016 each year, with just 64 participants so far this year, according to Pitchbook.
China VC deal activity in the second quarter continued a recent decline, to the lowest since the first quarter of 2017, according to Pitchbook.
The data showed China VC deal activity with U.S.-only investor participation in artificial intelligence has fallen since the first quarter of 2022. Pitchbook recorded barely any such deals in quantum computing since 2021, while semiconductors saw moderate activity through the first half of this year.

Read more about China from CNBC Pro

The industry and political developments also mark a shift in the overall risk environment.
“The kind of law that Biden’s [planning], it’s small but it’s important because once the state starts to meddle with these things it creates more dramatic possibilities,” said Jonathan Levy, a University of Chicago economic history professor and author of “Ages of American Capitalism: A History of the United States.”
While he said he doesn’t have any sources within the Biden administration, Levy said the latest developments signal to him that the U.S. government doesn’t want the new economic relationship with China “to consist of U.S. investment funds investing in Chinese high tech because we think high tech is kind of a strategic interest.”
“I also think more fundamentally, I don’t know what kind of relationship they have in mind, [but] there’s going to be a new order. We want to shape to some degree what that [order] looks like.”
— CNBC’s Amanda Macias contributed to this report. More

Employees prepare a window display at a Kate Spade store in The Shoppes at Marina Bay Sands shopping mall in Singapore, June 19, 2020.
Roslan Rahman | AFP | Getty Images

Check out the companies making headlines during midday trading Thursday.
Disney — Shares of the media giant jumped 5.3%. Late Wednesday, the company said it would raise the price on its ad-free streaming tier in October and that it would crack down on password sharing. Disney reported a 7.4% decline in subscriber count last quarter, however. It also recorded $2.65 billion in one-time charges and impairments, dragging the company to a rare quarterly net loss.

AppLovin — Shares popped more than 24.1% on Thursday. On Wednesday, the game developer posted solid second-quarter results and shared stronger-than-expected revenue guidance for the current period. AppLovin said it anticipates revenue to range between $780 million and $800 million, ahead of the $741 million expected by analysts, per Refinitiv. Earnings for the recent quarter came in at 22 cents, versus the 7 cents anticipated.
Alibaba — U.S.-traded shares rose 4.3% Thursday after the Chinese company beat analysts’ expectations and posted its biggest year-over-year revenue growth since 2021. In the June quarter, the company posted revenue of 234.16 billion yuan versus 224.92 billion yuan expected, per Refinitiv.
Capri, Tapestry — Capri soared more than 55.4%, while luxury company Tapestry slid 16% during Thursday’s trading session. The moves come after Thursday’s announcement that Tapestry, which is behind the brands Coach and Kate Spade, is set to acquire Capri Holdings in a roughly $8.5 billion deal. Capri owns the Versace, Jimmy Choo and Michael Kors brands.
Wynn Resorts — Shares of the hotel and casino company climbed 3% after Wynn topped analysts’ estimates in its second-quarter results. Late Wednesday, the company reported 91 cents in adjusted earnings per share on $1.6 billion of revenue. Analysts surveyed by Refinitiv were expecting 59 cents per share on $1.54 billion of revenue.
Global Payments — The financial technology stock added nearly 3% after Jefferies upgraded the company to buy from hold, citing long-term margin expansion and revenue growth as consumer spending increases. The analyst assigned a price target of $145, which implies a 16.9% gain from Wednesday’s close.

Penn Entertainment — Shares dropped about 3.9% on Thursday. Truist downgraded shares to hold from buy in a note from Wednesday evening, citing uncertainty around the company’s partnership with Disney’s ESPN to relaunch its sports betting app.
Roblox — Shares of the gaming company added 3.2% after an upgrade to outperform from Wedbush. Analyst Nick McKay remains optimistic on Roblox’s long-term trajectory, even though the company recently missed analysts’ estimates on the top and bottom lines in the second quarter.
Fleetcor Technologies — Shares of the global business payments company popped 4.5%. Several Wall Street firms hiked their price targets on Fleetcor on Wednesday in response to the company’s top and bottom-line beat for the second quarter. Earlier this week, Fleetcor posted adjusted earnings of $4.19 per share on revenue of $948.2 million. Analysts polled by FactSet called for earnings of $4.17 per share on revenue of $945 million.
— CNBC’s Brian Evans, Hakyung Kim, Samantha Subin, Jesse Pound, Yun Li and Alex Harring contributed reporting. More

A shopper looking at Michael Kors handbags in Macy’s flagship store in New York.
Scott Mlyn | CNBC

Check out the companies making headlines before the bell:
Capri, Tapestry — Capri soared more than 57%, while Tapestry slid 3.2% in premarket trading. The moves come after luxury company Tapestry, which is behind the brands Coach and Kate Spade, announced Thursday it would acquire Capri Holdings in a roughly $8.5 billion deal. Capri owns the Versace, Jimmy Choo and Michael Kors brands. 

