Finance

The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap.
The analysts did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth that would require more support from debt.
Nomura estimates a funding gap of about 6 trillion yuan ($895.52 billion) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue.

During the first four months of the year, investment in real estate development fell by 2.7% from a year ago. Pictured here is a project in Qingzhou, Shandong province, on May 15, 2022.
CFOTO | Future Publishing | Getty Images

BEIJING — The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap.
“The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue,” Ting Lu, chief China economist at Nomura, and a team said in a report last week.

They estimate a funding gap of about 6 trillion yuan ($895.52 billion) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue.
“Much of the incoming ‘stimulus measures’, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap,” the Nomura analysts said.
It’s that 3.5 trillion yuan figure they expect will be hard to fill, and they listed several measures, from using fiscal deposits to increasing borrowing, that could be used to make up the shortfall.
Economic data for April showed weakening growth as Covid controls took a toll. Premier Li Keqiang said during a rare nationwide meeting last week that in some respects, the difficulties were greater than in 2020.

Even before the latest Covid outbreak, land sales, a significant source of local government revenue, have plunged following Beijing’s crackdown on real estate developers’ high reliance on debt. Local governments are also responsible for implementing tax cuts and refunds that Beijing has announced to support growth.

The Japanese bank and analysts from other firms did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth that would require more support from debt.
Excluding tax cuts and refunds, the Ministry of Finance said local fiscal revenue grew by 5.4% during the first four months of the year from a year ago. Eight of China’s 31 province-level regions saw a drop in fiscal revenue during that time, the ministry said, without naming them.
Incomplete data for the period from Wind Information showed the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin posted year-on-year declines in fiscal revenue for the first four months of the year. Tianjin was the worst with a 27% decline.
In 2021, Tibet was the only province-level region to see a decline in fiscal revenue, according to Wind.
It’s “important to notice that the decline of fiscal revenue happened not only in cities under lockdown,” said Zhiwei Zhang, president and chief economist, Pinpoint Asset Management.
“Many cities without Omicron outbreaks also suffered, as their economies are linked to those currently under lockdown,” Zhang said in an email in mid-May. “The economic costs are not limited to a small number of cities, it is a national problem.”

Shenzhen sees fiscal revenue plunge

Since March, mainland China has sought to control its worst Covid outbreak in two years with stay-home orders and travel restrictions in many parts of the country, notably Shanghai and the surrounding region.
Although financial data isn’t readily available for many Chinese cities, the southern tech hub of Shenzhen released figures showing a 44% year-on-year drop in fiscal revenue in April to 25.53 billion yuan. That followed a 7% year-on-year decline in March to 22.95 billion yuan.
“The local governments face mounting fiscal pressure. Their expenditure is rising but revenue dropping,” Zhang said. “Land sales are down sharply as well. I think the central government may have to revise the fiscal budget and issue more debt to help the local governments.”
Beijing in March already announced an increase in transfer of funds from the central to local governments. When asked in May whether that would be expanded, the Ministry of Finance noted some funding for next year would be transferred ahead of time to help local governments with tax refunds and cuts this year.

Pressure to spend on infrastructure

To Susan Chu, senior director at S&P Global Ratings, she’s more concerned about the deficit, the decline in revenue versus spending. Land sales don’t create deficit pressure, she said, noting that “more pressure will come from infrastructure spending, tax cut allocation.”
A “widening deficit means there’s a chance of more borrowing or debt burden in the future,” Chu said in a phone interview earlier this month. While she doesn’t expect off-budget borrowing will come back, she said it is an important signal to watch for assessing risk.
In late April, Chinese President Xi Jinping called for a nationwide push to develop infrastructure ranging from waterways to cloud computing infrastructure. It was not clear at what scale or timeframe the projects would be constructed.

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“This year, one consequence will be that there will be less money left over for infrastructure expenditure,” Jack Yuan, VP and senior analyst at Moody’s Investors Service, said in a phone interview earlier this month.
He said since land sales have been an important source for local government spending on infrastructure, a drop in land sales and limited increase in special purpose bonds would restrict financing options for infrastructure spending.
“We expect the debt to continue to climb this year as a result of these economic pressures,” Yuan said, noting it remains to be seen how Beijing decides to balance economic growth with debt levels this year.

