Month: January 2024

Job Gains Picked Up in December, Capping Year of Healthy Hiring Unemployment held at 3.7% last month and hiring was revised lower in prior months

The U.S. economy added 216,000 jobs last month with most industries increasing employment, the Labor Department reported Friday. That was larger than November’s gain of 173,000, and better than forecasters were expecting. For all of 2023, employers added 2.7 million jobs, a slowdown from 4.8 million in 2022, but a better gain than in the several years preceding the pandemic. (…)

Employers added a combined 71,000 fewer jobs in October and November than previously estimated. (…)

Wages rose a healthy 4.1% last month from a year earlier and the unemployment rate in December held at 3.7%. (…)

Friday’s report will do little to alter that calculus and keeps the central bank on track to hold rates steady at its next policy meeting, Jan. 30-31. It suggests the labor market is no longer at risk of overheating, particularly as private-sector hiring has eased over the past few months. But it also doesn’t point to material weakness that might move up the Fed’s timetable for cutting rates. (…)

Even so, some analysts said parts of the report signaled underlying weakness, highlighted by a steep drop in the labor-force participation rate. (…)

• Clearly slowing!?

Looking at quarterly data, employment growth is clearly slowing, but really only back to its pre-pandemic numbers (dashed lines) although private employment growth is now lower.

The diffusion index, a measure of the breadth of job gains across industries, rose to its highest level since August, a sign that most industries are still adding jobs, but at a slower rate. Looking at just the private sector, the 3-m job gain average is now 115k vs the 6-m average of 134k, the 2023 average of 169k and the 2022 average of 376k.

Since December 2019 to November 2023 (its peak level), the labor force (persons 16 yrs and older) grew by 3.43 million people (+2.1%). Meanwhile, the number of employed Americans rose 5.47 million (3.6%) and now represents 93.9% of the labor force, up from 92.8% pre-pandemic and from its previous high of 93.3% in December 1999.

Without a sustained rise in the participation rate (% of the population that is either working or actively looking for work), the employment math needs to slow down further. There is much hope on the participation rate easing labor market pressures but actual trends are not encouraging.

The percentage of the population at work has always risen post recessions. That’s not happening just yet. The labor participation rate is not even back to its pre-pandemic level, itself way down from pre-GFC.

• The total participation rate has been slowly crawling back to its Q4’19 level which was nonetheless still down from its pre-GFC level.

• The participation rate of the important 25-54 age group is also only back to its pre-pandemic and pre-GFG levels.

• The younger cohort (lower wages, productivity) has been growing the labor market since 2016 but that only helped offset the decline in the older age group (higher wages, productivity) which has yet to show any desire to return to work en masse.

This in spite of real wages 3.5% above their pre-pandemic level and 13% above their pre-GFC level.

Purchasing managers surveys suggest a coming marked slowdown in hiring (although S&P Global’s survey is not as weak):

The openings are there, but not the hires:

Meanwhile, Indeed’s data show wage increases flattening in the 4-5% range:

Indeed, hourly earnings rose 5.4% annualized in December…

… helping aggregate weekly payrolls rise 5.4% YoY in December and 5.2% in Q4, only slightly slower than the 5.7% gain in Q3. Consumption expenditures should thus keep rising nicely given PCE inflation well below 3% in Q4.

Canada’s job growth stalls in December, while wages accelerate

The country added just 100 net new jobs in December, after an increase of 25,000 in November and 18,000 in October, Statistics Canada said Friday. Bay Street analysts were expecting an increase of 13,500 jobs last month.