AppLovin — AppLovin shares popped 25.8% in early morning trading after the company posted strong second-quarter results and optimistic third-quarter revenue guidance. The game developer said it expects $780 million to $800 million in revenue for the third quarter, exceeding the $741 million expected by analysts. AppLovin reported earnings of 22 cents per share for the second quarter, while analysts expected 7 cents, according to Refinitiv.
Sonos — Sonos popped 5% after beating analysts’ expectations in its latest quarterly results. The wireless speaker maker reported a loss of 18 cents per share on revenue of $373 million for its fiscal third quarter. Analysts polled by Refinitiv had expected a 20 cent loss per share on revenue of $334 million. Sonos also raised its full-year EBITDA guidance.
Alibaba Group — The U.S. listed shares of Alibaba rose 3.8% after the Chinese tech company beat analysts’ expectations in its quarter ending June. It reported non-GAAP per-share diluted earnings of CNY17.37, more than the consensus estimate of CNY14.59, according to StreetAccount. It posted revenue of CNY234.16 billion, exceeding the CNY224.75 billion forecast. 
Wynn Resorts — Wynn Resorts gained 2.2% after exceeding expectations for its second quarter on the top and bottom lines. The casino operator posted adjusted earnings of 91 cents per share on revenue of $1.6 billion. Analysts polled by Refinitiv had anticipated 59 cents on revenue of $1.54 billion.
Walt Disney — Shares of the media giant gained about 2% in premarket trading after the company said it would raise the price on its ad-free streaming tier in October and that it would crack down on password sharing. Disney reported a 7.4% decline in subscriber count last quarter, however. It also recorded $2.65 billion in one-time charges and impairments, dragging the company to a rare quarterly net loss.

Trade Desk — Shares of the advertising technology company moved up less than 1% after a second-quarter report that beat expectations on the top and bottom lines. Trade Desk generated 28 cents in adjusted earnings per share on $464 million of revenue. Analysts surveyed by Refinitiv were expecting 26 cents per share on $455 million of revenue. The company also said it expected revenue of at least $485 million in the third quarter, above the $480 million projected by analysts.
Six Flags Entertainment — Shares slid 3% after Six Flags reported second-quarter earnings that missed estimates. The amusement park company reported earnings of 25 cents per share on revenue of $444.0 million. Analysts polled by Refinitiv had anticipated per-share earnings of 78 cents on revenue of $459.0 million.
Illumina — Illumina dropped 4.6% after reporting weaker-than-expected guidance. The DNA sequencing company surpassed expectations for the second quarter, but expects some weakness in the second half of the year because of a slow recovery in China and a more cautious consumer. Illumina forecasts full-year revenue to rise 1% year over year, lower than the 7.1% rise analysts polled by Refinitiv were anticipating. 
— CNBC’s Yun Li, Jesse Pound and Pia Singh contributed reporting More

