Finance

British tech entrepreneur Mike Lynch was acquitted in June of fraud charges in a landmark trial.
He was accused by Hewlett Packard of working to artificially inflate the value of his company Autonomy when he sold it to the U.S. tech giant for $11.7 billion in 2011.
Lynch — once lauded by the U.K. press as “Britain’s Bill Gates” — is now missing after the sinking of a superyacht off the coast of Sicily.

Mike Lynch, 59, is the founder of enterprise software firm Autonomy. He was acquitted of fraud charges in June after defending himself in a trial over allegations that he artificially inflated Autonomy’s value in an $11.7 billion sale to tech giant Hewlett Packard.
Chris Ratcliffe | Bloomberg | Getty Images

LONDON — British technology entrepreneur Mike Lynch was acquitted of fraud charges in June in a landmark trial over allegations made by Hewlett Packard that he had artificially inflated the value of his company when he sold it to the U.S. enterprise tech giant for $11.7 billion in 2011.
Just two months after his acquittal, Lynch — who was once lauded by the U.K. national press as “Britain’s Bill Gates” — was reported missing Monday after the sinking of a superyacht off the coast of Sicily.

The yacht, called the Bayesian, capsized at around 4 a.m. local time while anchored off the coast of Porticello, a small fishing village located in the province of Palermo in Italy. It was struck by an unexpectedly violent storm, according to local media reports.
Lynch’s wife, Angela Bacares, is among the 15 people who were rescued after the yacht’s collapse. At least one man has died, while six people — including Lynch’s daughter Hannah — remain unaccounted for, officials have said.
Sicily’s civil protection agency told reporters late Monday that Morgan Stanley International chairman, Jonathan Bloomer, his wife Judy, and Clifford Chance lawyer Chris Morvillo are also missing.
In a separate incident Saturday, Stephen Chamberlain, the former vice president of finance at Autonomy and a co-defendant in Lynch’s trial, died after being “fatally struck” by a car while out running in Cambridgeshire, Chamberlain’s lawyer told Reuters news agency.

Who is Mike Lynch?

Lynch, 59, is the founder of enterprise software firm Autonomy. He also runs Invoke Capital, a venture capital firm focused on backing European tech startups, which he founded in 2012.

He became the target of a protracted legal battle with Hewlett Packard after the technology firm accused Lynch of inflating Autonomy’s value in an $11.7 billion sale. HP took an $8.8 billion write-down on the value of Autonomy within a year of buying it.

Lynch was extradited from Britain to the U.S. last year to stand trial over the HP allegations. He faced criminal charges, including wire fraud and conspiracy for allegedly scheming to inflate Autonomy’s revenue starting in 2009 in a bid to entice a buyer.
But two months ago, Lynch, who has long denied the accusations, was acquitted of fraud charges in a surprise victory following the trial, which lasted for three months.
During the trial, Lynch took the stand in his own defense, denying wrongdoing and telling jurors that HP botched Autonomy’s integration.
Prosecutors had alleged Lynch, along with Autonomy’s now-deceased finance executive Chamberlain, padded Autonomy’s finances in a number of ways.
These included back-dated agreements and so-called “round-tripping” deals that sought to artificially inflate Autonomy’s sales by fronting cash cash to customers through fake contracts.
Lynch told jurors that he was focused on technology-related matters at Autonomy and left accounting and money decisions to the company’s then-chief financial officer, Sushovan Hussain.

Hussain was separately convicted in the U.S. in 2018 on charges of conspiracy, wire fraud and securities fraud related to the HP deal. He was released from prison in January after serving a five-year sentence.

‘Britain’s Bill Gates’

Lynch was born in Ilford, a large town in East London, in 1965 and grew up near Chelmsford in the English county of Essex.
He attended the University of Cambridge, where he studied natural sciences, focusing on areas including electronics, mathematics and biology. After completing his undergraduate studies, Lynch completed a Ph.D. in signals processing and communications.
Toward the end of the 1980s, Lynch founded Lynett Systems Ltd., a firm which produced designs and audio products for the music industry.
A few years later, in the early 1990s, he founded a fingerprint recognition business called Cambridge Neurodynamics, which counted the South Yorkshire Police among its customers.
But his big break came in 1996 with Autonomy, which he co-founded with David Tabizel and Richard Gaunt as a spinoff from Cambridge Neurodynamics. The company scaled into one of Britain’s biggest tech firms.
Lynch held a lot of influence in the U.K. technology sphere at the height of his success, having once been dubbed Britain’s Bill Gates by the media.