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Terra has launched a new version of its failed luna cryptocurrency, which plunged to $0 this month.
At its height, the old luna — now known as “luna classic” — had a circulating supply of over $40 billion.
The revived luna token is already trading on exchanges. But its price is crashing.

Cryptocurrency markets have seen a steep sell-off after the collapse of controversial blockchain project Terra.
Dan Kitwood | Getty Images

A new version of the collapsed luna cryptocurrency is already live on major exchanges — and it’s gotten off to a bad start.
Last week, supporters of the Terra blockchain project voted to revive luna but not terraUSD, a so-called “stablecoin” that plunged below its intended peg to the dollar, causing panic in the crypto market.

TerraUSD, or UST, is what’s known as an algorithmic stablecoin. It relied on code and a sister token, luna, to maintain a $1 value. But as digital currency prices fell, investors fled the stablecoin, sending UST tumbling — and taking luna down with it.
At its height, the old luna — now known as “luna classic” — had a circulating supply of over $40 billion.
Now, luna has a new iteration, which investors are calling Terra 2.0. It is already trading on exchanges including Bybit, Kucoin and Huobi. Binance, the world’s largest crypto exchange, says it will list luna on Tuesday.
Its launch has not gone well.
After reaching a peak of $19.53 on Saturday, luna dropped as low as $4.39 just hours later, according to CoinGecko data. It has since settled at a price of around $5.90.

Analysts are deeply skeptical about the chances of Terra’s revived blockchain being a success. It will have to compete with a host of other so-called “Layer 1” networks — the infrastructure that underpins cryptocurrencies like ethereum, solana and cardano.
Terra is distributing luna tokens through what’s called an “airdrop.” Most will go to those who held luna classic and UST before their collapse, in an effort to compensate investors.
But many investors burned by the debacle are unlikely to trust Terra a second time, experts say. Vijay Ayyar, head of international at crypto exchange Luno, said there’s been a “massive loss in confidence” in the project.