The unemployment rate remained at 5.8 per cent. It has risen consistently over the past year as rapid population growth has outstripped job creation. But last month, this dynamic was offset by a decline in labour-force participation, keeping the unemployment rate steady. (…)

On an annual basis, average hourly wages rose 5.4 per cent in December, up from 4.8 per cent in November and the quickest pace since last February. Bank of Canada officials have said that continuing wage growth in excess of four per cent is not compatible with its two-per-cent inflation target, unless there is a significant jump in labour productivity. (…)

The Canadian economy overall has slowed more rapidly than its neighbour to the south. And this showed up in softer labour market data through the back half of 2023. Job growth in Canada averaged 48,000 per month in the first half of the year, but only 23,000 per month in the second half, Statscan said. (…)

• David Rosenberg: Why the BoC will be forced into cutting rates sooner – and to lower levels – than most people think

(…) The BoC hiked policy rates by 475 basis points since March 2022 to 5 per cent and pursued the most aggressive tightening cycle since the late 1980s. While it is clear that monetary policy is restrictive, the question of “how restrictive” remains puzzling.

To answer this, first, one has to estimate the neutral interest rate (the difference between the overnight rate and the nominal neutral rate would quantify the restrictiveness). This matters because the lower the neutral rate, the more cuts would be needed for the BoC to move from a “restrictive” to a “neutral” monetary policy. (…)

The BoC left its measure of the neutral rate unchanged from its 2022 estimate within the range of 2-3 per cent (0-1 per cent in real terms, after inflation) in the latest Monetary Policy Report in October 2023. Meanwhile, the New York Fed took down its estimate (on an inflation-adjusted basis) from 1.7 per cent in 2022Q3 to 1.3 per cent in 2023Q3, corresponding to 3.3 per cent in nominal terms. (…)

Governor Tiff Macklem seems not to be persuaded by the Bank’s models and suggested in November that “there are some reasons to believe it’s more likely that the neutral rate is higher than lower.” Adding to this were the remarks from former deputy governor Paul Beaudry in June: “The risks appear mostly tilted to the upside … that makes it more likely that long-term real interest rates will remain elevated relative to their pre-pandemic levels than the opposite.”

Beaudry justified his stand on higher neutral rates by mentioning i) aging demographics, ii) shrinking global savings mainly due to China, iii) a possible easing in income inequality, and iv) higher demand for investments as a result of a transition to green technology and advances in AI.

We argue that the majority of forces that drive the neutral rate down have not reversed their course and there are more reasons to think that the neutral rate is heading lower than higher. Labour productivity fell in 12 of the past 13 quarters and is 2.5 per cent below the year-ago level. Unlike the U.S., Canadian productivity did not pick up and continues its secular downtrend – in terms of the level, it is back to where it was 10 years ago.

While some point to productivity-enhancing developments such as AI as an answer, they are unlikely to move the needle in the near term enough in the face of a massive deleveraging cycle that awaits households and chronically low business investment. Savings will rise as households anticipate mortgage renewals, and firms will have to choose between rolling over their debt and servicing it at a higher cost or retiring it. In either case, future demand for investment faces downward pressure, pushing down the neutral rate.

Another major determinant of the neutral rate, the wealth/income inequality, has increased gradually in Canada from 2020 to 2022 – the Gini index of net personal wealth (a measure of wealth inequality) stood at 0.74, the highest level since 2007. Inequality likely worsened in 2023 with low-income consumers bearing much of the inflation burden.

This upward trend in inequality is prone to stay with low and middle-income households suffering elevated food and shelter prices and rising unemployment. Meanwhile, high-income households spend a much smaller proportion of their income on goods and services. They likely are owners of capital, in which case they have benefited from higher shelter costs and an incoming rally in the fixed-income space. A rise in income/wealth inequality will drive down the neutral rate as the rich tend to save more than the average household.

Regarding demographics, the neutral rate in Canada has both upside and downside risks. An immigration-led rise in population (+3.2 per cent year over year in 2023Q4 as per Statistics Canada, the highest yearly increase since 1958) is pushing up labor supply, hence driving up the neutral rate through higher potential GDP growth even though the unemployment rate keeps rising (up +0.9 percentage points to 5.8 per cent from the cycle low). Over two-thirds of new immigrants are between 25 and 64 years old, contributing to the much-needed labour supply in Canada.