He was previously on the board of U.K. broadcaster BBC. He also once served as an advisor to the British government on the Council for Science and Technology.
In his role as head of venture firm Invoke, Lynch was closely involved in helping British cybersecurity firm Darktrace and legal software startup Luminance get off the ground, backing both firms with sizable sums of cash.
Publicly-listed Darktrace, which had fended off similar allegations of inflating its revenues by U.S. short seller Quintessential Capital Management (QCM), earlier this year agreed a deal to bought out and taken private by U.S. private equity firm Thoma Bravo for $5.32 billion in cash.
Lynch previously made the Forbes’ billionaires list in 2014 and 2015, with an estimate net worth of $1 billion, according to the business news outlet. However, while facing legal costs in the dispute with HP, he dropped off the list in 2016.

Legal struggles aside, Lynch has several hobbies to keep him busy, including keeping and caring for cattle and pigs at his home in Suffolk.
“I keep rare breeds,” Lynch told LeadersIn during an interview. “I have cows that became defunct in the 1940s and pigs that no one has kept since the medieval times and none of them have any Apple products whatsoever.”
Lynch reportedly returned to his farm in Suffolk, a county in the East of England, to recover from his U.S. legal battle, the local East Anglian Times newspaper reported.
Weeks before he was reported missing, Lynch told The Times newspaper of how he feared dying in prison if found guilty over the HP allegations.
“‘If this had gone the wrong way, it would have been the end of my life as I have known it in any sense,” Lynch said in the interview with The Times.
“It’s bizarre, but now you have a second life – the question is, what do you want to do with it?” he added. More

Silicon Valley’s tech bros are having a difficult few weeks. A growing number of investors worry that artificial intelligence (AI) will not deliver the vast profits they seek. Since peaking last month the share prices of Western firms driving the ai revolution have dropped by 15%. A growing number of observers now question the limitations of large language models, which power services such as ChatGPT. Big tech firms have spent tens of billions of dollars on ai models, with even more extravagant promises of future outlays. Yet according to the latest data from the Census Bureau, only 4.8% of American companies use ai to produce goods and services, down from a high of 5.4% early this year. Roughly the same share intend to do so within the next year. More

The U.S. and China have signed agreements for cooperating on financial stability, according to a People’s Bank of China readout Monday.
The agreement was part of a meeting of the U.S.-China Financial Working Group in Shanghai Thursday and Friday.
The readout described the conversation as “professional, pragmatic, candid and constructive,” according to a CNBC translation of the Chinese.

A bank employee count China’s renminbi (RMB) or yuan notes next to U.S. dollar notes at a Kasikornbank in Bangkok, Thailand, January 26, 2023.
Athit Perawongmetha | Reuters

BEIJING — The U.S. and China last week signed agreements for cooperating on financial stability, according to a People’s Bank of China readout Monday.
The agreement was part of a meeting of the U.S.-China Financial Working Group in Shanghai on Thursday and Friday. Brent Neiman, deputy under secretary for international finance at the Treasury Department, and Xuan Changneng, deputy PBOC governor, co-lead the working group.

The two sides also exchanged a list of people to contact in the event of financial stress or risk events, the PBOC readout said. A Treasury readout was not available as of early Monday afternoon Beijing time.
Representatives from the Federal Reserve, U.S. Securities and Exchange Commission, National Financial Regulatory Administration and China Securities Regulatory Commission also attended, the PBOC said.
The readout described the conversation as “professional, pragmatic, candid and constructive,” according to a CNBC translation of the Chinese statement. Topics discussed included capital markets, cross-border payments and the two countries’ monetary policy, especially in the context of China’s recently concluded Third Plenum meeting, the PBOC readout said.