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Asked recently about Amazon’s sprawling network of warehouses Brian Olsavsky, the firm’s finance chief, did not mince words. “We have too much space right now.” Faced with a surge in demand during the pandemic, the online retailer doubled its capacity from 193m square feet (18m square metres) at the end of 2019 to 387m square feet two years later. Today it has a glut, which the company says is costing it tens of millions of dollars a day. Retailers are bracing themselves for a slowdown, or even a recession, as the Federal Reserve raises interest rates. But Amazon’s troubles reflect another crucial factor for the American economy: a shift in spending from goods back to services which could lower inflation, making the Fed’s job easier. Target, another retailer, reported a 52% drop in net income in the three months to April, compared with the previous year, which it blamed in part on a rapid slowdown in demand for appliances, furniture and televisions. “We [expected] the consumer to continue refocusing their spending away from goods and into services,” Brian Cornell, the firm’s boss, said, but “we didn’t anticipate the magnitude of that shift.” Overall, the switch should ease pressure on global supply chains and lower inflation. But it has been slow and uneven. Confined to their homes during the worst of the pandemic, Americans splurged on appliances, cars and furniture. Fiscal largesse, including three rounds of “stimmy” cheques, helped fuel the buying binge. People bought substitutes for the services they could no longer avail themselves of—an exercise bike, say, to make up for closed gyms. Perhaps as a result of having a little extra cash, they also treated themselves to things like watches and luxury products. A year into the pandemic the composition of consumer spending had changed dramatically. By spring 2021, goods accounted for 42% of household spending, up from 36% before the pandemic; services accounted for 58%, down from 64%, a drop worth more than $900bn per year. Several other Western countries experienced a similar rise in goods consumption, though few witnessed a bigger boost than America. Daan Struyven and Dan Milo of Goldman Sachs, a bank, compare the evolution of real goods spending across 23 oecd countries and find that only Chile and Norway outperformed America. In Japan, goods purchases in the last three months of 2021 were 7% below pre-pandemic trends. America’s spending spree helped lift the economy out of recession, but it also contributed to an inflation headache. The deluge of new orders overwhelmed global supply chains, which were already suffering from pandemic-related disruptions, leading to clogged ports and shipping delays. With demand outstripping supply, goods prices rose. The Bureau of Labour Statistics reckons that goods prices boosted consumer-price inflation by 4.9 percentage points in the year to April 2022, having reduced it by 0.1 points in the 12 months before the pandemic. Now spending is starting to shift in the other direction. Data published on May 27th by the Bureau of Economic Analysis show that spending on goods fell in the year to April, and is now 9% above its pre-pandemic trend, down from a high of 16% last year. Spending on services is up by 7% in the same period, and is just 3% below pre-pandemic trends. But some services have been quicker to recover than others. Messrs Struyven and Milo of Goldman Sachs note that while “fun” spending categories with pent-up demand such as food services, air travel and hotels have rebounded over the past year, others have lagged behind. Services that cater to white-collar professionals have also been slow to recover. Mass transit spending is about 50% down from what it would have been, absent the pandemic; laundry and dry-cleaning revenues are 20% below trend. Even some essential services have been slow to bounce back. Spending on doctors’ and dentists’ services is roughly 15% below the pre-pandemic trend; child care is down by 22%. Appetite for many non-essential goods, meanwhile, shows little sign of abating. Spending on jewellery and recreational vehicles are 53% and 43% above trend, respectively. Spending on pets is up by 23%.One question is whether the composition of consumer spending will return to pre-pandemic norms. The hope is that this eases supply-chain bottlenecks and helps bring down inflation. Yet several uncertainties lie ahead. The process looks likely to be slow. Although Target was wrong-footed by the force of the shift towards services, if recent trends continue, goods and services spending would only return to pre-pandemic levels by perhaps the third quarter of next year. And some habits could well stick: the rise of remote work, say, may have permanently changed the consumption mix, keeping the relative demand for goods higher than it was before the pandemic. Hovering over all this, though, is a potentially souring economic environment. Consumer-price inflation is outpacing wage growth, and households are getting gloomier about their personal finances. American consumers powered an extraordinary goods boom over the past couple of years. What they do next is much less certain. ■ More

Ulta Beauty store.
Scott Mlyn | CNBC

Check out the companies making headlines in midday trading Friday.
Ulta Beauty — The beauty retailer surged 12.5% following better-than-expected quarterly earnings and revenue. Ulta Beauty also shared a better-than-expected outlook for the full year.

American Eagle — The stock dropped 6.6% after the retailer posted weaker-than-expected quarterly revenue. American Eagle reported $1.055 billion in revenue versus the Refinitiv consensus estimate of $1.142 billion.
Autodesk — Shares surged 10.3% after the software company reported earnings and revenue that beat analyst expectations. Autodesk reported total net revenue of $1.170 billion that was better than Refinitiv consensus estimate of $1.145 billion. The company’s earnings came in at $1.43 per share, beating expectations by 9 cents a share.
Big Lots — Shares dropped 12.1% after the discounter reported an earnings miss. Big Lots cited inflationary pressures while issuing weaker full-year guidance. The company’s comparable-store sales also fell more than expected.
Pinduoduo — Shares soared 15.2% after the Chinese e-commerce company reported quarterly results that surpassed expectations. Pinduoduo also reported a 7% in active buyers from the year-earlier period.
Dell — Shares of the IT company surged 12.9% following better-than-expected profit and revenue for the previous quarter. The computer hardware maker said it benefited from a jump in demand for desktop and laptop computers by business customers.

Red Robin — Shares of Red Robin Gourmet Burgers soared 25.1% after the restaurant chain beat on revenue estimates and shared a smaller-than-expected loss in the recent quarter. Comparable-store sales rose 19.7% year over year, beating a StreetAccount forecast of 17%.
Marvell Technology — Shares jumped 6.7% after the company reported earnings that beat expectations. Marvell Technology reported earnings of 52 cents per share on revenues of $1.447 billion. Analysts polled by Refinitiv were expecting earnings of 51 cents per share on revenues of $1.427 billion.
Workday — Shares dropped 5.6% after the human capital management company reported earnings that came in below expectations. Workday reported earnings of 83 cents per share, which was less than Refinitiv consensus estimates of 86 cents per share.
— CNBC’s Tanaya Macheel, Hannah Miao and Samantha Subin contributed reporting.