Try a little, and it is never too hard to argue that the stockmarket looks risky and a crash must be coming. But in the long run such arguments are usually best ignored. Since 1900 American shares have posted an average real return of 6.4% a year. Over three decades, that would transform the purchasing power of $1,000 into $6,400. Bonds, the main alternative, do not come close. With an average historical return of 1.7% a year, they would generate a measly $1,700. Cash would do worse still.The lesson for today’s investors, many of whom were caught out by this year’s bull market, might seem obvious. Forget about a downturn that may or may not materialise. Just buy and hold stocks, and wait for returns that will erase any number of brief dips. Unfortunately, there is a catch. What matters today is not historical returns but prospective ones. And on that measure, shares now look more expensive—and thus lower-yielding—when compared with bonds than they have in decades.Start with why stocks tend to outperform bonds. A share is a claim on a firm’s earnings stretching into the future, which makes returns inherently uncertain. A bond, meanwhile, is a vow to pay a fixed stream of interest payments and then return the principal. The borrower might go bust; changes to interest rates or inflation might alter the value of the cash flows. But the share is the riskier prospect, meaning it needs to offer a higher return. The gap between the two is the “equity risk premium”—the 4.7 percentage points a year that stocks have historically earned over bonds.What of the next few years? Estimating the return on a bond is easy: it is just its yield to maturity. Gauging stock returns is trickier, but a quick proxy is given by the “earnings yield” (or expected earnings for the coming year, divided by share price). Combine the two for ten-year Treasury bonds and the s&p 500, and you have a crude measure of the equity risk premium that looks forward rather than back. Over the past year, it has plummeted (see chart).Now consider the equity risk premium’s moving parts: earnings, Treasury yields and share prices. Both expected earnings and Treasury yields are roughly where they were in October, when share prices hit a trough. But since then shares have risen a lot, shrinking their earnings yield and bringing it closer to the “safe” Treasury yield. This might mean three things. Investors might believe earnings are about to start growing fast, perhaps because of an ai-fuelled productivity boom. They might think earnings have become less likely to disappoint, justifying a lower risk premium. Or they might fear that Treasuries—the benchmark against which stocks are measured—are now more risky.Sustained earnings growth is the dream scenario. The second option, though, is less rosy: that investors have let their revived animal spirits get ahead of them. Ed Cole of Man Group, an asset manager, argues the squeezed equity risk premium is a bet on a “soft landing”, in which central bankers quash inflation without a recession. This has become easier to envisage as price rises have cooled and most countries have so far avoided downturns. Yet surveys of manufacturers still point to recession in that sector, and the full dampening effect of rate rises may not yet have been felt. The third possibility is that, rather than cooing over stocks, investors are shunning the alternative. Last year was the worst for bonds in both America (where they lost 31% in real terms) and across developed markets (a 34% loss) in over a century.After that, says Sharon Bell of Goldman Sachs, a bank, it is unsurprising if some investors are wary of bonds and inclined to splurge on shares, especially if they believe inflation has moved structurally higher—something shares, as claims on nominal earnings, protect against, whereas bonds, deriving value from fixed coupons, do not. At the same time, governments are set to issue ever more debt to cover ageing populations, defence spending and cutting carbon emissions, while central banks have disappeared as buyers. Higher bond yields, and a mechanically lower equity risk premium, will be the result. This would imply a regime change, to one where the equity risk premium has shifted lower for the long term (rather than temporarily, to be corrected by a fall in share prices). Whatever the reason for the squeeze, investors have now placed their bets on rising profits. In a recent analysis, Duncan Lamont of Schroders, an investment firm, compared returns on the s&p 500 going back to 1871 with the yield gap against ten-year Treasuries. He found the relationship “has not been helpful in giving a steer on short-term market movements”. Over the longer term, though, there is a clear link. For stocks starting with a low yield gap to do well over ten years, “a near-condition has been real earnings growth”. Animal spirits can only take you so far before earnings must deliver. They would not have to slip far for even a long-term investor to conclude today’s market is too pricey. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Fifteen years ago, in August 2008, the world’s credit-rating agencies were in the midst of the worst period in their history. The global financial crisis was about to reach its zenith. It was already clear that the allegiances of rating agencies—beholden to both investors in and issuers of debt—had been stretched beyond a healthy limit. The survival of their business model looked uncertain.In a turn-up for the books, rating agencies have more than survived. Borrowers’ demands to have their homework marked have surged. During the market boom of 2021, Moody’s Investors Service, one of the “big three” agencies, made almost $4bn in revenues, compared with $1.8bn at its peak in 2007. The “issuer pays” business model, in which borrowers are on the hook for having their own bonds rated, creating a conflict of interest for the agencies, has limped on, too, despite endless demands for change. Yet even though they have gone largely unreformed, rating agencies have been on a good run in recent years.Ironically, rating agencies often spring into the limelight when they are least important. That is what happened on August 1st when Fitch, another of the big three, reduced the American government’s rating from aaa to aa+. After all, agencies do not offer superior expertise when it comes to the analysis of rich countries’ fiscal health. The economic data that they observe is widely watched by everyone else. In 2015 American money-market funds were liberated from having to use credit ratings as their only metric for deciding whether to invest in securities. Funds can now determine, for instance, that a security represents a “minimal credit risk”. This means that downgrades to the ratings of Treasuries matter even less than before.Companies that provide ratings nevertheless hold two important roles. First, they aggregate, sort and publish information about borrowers, which investors can analyse and use to compare them. Second, they act as a certification stamp on assets. Bank regulators use credit ratings to determine the capital requirements for lenders; funds use them to decide what they should and should not hold. Rating agencies have a difficult job: not attracting negative attention is about as good an outcome as they can reasonably expect. During the deep financial distress early in the covid-19 pandemic, they quietly managed just that, as the Committee on Capital Markets Regulation, a panel of researchers from academia, banking and business, concluded when later assessing their performance. In 2020, 198 companies rated by s&p Global Ratings defaulted, the most since the global financial crisis. Whereas 11 investment-grade firms failed to repay their debts in 2009, all of the defaults in the first year of the pandemic happened among companies already labelled as riskier speculative grades. The firms did take flak during the demise of Silicon Valley Bank (svb) in March. Both Moody’s and s&p had given svb investment-grade ratings. But the bank’s collapse, which was facilitated by social media, instant messaging and digital-finance apps, was unusually rapid. And the ratings that were awarded to the bank—of a3 and bbb respectively—were far from the highest notches available. Indeed, a downgrade warning from Moody’s the week before svb’s collapse was one of the triggers that revealed the parlous state of the bank’s funding. Rating agencies can be criticised for having been asleep at the wheel, or for prompting the crisis, but hardly both.Research also demonstrates a continued role for agencies in rating emerging-market government debt. One paper by the Bank for International Settlements, a club of central banks, shows that rating changes still have a big impact on credit-default-swap markets in the emerging world, suggesting that investors retain respect for agencies’ judgments. Another, published by the World Bank, calculates that the effect of credit ratings may even have risen since the global financial crisis. A one-notch improvement in a developing economy’s credit rating in comparison with similar countries raised capital inflows by around 0.6% of gdp in 2009-17, about a third more than in the preceding decade.Rating agencies are a lightening rod for criticism. Firms that attempt to be the arbiters of risk are bound to get stuff wrong—or worse, play a causal role—during unexpected blow-ups. Even though problems exposed during the financial crisis remain unfixed, rating agencies are still crucial to the working of capital markets. Recently, they have even been doing a pretty good job.■Read more from Buttonwood, our columnist on financial markets:Meet America’s disguised property investors (Aug 3rd)Investors are seized by optimism. Can the bull market last? (Jul 25th)The dollar’s dip will not become a sustained decline (Jul 20th)Also: How the Buttonwood column got its name More