Technical experts reported on each country’s systematically important global banks, financial institutions’ operational resilience and climate risk stress testing.
China’s government bond market saw heighted volatility earlier this month amid a report of PBOC intervention. Central bank governor Pan Gongsheng said Thursday via state media that China’s financial risks have dropped, including from local government debt.

Last week, U.S. and Chinese financial institutions also met in their first roundtable meeting under the framework of the working group, the PBOC said, without providing specific names. The institutions shared potential cooperation opportunities and discussed how finance could contribute to sustained growth.
U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier He Lifeng launched economic and financial working groups in September 2023 through which Treasury officials would meet regularly at a vice minister level with the Ministry of Finance and PBOC, respectively. More

Investors may want to consider buffer ETFs to hedge the recent market volatility.
Bruce Bond, CEO of Innovator ETFs, sees an opportunity in buffer exchange-traded funds to offer some protection from the market’s downside.

“This [strategy] fits a group of people that are interested in getting exposure to the market, but not taking the full risk of the market,” Bond told CNBC’s “ETF Edge” on Wednesday.
Innovator ETFs issue monthly buffer ETFs. Their August ETF is under the ticker PAUG and offers 15% downside protection. 

“If someone wants to invest in the S&P 500, they can get right in and do that,” Bond said. “They have 15% protection on the downside, and they have 12.8% opportunity on the upside.”
Bond recommends investors hold these ETFs until the end of the year, as the funds are constructed around one-year options within the portfolio.
“At the end of the year, the options are fully valued, and then we reset it for a following year,” Bond said. “Next August, they would fully value, then we would reset it for another year.” 

Index Fund Advisors’ Mark Higgins expressed his skepticism of strategies like buffer ETFs that allow investors to hedge volatility.
“My concern would be a lot of investors are creating a very expensive solution for what is ultimately a simple problem,” the senior vice president at Index Fund Advisors said in the same segment. “They need to be more comfortable with the normal volatility of markets.”
Higgins believes there are cheaper solutions to navigate uncertainty in the markets — the cheapest being not looking at your portfolio too often and talking with your advisor before making any drastic moves out of surprise or fear. 
“I think financial advisors that are doing their job can provide the calm,” Higgins said.

Disclaimer More

China’s financial risks have dropped, including from local government debt, People’s Bank of China Governor Pan Gongsheng said in interviews with state media.
Pan also said the central bank will work with the Ministry of Finance to enable China to reach its full-year growth targets.
He said that monetary policy would remain supportive.

Pan Gongsheng, governor of the People’s Bank of China (PBOC), during the Lujiazui Forum in Shanghai, China, on Wednesday, June 19, 2024. 
Bloomberg | Bloomberg | Getty Images

BEIJING — China’s financial risks have dropped, including from local government debt, People’s Bank of China Governor Pan Gongsheng said in state media interviews published late Thursday.
Pan also said the central bank will work with the Ministry of Finance to enable China to reach its full-year growth targets. He said that monetary policy would remain supportive.

Beijing has increasingly prioritized addressing risks from high debt levels in the real estate sector, which is closely linked to local government finances. International institutions have long called on China to reduce its ballooning debt levels.
“China’s overall financial system is sound. The overall risk level has significantly declined,” Pan said in an interview released by state broadcaster CCTV. That’s according to a CNBC translation of the transcript.
He noted that “the number and debt levels of local government financing platforms are declining,” and that the cost of their debt burden has “dropped significantly.”

Local government financing vehicles emerged in China in the last two decades to enable local authorities, who couldn’t easily borrow directly, to fund infrastructure and other projects. LGFVs primarily obtained financing from shadow banking.
The lack of regulatory oversight often meant indiscriminate funding of infrastructure projects with limited financial return. That raised the debt burden on LGFVs, for which the local governments are responsible.