As households age, they save more in preparation for longer retirement, but not so much once they are old. With a record number of 65+ year-olds as a share of the total population (22.4 per cent), a possible drawdown of savings from older people will exert further upward pressure on the neutral rate. However, the aging population also creates upward pressure on government spending, which could crowd out private investment and productivity. Overall, it is hard to tell whether a drawdown in aggregate savings is enough to outweigh the lower demand for investment. So, the effect of aging demographics on the neutral rate remains in question.

Lastly, economy-wide debt in Canada is modestly higher than the U.S. (337 per cent versus 335 per cent of GDP) – and excessive debt burdens, which represent a future drag on economic growth, are also a key anchor for a continuing depressed level of the equilibrium natural rate of interest (as has long been the case in Japan where total debt relative to GDP stands at 658 per cent).

We see the balance of forces pointing to R-star heading lower and what this means is that the longer the BoC stays on the sidelines and does not adjust policy rates lower, there will end up being an undesirable tightening in monetary conditions – for an economy which is now flatlining in real terms. When the BoC eventually cuts rates, we think it will need to be below the current 2 per cent estimate of neutral.

What does this all mean for the markets? The obvious trade is in the fixed-income space, which will be a primary beneficiary when the BoC cuts policy rates by more than 300 basis points to get to the neutral rate. The other major implication is on the Canadian dollar. Although the U.S. and Canada share many similar characteristics (such as income inequality and population aging), they differ significantly in terms of productivity growth.

This is a key factor. Productivity in the U.S. is expanding +2.5 per cent year over year which compares with a -2.5 per cent slump in Canada. This means that neutral rates will diverge from historical patterns, and interest rate differentials in the future will work against the Canadian dollar. In other words, the loonie should find equilibrium at a weaker level than has historically been the case (as in, at any given level of commodity prices).

Rosie may be overlooking the fact that the Bank of Canada’s mandate, unlike the Fed’s, is essentially focused on inflation: “Monetary policy: The Bank’s monetary policy framework aims to keep inflation low, stable and predictable.”

Here’s the BoC’s conundrum:

Despite clear signs that the labour market is easing, wage pressures remain significant, as evidenced by the evolution of average hourly earnings, which have continued to surge, with year-over-year growth showing its strongest increase during this inflationary episode. This undoubtedly complicates the task of the central bank, which may be reluctant to provide oxygen to an economy that is nevertheless showing signs of significant weakening. (NBF)

Yellen Declares US Economy Has Achieved Soft Landing

Treasury Secretary Janet Yellen declared Friday the US economy had achieved a long-sought soft landing, a historically unusual event in which high inflation is tamed without significantly damaging the labor market.

“What we’re seeing now I think we can describe as a soft landing, and my hope is that it will continue,” Yellen said Friday in an interview with CNN. (…)

No soft landing at the office:

Offices Around America Hit a New Vacancy Record The 19.6% of office space that isn’t leased in major U.S. cities is the highest since at least 1979.

China’s Debt Mountain Is Even Bigger Than Feared

(…) In recent weeks, China watchers have taken notice of a previously little-publicized assessment by a former adviser to China’s central bank. Li Daokui has estimated that local Chinese authorities had by 2020 run up a much bigger tally of debt than previously realized, at some 90 trillion yuan ($12.6 trillion).

Most of this debt came from building infrastructure, much of which is unlikely to generate revenues sufficient to pay off the obligations. With China’s trend growth rate notably lower now than it was, it leaves a burden over the long haul. National authorities have the wherewithal to resolve the problem, but it would take a major rethink in economic policy. Without a strategic shift, it leaves China heading for Japan-style stagnation.

Li Daokui is a Harvard-trained economist at Beijing’s Tsinghua University who served as an external adviser to the People’s Bank of China early in the last decade. In October, he delivered a lecture on his findings on the debt accumulated by China’s local authorities.

He explained that one oversight in previous estimates was a failure to dig out the basis for “capital” behind major infrastructure projects, such as a massive rail transit loop in the southwestern mega-city Chongqing. Almost two-fifths of Chongqing’s broader, near-$29 billion project came from so-called “paid-up capital.” But Li and his colleague’s analysis showed that the “paid-up capital” was effectively debt as well.