Last year was tough for all investors, but ones that hang out on Reddit suffered more than most. The Roundhill Meme exchange-traded fund, which tracks meme stocks, fell from $70 a share to $25. Fellow travellers in the covid-19 bubble, including non-fungible tokens (which use blockchains to sell digital artefacts) and spacs (blank-cheque initial public offerings), also collapsed, leaving apes (retail investors) with few options but to hodl (hold on for dear life) or cut their losses. Proclamations of the death of meme investing may, however, have been hasty. Meme stocks are now shooting past the rest of the market, which has itself surged. The meme index is up by nearly 60% this year, outperforming the s&p 500 by 40 or so percentage points. Returns on individual holdings are more bonkers still, even if some stocks have risen from a low base. Shares in SoFi, a fintech firm, have doubled; the market capitalisation of Palantir, a software-maker, has nearly tripled; stocks in Carvana, a car retailer, are up by 800%. Apes are going all in, some with their entire 401k retirement plans. There is no clearer evidence of a bull market.Some of the rallies, at a stretch, even make sense. Redditors view good news as a burst of rocket fuel for share prices. Carvana, which was teetering on the edge of bankruptcy, has averted a crisis by putting up more collateral in exchange for a debt cut. Palantir is riding the ai wave. A judge in Delaware recently rejected plans to further dilute shareholders in amc, a cinema chain and one of the early More