Coordinated efforts in the last year by local governments, financial institutions and investors have “alleviated the most pressing repayment needs of the weakest LGFVs and boosted market sentiment,” S&P Global Ratings analysts said in a July 25 report, one year since Beijing made a concerted effort to reduce LGFV risk.
However, the report said LGFV debt “remains a big problem.” The analysis found that more than 1 trillion yuan ($140 billion) of LGFV bonds are due to mature over the next couple of quarters, while such debt growth remains in the high single digits.
Exacerbating debt challenges is China’s slowing growth. The economy grew by 5% in the first half of the year, raising concerns among analysts that the country would not be able to reach its target of around 5% growth for the full year without additional stimulus.

The International Monetary Fund on Aug. 2 said in its regular review of China’s financial situation that macroeconomic policy should support domestic demand to mitigate debt risks.
“Small and medium-sized commercial and rural banks are the weak link in the large banking system,” the IMF report said, noting China has nearly 4,000 such banks that account for 25% of total banking system assets.

Addressing real estate

The number of high-risk small and medium-sized banks has dropped to half of what it was at their peak, Pan said via state media on Thursday, without sharing specific figures.
In real estate, he pointed out the mortgage down payment ratio has reached a record low of 15% in China, and that interest rates are also low. Pan noted central authorities are helping local governments with financing so they can acquire property and turn them into affordable housing or rental units.
Property and related sectors once accounted for at least one-fourth of China’s economy. But in recent years Beijing has sought to shift the country away from relying on real estate for growth, toward advanced tech and manufacturing.
Pan’s public comments come after a week of heightened volatility in the government bond market.
Earlier on Thursday, the PBOC made the rare decision to delay a rollover of its medium-term lending facility in favor of a 577.7 billion yuan capital injection via another tool called the 7-day reverse repurchase agreement. Pan highlighted that 7-day tool in June when discussing PBOC efforts to revamp its monetary policy structure.
The PBOC is scheduled Tuesday morning to release its monthly loan prime rate, another benchmark rate. The central bank cut the 1-year and 5-year loan prime rates by 10 basis points each in July, after keeping the 1-year unchanged for 10 straight months, and the 5-year unchanged for four months. More

The inflation rate has throttled back significantly from its pandemic-era highs.
Some areas of the U.S. economy have experienced deflation. Their prices have declined.
They include prices for physical goods such as cars and trucks, clothing and furniture, as well as other categories, such as airline fares and some food items.

Fotostorm | E+ | Getty Images

Inflation cooled below 3% in July 2024, the first time it dropped beneath that level in more than three years.
While many areas of the U.S. economy are disinflating — meaning their prices are still rising, though at a slower rate — some have been outright deflating. That means their prices have actually declined.

Deflation has largely occurred for physical goods, though it has also appeared in categories such as airline fares, gasoline and various food items, according to the consumer price index.
These are “micro pockets” of deflation, said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

But the deflationary dynamic is less widespread than it was earlier in the pandemic, when the unwinding of contorted supply-and-demand dynamics made it more pronounced, economists said.
“Broadly speaking, deflation for various items is increasingly less broad-based,” said Mark Zandi, chief economist at Moody’s.
Consumers shouldn’t expect a broad and sustained fall in prices across the U.S. economy. That generally doesn’t happen unless there’s a recession, economists said.

Why goods prices have fallen

“Core” goods — commodity prices excluding those related to food and energy — have declined by about 2% since July 2023, on average, according to CPI data.
They fell 0.3% during the month, from June to July 2024.
Demand for physical goods soared in the early days of the Covid-19 pandemic as consumers were confined to their homes and couldn’t spend on things such as concerts, travel or dining out.
The health crisis also snarled global supply chains, meaning goods weren’t hitting the shelves as quickly as consumers wanted them.
Such supply-and-demand dynamics drove up prices.