The research also determined that the fiscal wherewithal of local authorities to service their debt had deteriorated by 2020. The conclusion: “It’s clear that local governments are compelled to incur new debts to repay existing ones, which is unsustainable.” Given how growth momentum has deteriorated in recent years, the debt-servicing ability is likely “even lower now,” according to Li.

In much the same way, Japan’s economic growth by the 1990s was insufficient to simply pay off the mountain of debt created during the bubble years, based on real-estate collateral valued at entirely unrealistic prices. Tokyo’s response was to guide banks into offering companies forbearance, and avoiding US-style bankruptcies with all the social and labor carnage they entail.

Another piece of Japan’s response was to keep lowering interest rates to encourage new borrowing to fund new investments. The trouble with that was the appetite to extend or take on new credit was limited. Low rates came to be seen as a symptom of Japan’s diminished potential. (…

Li argues that there’s a three-part solution for China’s local debtload, which his analysis showed amounted to 88% of gross domestic product as of 2020. That’s notably larger than previous estimates by the International Monetary Fund. (It would have been all the bigger in Li’s worst-case estimate of $14 trillion worth of debt.)

First would be to have the central government simply take over part of the local authorities’ obligations. There have been signs in recent months that President Xi Jinping’s team is indeed thinking along these lines, though policymakers in Beijing have long sought to maintain the central government’s relatively low debt-to-GDP ratio.

Li’s second step is to extend the duration of debt, something that is under way through a variety of swap programs—some at the local level and some involving the central bank.

The third component, however, would require a significant ideological shift. That would involve selling off state assets. In Japan, that was one component of the eventual solution to its own bad-debt mountain under Prime Minister Junichiro Koizumi, in the years before the global financial crisis. (A policy option Tokyo is looking at again.)

But far from embracing privatization, Xi’s regime has tilted instead toward elevating the role of the state. It seems hard to envision a dose of 1980s Thatcherism to reduce debt and energize the private sector.

Which all magnifies the risk of a dynamic in China’s financial system that limits the economy’s potential in coming years.

China Stocks Slump to Five-Year Low in a Dismal Start to 2024

EARNINGS WATCH

Goldman Says S&P 500 Earnings Forecast Could Rise Further US growth, Fed pivot, weaker dollar may boost profits

S&P 500 companies’ earnings per share are forecast to rise 5% to $237 this year, the team led by chief US equity strategist David Kostin predicted in a weekly research note.

That’s above the median $231-per-share forecast of strategists tracked by Bloomberg but could still be too low, the Goldman Sachs strategists said.

“We see potential upside to our EPS estimate from stronger US economic growth, lower interest rates, and a weaker dollar” despite lower oil prices, the strategists said. (…)

Actually, the LSG/IBES estimate for 2024 is $243.98, up 11.1% from the $219.67 current estimate for 2023. Trailing EPS are $218.93.

• Analysts Made Larger Cuts Than Average to EPS Estimates for S&P 500 Companies for Q4

(…) The Q4 bottom-up EPS estimate decreased by 6.8% (to $53.90 from $57.86) from September 30 to December 31. (…)

During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 3.5%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the quarter has also been 3.3%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 4.2%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during quarter has been 3.8%.

Thus, the decline in the bottom-up EPS estimate recorded during the fourth quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average. This quarter also marked the largest decrease in the bottom-up EPS estimate since Q3 2022 (also -6.8%). (…)

  China-U.S. cooperation ‘no longer an option … but an imperative’ – Wang Yi

Chinese Foreign Minister Wang Yi said on Friday the most urgent task for Sino-U.S. relations is to establish a correct understanding and cooperation between the two sides, stressing it is “no longer an option … but an imperative” for the world.

Cooperation is the “most correct choice for China and the United States to get along”, Wang said in a keynote speech at an event to mark the 45th anniversary of the establishment of diplomatic relations between China and the U.S.