It can sometimes be difficult to wrap one’s head around the world’s second biggest economy. But three headlines in the space of two days—August 8th and 9th—captured the predicament that China now faces. Exports fell by more than 14% in dollar terms. Country Garden, one of the country’s biggest property developers, missed two coupon payments on its dollar bonds. And annual consumer-price inflation turned negative. In sum: China’s export boom is long over. Its property slump is not. And, therefore, deflation beckons.Ever since China imposed its first brutally effective lockdown on Wuhan in early 2020, its economy has been out of sync with the rest of the world’s. When the country abandoned its ruinous zero-covid controls at the end of last year, many economists hoped that the exceptionalism would continue, and that China would stage a rapid recovery, even as other big economies courted recession. The expectation also raised a fear. Analysts worried that China’s renewed appetite for commodities and other goods would put upward pressure on global inflation, making the lives of central bankers elsewhere even harder. Neither the hopes for growth nor the fears of inflation have been realised.Instead, China is now struggling to meet the government’s modest growth target of 5% for 2023 (“modest” because last year provides such a low base for comparison). Far from becoming an inflationary force in the global economy, the country is now flirting with falling prices. According to the data released on August 9th, consumer prices dropped by 0.3% in July compared with a year earlier. Viewed in isolation, that is no great cause for alarm. A solitary month of mild deflation is not sufficient to turn China into the next Japan. Consumer inflation has been negative before—in 30 months this century, and as recently as 2021. Moreover, July’s figure says almost as much about pork’s past as it does about China’s economic future. Prices for the country’s favourite meat were unusually high in July last year. They have since fallen by a quarter, contributing to the negative headline number. But consumer prices are not the only ones in the trough. The prices charged by producers (at the proverbial “factory gate”) have now declined year-on-year for ten months in a row. Those fetched by China’s exports dropped by more than 10% in July, according to estimates by analysts at ubs, a bank. And the gdp deflator, a broad measure that covers all the goods and services produced in the country, fell by 1.4% in the second quarter compared with a year earlier. That is only its sixth decline this century and its steepest since 2009. Many economists foresaw the drop in pork and food prices. They assumed, however, that it would be offset by a faster increase in the cost of services, as China’s economy gathered steam. They also expected that the property market would stabilise, which would prop up demand for other goods, both upstream (in products such as steel and construction equipment) and down (in those such as furniture and household appliances).After a brief revival in the early months of the year, property sales are faltering again. Those in 30 big cities fell by 28% in July compared with the year before. Declines in rents and the prices of household appliances both contributed to the negative turn in consumer prices in July. Country Garden also blamed “a deterioration in sales”, among other things, for its failure to pay its bondholders on the expected date this month. The company has a 30-day grace period before it falls into default.China’s government is also now up against the clock. In recent weeks a rotating cast of committees, ministries and commissions has unveiled a variety of measures to improve the economy. A 31-point plan to encourage private enterprise announced that the government would remove barriers to entry and strengthen intellectual-property rights. A 20-point plan to expand consumption touted cheaper tickets for scenic spots, among other goodies. A 26-point plan to increase labour mobility promised to make it easier for rural migrants to settle in cities (and easier for foreign businesspeople to get visas).Yet if the property market does not improve, deflationary pressure will persist. The longer it lasts, the more difficult it will be to reverse. Thus a more forceful fiscal and monetary push is required. ubs calculates that the government’s deficit, broadly defined, shrank in the first half of this year, providing less support to the economy. Meanwhile, the central bank has barely cut interest rates, reducing its short-term policy rate from 2% to 1.9%. That is not enough to keep up with the decline in inflation, which means the real cost of borrowing is rising (see chart). In order to defeat deflation, the budget deficit will have to widen. And the central bank’s efforts will need to go beyond 0.1 point. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Country Garden, one of the largest non-state-owned developers by sales, has reportedly missed two coupon payments on dollar bonds that were due Sunday.
Meanwhile, Dalian Wanda saw its senior vice president Liu Haibo taken away by police after the company’s internal anti-corruption probe, Reuters reported.

Pictured here are residential buildings developed by Country Garden Holdings Co. in Baoding, Hebei province, China, on Tuesday, Aug. 1, 2023.
Qilai Shen | Bloomberg | Getty Images

BEIJING — Two years after Evergrande’s debt troubles, worries about China’s real estate sector are coming to the forefront again.
Country Garden, one of the largest non-state-owned developers by sales, has reportedly missed two coupon payments on dollar bonds that were due Sunday. Citing the firm, Reuters said the bonds in question are notes due in February 2026 and August 2030.