The environment has changed, however.
To that point, the initial pandemic-era craze of consumers fixing up their homes and upgrading their home offices has diminished, cooling prices. Supply-chain issues have also largely unwound, economists said.
Furniture and bedding prices are down more than 5% since July 2023, according to CPI data. Prices have also fallen over the past year for dishes and flatware (down about 8%), laundry equipment (-6%), nonelectric cookware (-10%), toys (-3%), and tools and hardware (-1%), according to the CPI.
Apparel prices are also down, for men’s and women’s outerwear (-12% and -4%, respectively), and infants and toddlers’ apparel (-4%), for example.
More from Personal Finance:Social Security cost-of-living adjustment may be 2.6% in 2025Here’s the inflation breakdown for July 2024A U.S. construction boom is sending rents lower
Prices for new and used vehicles have fallen by 1% and 11%, respectively, since July 2023. Car and truck rental prices have deflated about 6%.
Car prices were among the first to surge when the economy reopened broadly early in 2021, amid a shortage of semiconductor chips essential for manufacturing.
“Vehicle prices remain under pressure from improved inventory and elevated financing costs,” Sarah House and Aubrey George, economists at Wells Fargo Economics, wrote in a note in July.

Higher financing costs are the result of the Federal Reserve raising interest rates to tame high inflation. Economists expect central bank officials to start cutting rates at their next policy meeting in September.
Outside of supply-demand dynamics, the U.S. dollar’s strength relative to other global currencies has also helped rein in prices for goods, economists said. This makes it less expensive for U.S. companies to import items from overseas, since the dollar can buy more.
Long-term forces such as globalization have also helped, by increasing imports of more lower-priced goods from China, economists said.

Deflation for airfare, food and electronics

Daniel Garrido | Moment | Getty Images

Airline fares have declined about 3% over the past year, according to CPI data.
The drop is partly attributable to a decline in jet fuel prices, said Stephen Brown, deputy chief North America economist at Capital Economics. Average aviation jet fuel prices are down about 17% from last year, according to the International Air Transport Association.
Airlines have also increased the volume of seats available on domestic routes, largely by flying bigger planes, Hayley Berg, lead economist at travel site Hopper, wrote in April.
This summer, “we’ve repeatedly seen airlines slash prices on many routes for travel in the next few months,” wrote Gunnar Olson, flight deal analyst at Thrifty Traveler. “It’s led us to declare that this is the best summer ever for travel.”

Grocery prices have fallen for items such as cereal, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine and snacks, according to CPI data.
Each grocery item has its own supply-and-demand dynamics that can influence pricing, economists said. For example, apple prices have deflated almost 15% in the past year due to a supply glut.
Additionally, there have been more price promotions lately at grocery stores, with a few “major retailers recently announcing price cuts that are likely to pressure competitors’ pricing,” wrote House and George of Wells Fargo.

Other categories’ deflationary dynamics may be happening only on paper.
For example, in the CPI data, the Bureau of Labor Statistics controls for quality improvements over time. Electronics such as televisions, cellphones and computers continually get better, meaning consumers generally get more for the same amount of money.
That shows up as a price decline in the CPI data. More

Warren Buffett speaks during the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 4, 2024. 

A coincidence or master plan? Warren Buffett now owns the exact same number of shares of Apple as he does Coca-Cola after slashing the tech holding by half.
Many Buffett followers made the curious observation after a regulatory “13-F” filing Wednesday night revealed Berkshire Hathaway’s equity holdings at the end of the second quarter. It showed an identical 400 million share count in Apple and Coca-Cola, Buffett’s oldest and longest stock position.

It’s prompted some to believe that the “Oracle of Omaha” is done selling down his stake in the iPhone maker.
“If Buffett likes round numbers, he may not be planning to sell any additional shares of Apple,” said David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. “Just as Coca-Cola is a ‘permanent’ holding for Buffett, so may be Apple.”

Arrows pointing outwards

The 93-year-old legendary investor first bought 14,172,500 shares of Coca-Cola in 1988 and increased his stake over the next few years to 100 million shares by 1994. So the investor has kept his Coca-Cola stake steady at essentially the same round-number share count for 30 years.
Due to two rounds of 2-for-1 stock splits in 2006 and 2012, Berkshire’s Coca-Cola holding became 400 million shares.
Buffett said he discovered the iconic soft drink when he was only 6 years old. In 1936, Buffett started buying Cokes six at a time for 25 cents each from his family grocery store to sell around the neighborhood for five cents more. Buffett said it was then he realized the “extraordinary consumer attractiveness and commercial possibilities of the product.”