“It can be said that China-U.S. cooperation is no longer an option for the two countries and even for the world, but an imperative that must be seriously addressed,” Wang said. (…)

Wang said China hopes the U.S. will relax its mindset and “in an attitude of equality and inclusiveness” respect the choices made by the Chinese people and China’s development path, including when defending its national sovereignty and territorial integrity.

“We are willing to commit ourselves to building a stable, healthy and sustainable China-U.S. relationship on the basis of mutual respect,” he said.

Wang also said China’s development and revitalisation has a “strong endogenous momentum”, which he said meant that China will assume greater responsibility for the world’s peace and development.

“We have no intention of replacing anyone, overriding anyone, and have no intention of seeking hegemony,” he added. (…)

“We must insist on peaceful coexistence, and the most important thing is to effectively manage differences,” Wang said. (…)

David Meale, U.S Deputy Chief of Mission for the Embassy of the U.S. in Beijing, who attended the event with Wang, said “as we look ahead to 2024, my colleagues in the U.S. Embassy and in our four consulates general look forward to working with our counterparts to continue to responsibly manage our bilateral relationship.”

SERVICES PMIs

USA: Service sector expansion picks up, but demand conditions remain historically subdued

The seasonally adjusted final S&P Global US Services PMI Business Activity Index posted 51.4 in December, up from 50.8 in November and broadly in line with the earlier released ‘flash’ estimate of 51.3. The rate of growth in output accelerated for the third month running and was the sharpest since July. Where an increase in activity was reported, firms linked this to an improvement in demand conditions and a greater rise in new orders. The pace of expansion was only marginal, however, and slower than the series average.

Service providers recorded a quicker expansion in new business at the end of 2023, as the rate of growth picked up to the fastest since June. Although only modest and historically muted, greater new orders were attributed to stronger client demand, with some stating this stemmed from increased advertising spending and a rise in customer referrals.

The overall upturn in new business was dampened by a renewed contraction in new export orders, however. The fall was the first since September and reportedly driven by lower purchasing power among customers in key export markets.

A quicker rise in total new orders led service sector firms to step up their hiring during December, as employment rose at a steeper pace. The rate of job creation was the joint-fastest since June as firms sought to boost capacity in anticipation of greater activity in the coming months.

Increased staffing numbers aided service providers in their efforts to clear incomplete business. Backlogs of work fell for the sixth month running and at the fastest pace since September.

At the same time, greater wage bills and higher food and fuel costs led to a sharper rise in input prices at the end of the year. Cost burdens increased at the most marked pace for three months, with the rate of inflation historically elevated.

Efforts to drive new orders and spur client spending led to a softer uptick in selling prices. The pace of charge inflation remained steep in the context of the series history, but eased to one of the slowest in over three years.

December saw business confidence at service providers tick higher. Although still subdued relative to the series trend, the level of optimism was strong overall. Upbeat expectations for output over the coming year were underpinned by hopes of further upticks in client demand, anticipated reductions in interest rates and investment in advertising and new product development.

At 50.9 in December, the final S&P Global US Composite PMI Output Index was up slightly from 50.7 in November and signalled a marginal expansion in business activity. The rise in output was driven by further growth in service sector activity, with manufacturers posting a renewed decline in production.

Similarly, there was a sectoral divergence in new order trends as service providers recorded a stronger uptick in new sales while goods producers registered a faster fall in new business. Foreign client demand dragged on the overall expansion amid a broad-based drop in new export orders.

On the price front, total input costs rose at a sharper rate in December as operating expenses at manufacturers and service providers increased at faster paces. Despite a steeper uptick in output charges among goods producers, a softer rise at service providers dampened the overall pace of increase in selling prices.

Meanwhile, employment growth at service sector firms outweighed a marginal drop in manufacturing workforce numbers. Pressure on capacity dwindled further as private sector firms depleted backlogs of work at a solid pace.

Canada: Marked contraction of service sector as sales fall again

(…) Weighing on sector performance was an accelerated and marked drop in incoming new business. December’s survey showed that sales fell for a fifth successive month, and to the greatest degree in three years. There were many reports that market demand was subdued, characterised by hesitancy amongst clients in committing to new sales.