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More than $163 billion in pandemic-era unemployment benefits was likely issued in error, with a big chunk due to fraud, according to a U.S. Department of Labor report.
Congress raised weekly benefits and states contended with administrative issues, making the system attractive to criminals.
However, some think more stringent fraud prevention would have been costly for households who needed the aid quickly to prevent hardship.

Courtneyk | E+ | Getty Images

More than $163 billion in benefits likely leaked from the unemployment system during the pandemic, with a “significant portion” attributable to fraud, according to a U.S. Department of Labor report.
Congress created many new programs in March 2020 to support millions of people who lost their jobs from the Covid-19 fallout. Together, the programs raised weekly benefits, increased their duration and expanded the pool of workers eligible for payments. They ended last September, though many states opted out sooner.

In that time, the federal government issued almost $873 billion in total unemployment payments, the Labor Department said in a semiannual report to Congress released Thursday.
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“The unprecedented infusion of federal funds into the [unemployment insurance] program gave individuals and organized criminal groups a high-value target to exploit,” according to the report.
Criminals were able to defraud the system due to program weaknesses and easily stolen personally identifiable information, the agency said.
Many states weren’t prepared to process the crush of new claims for benefits and struggled to implement the newly created programs — and many traditional internal fraud controls weren’t used as a result.

Criminals could make a fraudulent claim for benefits with relatively low risk of being caught, potentially getting tens of thousands of dollars, the Labor Department said.
Much criminal activity targeted the temporary Pandemic Unemployment Assistance program for gig, self-employed and other workers. Lawmakers initially let program applicants self-attest their qualification for benefits; they later rescinded that feature and added fraud safeguards, as did states.
The Labor Department has also taken additional fraud-prevention measures, including grant money to help states upgrade their administrative systems.

The volume of [unemployment] investigative matters currently under review is unprecedented in the OIG’s history.

U.S. Labor Department’s Office of Inspector General

Some argue that less red tape was critical to pump financial aid into households quickly amid a deep crisis.
Even with rules that were initially laxer, it took states weeks (sometimes months) to start issuing Pandemic Unemployment Assistance. For example, early PUA checks corresponded to delays of six or seven weeks, according to a recent report from The Hamilton Project, part of the Brookings Institution.
“These delays were consequential in terms of consumer welfare,” the report said, mentioning an inability to pay bills, increased credit card debt, high interest rate borrowing, depleted savings, food scarcity and homelessness.

So-called “improper payments” occurred even before the pandemic. This isn’t all because of fraud; some may be from processing errors by state labor agencies or application mistakes from claimants.
In December, the Labor Department reported that 18.7% of benefit payments in 2021 were issued improperly. By applying the 2021 rate to the $873 billion of total pandemic-era unemployment benefits, the Labor Department derived its new estimate that at least $163 billion may have been issued improperly.

Before the pandemic, the Labor Department’s Office of Inspector General opened about 120 investigations each year related to unemployment insurance. In the pandemic era, the Office has gotten more than 144,000 unemployment fraud complaints from the U.S. Department of Justice and has independently opened more than 39,000 fraud investigations — an increase in volume by a factor of more than 1,000, it said.
“The volume of investigative matters currently under review is unprecedented in the OIG’s history,” its report said.

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Check out the companies making headlines before the bell:
Big Lots (BIG) – The discount retailer’s shares tumbled 21.2% in the premarket after missing Wall Street forecasts for quarterly earnings and revenue. The company also reported a larger-than-expected slump in comparable-store sales and issued cautious full-year guidance, saying inflationary pressures reduce discretionary spending.