Slashing Apple stake
Investing in tech high flyers such as Apple appears to defy Buffett’s long-held value investing principles, but the famed investor has treated it as a consumer products company like Coca-Cola rather than a technology investment.
Buffett has touted the loyal customer base of the iPhone, saying people would give up their cars before they give up their smartphones. He even called Apple the second-most important business after Berkshire’s cluster of insurers.
So it was shocking to some when it was revealed that Berkshire dumped more than 49% of its stake in the iPhone maker in the second quarter.
Many suspected that it was part of portfolio management or a bigger overall market view, and not a judgement on the future prospects of Apple. The sale brought down Apple’s weighting in Berkshire’s portfolio to about 30% from almost 50% at the end of last year.
And with it settled at this round number, it appears to be in a spot that Buffett favors for his most cherished and longest-held equities.
Still, some said it could just be a pure coincidence.
“I don’t think Buffett thinks that way,” said Bill Stone, chief investment officer at Glenview Trust Co. and a Berkshire shareholder.
But at Berkshire’s annual meeting in May, Buffett did compare the two and referenced the holding period for both was unlimited.
“We own Coca-Cola, which is a wonderful business,” Buffett said. “And we own Apple, which is an even better business, and we will own, unless something really extraordinary happens, we will own Apple and American Express and Coca-Cola.”

Don’t miss these insights from CNBC PRO More

China’s latest efforts to stem a bond market rally shows that authorities are worried about financial stability, analysts said.
The sovereign bond market is “the backbone of the financial sector, even if you run a bank-driven sector” like China or Europe, said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis.
Because of rapidly falling yields, Chinese insurance companies have parked much of their assets in the bond markets after guaranteeing fixed return rates for life insurance and other products, said Edmund Goh, head of China fixed income at Abrdn. That’s a major problem for the industry.

People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 
Jason Lee | Reuters

BEIJING — China’s latest efforts to stem a bond market rally reveals wider worries among authorities about financial stability, analysts said.
Slow economic growth and tight capital controls have concentrated domestic funds in China’s government bond market, one of the largest in the world. Bloomberg reported Monday, citing sources, that regulators told commercial banks in Jiangxi province not to settle their purchases of government bonds.

Futures showed prices for the 10-year Chinese government bond tumbled to their lowest in nearly a month on Monday, before recovering modestly, according to Wind Information data. Prices move inversely to yields.
“The sovereign bond market is the backbone of the financial sector, even if you run a bank-driven sector like China [or] Europe,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis.
She pointed out that in contrast to electronic trading of the bonds by retail investors or asset managers in Europe, banks and insurers tend to hold the government bonds, which implies nominal losses if prices fluctuate significantly.

The 10-year Chinese government bond yield has abruptly turned higher in recent days, after falling all year to a record low in early August, according to Wind Information data going back to 2010.
At around 2.2%, the Chinese 10-year yield remains far lower than the U.S. 10-year Treasury yield of nearly 4% or higher. The gap reflects how the U.S. Federal Reserve has kept interest rates high, while the People’s Bank of China has been lowering rates in the face of tepid domestic demand.

“The problem is not what it shows [about a weak economy],” Garcia-Herrero said, but “what it means for financial stability.”
“They have [Silicon Valley Bank] in mind, so what that means, corrections in sovereign bond yields having a big impact on your sovereign balance sheet,” she continued, adding that “the potential problem is worse than SVB and that’s why they’re very worried.”
Silicon Valley Bank collapsed in March 2023 in one of the largest U.S. bank failures in recent times. The company’s struggles were largely blamed on shifts in capital allocation due to aggressive rate hikes by the Fed.
PBoC Governor Pan Gongsheng said in a speech in June that central banks need to learn from the Silicon Valley Bank incident, to “promptly correct and block the accumulation of financial market risks.” He called for special attention to the “maturity rate mismatch and interest rate risk of some non-bank entities holding a large number of medium and long-term bonds.” That’s according to CNBC’s translation of his Chinese.
Zerlina Zeng, head of Asia credit strategy, CreditSights, noted that the PBoC has increased intervention in the government bond market, from increased regulatory scrutiny of bond market trading to guidance for state-owned banks to sell Chinese government bonds.
The PBoC has sought to “maintain a steep yield curve and manage risks arising from the concentrated holding of long-end CGB bonds by city and rural commercial banks and non-bank financial institutions,” she said in a statement.
“We do not think that the intention of the PBOC’s bond market intervention was to engineer higher interest rates, but to guide banks and non-bank financials institutions to extend credit to the real economy rather than parking funds in bond investments,” Zeng said.