Several companies blamed high interest rates as a factor weighing on demand. However, weakness was not confined to the domestic market; new export business declined in December at the steepest rate since April 2021.

Subdued trends in activity and new business inevitably weighed on hiring decisions in December, with employment own marginally for a second month in a row. This was linked in the main to a lack of workloads at units although some firms signalled ongoing difficulties in recruiting suitably qualified workers. (…)

Wages were cited again by panellists as a source of inflation in December. (…)

  

Eurozone economy’s downturn continues in December

The HCOB Eurozone Services PMI Business Activity Index rose fractionally to 48.8 in December, from 48.7 in November, signalling a modest contraction in services output across the euro area that was broadly similar to that seen previously. Overall, the decline was the fifth in as many months, although the latest contraction was the softest over this sequence.

Demand for eurozone services fell at the end of the year. Having said that, the rate of decline in new business receipts was the lowest since last July. Sales made to foreign clients also contracted, with the decrease quickening since the month prior.

Employment growth was maintained across the euro area services economy. The rate of job creation was unchanged on the month and only marginal. In fact, the expansion in workforce numbers was the joint-second softest since February 2021. Backlogs of work continued to fall, as has been the case since last July.
Business confidence improved during December, rising to its highest level since mid-2023. Nevertheless, growth expectations remained weak by historical standards.

Lastly, December survey data showed eurozone services firms were more aggressive with their price setting, despite input cost inflation slowing to a five-month low.

Euro-Area Inflation Picks Up Again as Energy Aid Is Removed

Euro-zone inflation quickened in December, highlighting the rocky path back to 2% foreseen by the European Central Bank as governments remove support for lofty energy costs.

Consumer prices rose 2.9% from a year ago, up from 2.4% in November, Eurostat said Friday. That matched the median estimate in a Bloomberg survey of economists.

The burden from energy eased by much less than in the previous month, driven in large part by Germany’s decision to cover households’ heating bills in the final month of 2022. A measure of core prices omitting such volatile elements fell for a fifth month, to 3.4%. (…)

BTW: Core HICP inflation, excluding energy, food, alcohol and tobacco, fell 0.14% in December.

• Global Food Prices Post Biggest Annual Drop Since 2015

An index of food-commodity prices created by the United Nations’ Food and Agriculture Organization fell about 10% in 2023, according to data released on Friday.

While the index tracks raw commodity costs rather than retail prices, the steep drop could indicate potential relief on the way for consumers, as food prices ease from a 2022 peak that followed Russia’s invasion of Ukraine and contributed to a cost-of-living crisis in countries across the world. (…)

Chinese Stock Indicator With 100% Success Rate Is Flashing Buy The risk premium of Chinese stocks reaches a level that historically leads to spectacular returns.

With sentiment toward China’s economy and markets as depressed as they are now, perhaps it pays to be a contrarian. And at least according to one measure, there’s a reason for optimism: The risk premium of Chinese stocks has reached a level that historically leads to spectacular returns.

China’s stock market is sinking to the bottom of the global ranking in the first week of 2024 trading. From its peak in 2021, the CSI 300 Index has lost about 42%, comparable to the drawdown during the burst of the stock bubble in 2015.

In contrast, China’s bond market has extended its rally, sending the yield on 10-year notes to 2.5%, the lowest since April 2020. Both markets are telling the same story about the macro weakness in China.

Compared with bonds, Chinese stocks have rarely been so cheap. At about 8%, the earnings yields of the CSI benchmark is 5.7 percentage points above the 10-year yield. Since 2005, the gap has rarely been this big. Similarly, the dividend yield of the stock benchmark has risen above the long-term bond yields for the first time since at least 2005. (…)

There’s been five previous periods in almost two decades that the stock-bond yield gap has reached 5.5 points or more, including during the 2008 financial crisis and the pandemic in 2020. Stocks rose in the following 12 months each time, with a whopping return of 57% on average. (…)