Country Garden did not immediately respond to CNBC’s request for comment on the reports.
Meanwhile, Dalian Wanda saw its senior vice president Liu Haibo taken away by police after the company’s internal anti-corruption probe, Reuters reported Tuesday, citing a source familiar with the matter. Dalian Wanda did not immediately respond to a CNBC request for comment.
Hong Kong-listed shares of Country Garden closed more than 1.7% lower on Wednesday, after sharp declines earlier in the week.
“With China’s total home sales in 1H23 down year-on-year, falling home prices month-on-month across the past few months and faltering economic growth, another developer default (and an extremely large one, at that) is perhaps the last thing the Chinese authorities need right now,” according to Sandra Chow, co-head of Asia Pacific Research for CreditSights, which is owned by Fitch Ratings.

We are concerned that as big cities lift local property restrictions, it will drain up demand in low tier cities, which account for 70% of national new home sales volume…

An investor relations representative for Country Garden didn’t deny media reports on the missed payments and didn’t clarify the company’s payment plans, Chow and a team said in a note late Tuesday.

The report noted negative market sentiment spillover to other non-state-owned developers such as Longfor. Shares of Longfor closed about 0.8% higher Wednesday in Hong Kong after trading more than 1% lower during the day.
“Overall homebuyer sentiment is likely to also suffer as a result,” the analysts said.

Home prices in focus

China’s massive real estate market has remained sluggish despite recent policy signals. In late July, its top leaders indicated a shift toward greater support for the real estate sector, paving the way for local governments to implement specific policies.
Uncertainties remain around the sensitive topic of home prices.
“We are concerned that as big cities lift local property restrictions, it will drain up demand in low tier cities, which account for 70% of national new home sales volume and are the real drivers of commodity demand and construction activity,” Nomura analysts said in an Aug. 4 report.

“We are also concerned that merely easing restrictions on existing home sales without lifting restrictions on home purchase may add supply and depress home prices,” the report said.
For the last several years, Chinese authorities have attempted to curb debt-fueled speculation in the country’s massive — and hot — real estate market. In 2020, Beijing cracked down on developers’ high reliance on debt for growth.
Highly indebted Evergrande defaulted in late 2021, followed by a few others.

With that faltering confidence, the private property sector will likely remain a drag on the country’s growth for the rest of the year.

Rhodium Group

Last year, many people halted mortgage payments after a delay in receiving the homes they had bought. Most apartments in China are sold before they are completed.
“After watching developers default and fail to complete housing for other families, few Chinese families are willing to shell out in advance for new housing,” Rhodium Group analysts said in a note this week. “With that faltering confidence, the private property sector will likely remain a drag on the country’s growth for the rest of the year.”
The analysts pointed out that new starts in residential construction have fallen for 28 months straight.
Real estate and related industries have accounted for about a quarter of China’s economy.
Redmond Wong, market strategist at Saxo Markets Hong Kong said Country Garden will find it “very difficult, if not impossible” to refinance — and other Chinese developers would face difficulties raising money as a result, especially offshore.
He pointed out that since China started its deleveraging campaign in 2016, it is very unlikely the state would step in to bail out real estate developers. “The most likely way for Country Garden or Chinese developers in similar situation to avoid defaults will be asset sales,” Wong added.

State-owned developers stand out

China’s state-owned developers have generally fared better in the latest real estate slump.
Country Garden has had the worst sales performance so far this year among China’s 10 largest real estate developers, with a 39% year-on-year decline in sales, according to data published by E-House Research Institute.

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Vanke was the only other one of the 10 developers to post a year-on-year sales decline for January to July period, down 9%, the research showed.
The other names were mostly state-owned, such as Poly Development, which ranked first with a 10% sales increase during that time, according to the analysis.
But that’s had little impact on home prices overall.
Nomura pointed out in a separate report that average existing home prices dropped by 2% in July from the prior month, worse than the 1.4% decline in June, based on a Beike Research Institute data sample of 25 large cities.
The July level is 13.4% below a historical high two years ago, the Nomura report said.

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The seven-day moving average of new home sales as of Aug. 6 was down by 49% versus 2019, according to Nomura. That’s worse than the 34.4% decline for the prior week.
Far more Chinese household wealth has been locked up in property than is the case in many other countries.
Tight capital controls also make it difficult for people in China to invest outside the country, while the local financial markets are less mature than those of developed countries.
“Right now people are reassessing what in the future will be a good investment,” Liqian Ren, leader of quantitative investment at WisdomTree, said in an interview last week.
“Since the beginning of last year, people are starting to realize real estate prices are not going up,” Ren said. “I don’t think it’s the lack of confidence. For many people they still have money in the bank.”
— CNBC’s Hui Jie Lim contributed to this report. More