Hibbett (HIBB) – The sporting goods retailer’s stock slid 6.5% in premarket trading after falling short of analysts’ profit and sales estimates for the latest quarter. Hibbett said its customers had less discretionary income than in the year-earlier quarter when stimulus payments helped boost spending.
Pinduoduo (PDD) – The China-based e-commerce platform operator’s quarterly results were better than expected as China’s Covid-19 lockdowns helped boost online spending. Pinduoduo rallied 8.8% in premarket action.
Canopy Growth (CGC) – The cannabis producer reported a wider-than-expected quarterly loss, with revenue that also fell short of analyst forecasts. The company said it expects to be profitable on an adjusted basis in fiscal 2024. Canopy Growth slid 10.5% in premarket trading.
Costco (COST) – Costco beat top and bottom-line estimates for its most recent quarter, but the warehouse retailer’s profit margins shrank by nearly 1 percentage point due to increased costs for labor and freight. Costco said it was increasing prices for certain food items to offset those increases. Its stock lost 1.3% in the premarket.
Dell Technologies (DELL) – Dell surged 9.8% in premarket trading, following better-than-expected profit and revenue for its latest quarter. The computer hardware maker benefited from a jump in demand from businesses for desktop and laptop computers.

Gap (GPS) – Gap shares slumped 17.8% premarket action after the apparel retailer slashed its full-year earnings forecast and posted a wider-than-expected quarterly loss. Gap’s results were hit by higher costs for shipping and deeper levels of discounting.
Ulta Beauty (ULTA) – Ulta shares jumped 8.4% in premarket trading after the cosmetics retailer beat Street forecasts with its latest quarterly report and issued an upbeat outlook. Ulta was helped by strong demand for beauty products.
American Eagle Outfitters (AEO) – American Eagle tumbled 13.4% in premarket trading after its quarterly profit and revenue fell short of Wall Street estimates. The apparel retailer’s CEO, Jay Schottenstein, said the quarter was a challenging one with demand well below the company’s expectations.
Red Robin Gourmet Burgers (RRGB) – The restaurant chain’s shares surged 12.9% in premarket action after it reported a smaller-than-expected quarterly loss and revenue that exceeded analyst forecasts. Red Robin also updated its commodity cost guidance for the full year, due to the effects of inflation.

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Alibaba’s total revenue rose by 9% in the latest quarter from a year ago, the slowest on record, according to financial history accessed through Wind Information.
Tencent’s revenue for the quarter was little changed, while JD.com saw a roughly 18% increase from a year ago — both the slowest on record, according to Wind data.
Chinese tech giant Baidu’s mild 1% revenue increase was only the worst since 2020, a year that saw two quarters of revenue decline, Wind data showed.

Alibaba, whose headquarters are pictured here on May 26, said its online physical goods GMV in China, excluding unpaid orders, fell further in April, with a “low teens” decline from a year ago.
Str | Afp | Getty Images

BEIJING — Chinese tech giants Alibaba, Tencent and JD.com have all posted their slowest revenue growth on record as Covid and Beijing’s tech crackdown took their toll.
Since the fall of 2020, China has fined corporations and scrutinized them for alleged monopolistic practices. A Covid resurgence since March has added pressure to growth, with travel restrictions and stay-home orders disrupting supply chains and logistics.

Reflecting the economic slowdown, e-commerce giant Alibaba reported on Thursday a drop in online shopping for its two main China platforms in the quarter ended March 31.
The company’s total revenue rose by 9% in the latest quarter from a year ago — the slowest on record, according to financial history accessed through Wind Information.
Tencent’s revenue for the quarter was little changed, while JD.com saw a roughly 18% increase from a year ago — both the slowest on record, according to Wind data.
Alibaba shares soared by nearly 15% in New York trading overnight after reporting better-than-expected results. JD.com’s U.S.-listed shares rose by 5%, while Tencent’s climbed more than 1% in Hong Kong trading Friday.

China’s consumer demand

“Macro-sensitive stocks” such as Alibaba and Baidu might temporarily benefit from low earnings expectations, and anticipation that Shanghai is close to ending its lockdown, Jialong Shi and Thomas Shen, analysts at Nomura, said in a note Friday.

“However, we believe the sustainability of this rally will likely be dictated by the pace of recovery for China consumer demand, which the market will likely closely follow over the coming months,” the analysts said.
China’s already sluggish retail sales fell further in April, down 11.1% from a year ago.
Even online sales of physical goods fell, down by 1% — worse than during the initial shock of the pandemic in 2020. That’s according to CNBC calculations of official data accessed through Wind Information.