Insurance hole in the ‘trillions’

Stability has long been important for Chinese regulators. Even if yields are expected to move lower, the speed of price increases pose concerns.
That’s especially an issue for Chinese insurance companies that have parked much of their assets in the bond market — after guaranteeing fixed return rates for life insurance and other products, said Edmund Goh, head of China fixed income at Abrdn.
That contrasts with how in other countries, insurance companies can sell products whose returns can change depending on market conditions and extra investment, he said.
“With the rapid decline in bond yields, that would affect the capital adequacy of insurance companies. It’s a huge part of the financial system,” Goh added, estimating it could require “trillions” of yuan to cover. One trillion yuan is about $140 billion USD.
“If bond yields move lower slower it will really give some breathing space to the insurance industry.”

Why the bond market?

Insurance companies and institutional investors have piled into China’s bond market partly due to a lack of investment options in the country. The real estate market has slumped, while the stock market has struggled to recover from multi-year lows.
Those factors make the PBoC’s bond market intervention far more consequential than Beijing’s other interventions, including in foreign exchange, said Natixis’ Garcia-Herrero. “It’s very dangerous what they’re doing, because losses could be massive.”
“Basically I just worry that it will get out of control,” she said. “This is happening because there [are] no other investment alternatives. Gold or sovereign bonds, that’s it. A country the size of China, with only these two options, there’s no way you can avoid a bubble. The solution isn’t there unless you open the capital account.”
The PBoC did not immediately respond to a request for comment.
China has pursued an economic model dominated by the state, with gradual efforts to introduce more market forces over the last few decades. This state-led model has steered many investors in the past to believe Beijing will step in to stem losses, no matter what.
The news of a local bank canceling a bond settlement “came as a shock to most people” and “shows the desperation on the Chinese government side,” said abrdn’s Goh.
But Goh said he didn’t think it was enough to affect foreign investor confidence. He had expected the PBoC to intervene in the bond market in some form.

Beijing’s yield woes

Beijing has publicly expressed concerns over the speed of bond buying, which has rapidly lowered yields.
In July, the PBoC-affiliated “Financial News” criticized the rush to buy Chinese government bonds as “shorting” the economy. The outlet later diluted the headline to say such actions were a “disturbance,” according to CNBC’s translation of the Chinese outlet.
Chang Le, fixed-income senior strategist at ChinaAMC, pointed out that the Chinese 10-year yield has typically fluctuated in a 20 basis-point range around the medium-term lending facility, one of the PBoC’s benchmark interest rates. But this year the yield hit 30 basis points below the MLF, he said, indicating the accumulation of interest rate risk.
The potential for gains has driven up demand for the bonds, after such buying already outpaced supply earlier this year, he said. The PBoC has repeatedly warned of risks while trying to maintain financial stability by tackling the lack of bond supply.
Low yields, however, also reflect expectations of slower growth.
“I think poor credit growth is one of the reasons why bond yields have moved lower,” Goh said. If smaller banks “could find good quality borrowers, I’m sure they would rather lend money to them.”
Loan data released late Tuesday showed that new yuan loans categorized under “total social financing” fell in July for the first time since 2005.
“The latest volatility in China’s domestic bond market underscores the need for reforms that channel market forces toward efficient credit allocation,” said Charles Chang, managing director at S&P Global Ratings.
“Measures that enhance market diversity and discipline may help reinforce the PBOC’s periodic actions,” Chang added. “Reforms in the corporate bond market, in particular, could facilitate Beijing’s pursuit of more efficient economic growth that incurs less debt over the long term.” More