The Nomura analysts said many businesses were deciding to cut marketing spending as a way to ride out the difficult environment, “which might lead to a belated recovery in the ads industry even if China is completely out of the lockdown mode.”
Alibaba said excluding unpaid orders, gross merchandise value (GMV) saw a “low single-digit decline” from a year ago, according to an earnings call transcript from FactSet. GMV is a measure of goods sold over a set period of time.
The company said its online physical goods GMV in China, excluding unpaid orders, fell further in April, with a “low teens” decline from a year ago. The company said more than 80 cities in China — mostly national economic centers — reported confirmed Covid cases in April. That represents more than half of Alibaba’s China retail marketplace GMV.
For the April to June quarter, China Renaissance analysts said in a report they expect Alibaba’s China commerce GMV to drop by 13.5% year-on-year, for a 6% decline in overall net revenue.

Bright spots

Other Chinese companies reporting results for the latest quarter painted a more upbeat picture.
Baidu: Chinese tech company Baidu’s mild 1% quarterly revenue increase was only the worst since 2020, a year that saw two quarters of revenue decline, Wind data showed. The search engine giant has expanded in recent years into cloud services and robotaxis.
“We see solid progress in its various AI initiatives,” Daiwa Capital Markets analysts wrote in a report Thursday. They noted Baidu’s AI cloud revenue grew by 45% year-on-year in the first quarter, faster than the company’s peers.
Dada: Grocery delivery company Dada, which is now majority-owned by JD, reported a 21% year-on-year revenue increase in the latest quarter, the best since the third quarter of 2021, according to Wind. Dada said it was one of the businesses local government approved to maintain operations during lockdowns.
The company reported more than triple the GMV and double the number of active customers in the 12 months ended late March, versus the same period two years ago.

Read more about China from CNBC Pro

Kuaishou: Short-video, livestreaming and emerging e-commerce app Kuaishou reported 19% revenue growth in the latest quarter, the slowest on record, although only going back to the third quarter of 2020, Wind showed.
“Despite the recent macro uncertainties due to COVID, we think Kuaishou’s bottom-up efforts in market share gains in ad and e-commerce and effective cost control could continue to help Kuaishou outperform on fundamentals,” UBS analyst Felix Liu and a team wrote this week.
It’s “impressive” that Kuaishou delivered growth in the number of active users and time spent per user, while using less-than-expected sales and marketing expenses, the analysts said.

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Stock futures were little changed in overnight trading as the S&P 500 attempted to snap a seven-week losing streak.
Futures on the Dow Jones Industrial Average shed about 40 points. S&P 500 futures and Nasdaq 100 futures were near flat.

Retail corporate earnings continued after the market closed Thursday. Ulta Beauty shares rallied more than 6% postmarket after better-than-expected quarterly results, while Gap sunk about 13% after slashing its profit guidance.
The postmarket moves came after stocks gained in Thursday’s regular session. The Dow rose for a fifth-straight trading day, adding more than 500 points, or 1.6%. The S&P 500 climbed about 2% and the Nasdaq Composite rose nearly 2.7%.
A batch of strong earnings from the retail sector boosted market sentiment Thursday. The SPDR S&P Retail ETF gained more than 4%. Macy’s, Williams-Sonoma, Dollar Tree and Dollar General were among the leaders.
The three indexes are on track to close the week higher. The Dow is up 4.4%, the S&P 500 is 4% higher and the Nasdaq Composite is up 3.4% on the week.
Still, the averages are well off their highs, with the Nasdaq Composite solidly in bear market territory and the S&P 500 having briefly dipped more than 20% below its record last week.

The Nasdaq after Thursday’s close is down 27.6% from its record, while the S&P 500 and Dow are off by 15.8% and 11.7%, respectively.
“We think there’s a good chance for some more strength here. This is sort of a classic bear market rally or bounce off the bottom,” Troy Gayeski, chief market strategist for FS Investments, told CNBC’s “Closing Bell: Overtime” on Monday. “Inflation expectations have rolled over recently.”
On Friday, investors will be eyeing economic data releases, including personal income, consumer spending and core personal consumption expenditures.

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