Of course, valuation alone isn’t enough to turn around the market, a painful lesson we learned last year. A positive performance needs earnings to improve, valuation multiples to expand, or ideally, both. For that to happen, the housing market needs to stabilize and deflation needs to give way to modest inflation. So far, neither look promising without more forceful policy support. (…)

Whether China is morally or financially investable remains debatable. But valuation is better as these Alpine Macro charts show:

Good news: Services activity expands at quickest pace for five months in December

Growth momentum across China’s service sector continued to revive at the end of 2023, according to the latest PMI data. Companies signalled solid increases in activity and new business, with the latter expanding at the quickest pace since May. As a result, firms tentatively raised their workforce numbers for the first time in three months, while optimism regarding the year ahead also improved. (…)

 

Bad news: The year-long slow motion accident is now happening in real time:

Troubled China Shadow Bank Zhongzhi Files for Bankruptcy

Chinese shadow banking giant Zhongzhi Enterprise Group Co. filed for bankruptcy, cementing the rapid downfall of a firm that oversaw more than $140 billion at its peak before succumbing to the property crisis that has wreaked havoc on the world’s second-largest economy.

Zhongzhi said it “obviously” lacked the ability to repay its debts, according to a statement Friday from Beijing’s First Intermediate People’s Court, which accepted the case. An audit found Zhongzhi’s debts total 420 billion yuan to 460 billion yuan ($64.4 billion), compared with assets of 200 billion yuan, according to a letter to investors in November. (…)

While creditors are mostly wealthy individuals rather than financial institutions — limiting the direct impact on the financial system — the collapse exposes potential cracks in the $2.9 trillion trust sector amid disappointing economic growth and a worsening property slump. (…)

China’s highest-profile debt failures in recent years have tended to go through debt restructurings first, avoiding formal bankruptcy filings. HNA Group Co., the conglomerate that collapsed with billions of dollars of debt, completed its restructuring work in 2022. China Evergrande Group, whose default in 2021 accelerated the country’s property debt crisis and which has some $327 billion of liabilities, is still struggling to avoid liquidation and hasn’t filed for local bankruptcy proceedings yet.

Shadow banks like Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. China’s trust industry is a key alternative funding source for weaker borrowers unable to get regular bank loans such as real estate developers and local government financing vehicles. (…)

• Country Garden’s sales in 2023 less than half previous year’s Sharp dip in December points to ongoing woes for Chinese developer

Embattled Chinese property developer Country Garden Holdings’ contracted sales in 2023 plunged to less than half the previous year’s level, with a sharp dip in December underscoring the dire situation facing the company.

Contracted sales are the company’s main source of revenue but the figure for December dipped almost 70% year on year, according to a filing to the Hong Kong Exchange on Thursday evening.

In a brief announcement of unaudited operating data for the final month of 2023, the company said contracted sales reached 6.91 billion yuan ($972.8 million) by value and 680,000 square meters by area. Those figures are down 69% and 76%, respectively, on the year.

Contracted sales are the most important source of funds for developers to service debt. (…)

Contracted sales last year came to 174.3 billion yuan, a 51% decline from the year before. The 2023 figure was about 69% lower than its pre-crisis years of 2021 and 2020. (…)

Of its borrowings, 108.7 billion yuan was repayable by the end of June 2024. (…)

Ronshine China Holdings on Thursday said its 2023 sales dropped 72% from the year before to 16.3 billion yuan.

The company is also facing financial headwinds. It announced on Dec. 15 that it was unable to pay the principal and interest on an offshore bond that became due that day, totaling $425 million. It is still in the 30-day grace period for repayment on this bond, and Chairman Ou Zonghong has pledged to “actively engage with its creditors and seek an overall solution,” but the company has already defaulted on other debt obligations. (…)

Zhenro Properties Group on Wednesday said its sales last year came to 15.3 billion yuan, a 54% drop from the prior year.

The company’s total debt from bank borrowings and bond issuances was 62.9 billion yuan as of June, of which 95% is either due by June 2024 or payable on demand from creditors. Its cash and cash equivalents were slightly over 3 billion yuan. (…)

China Probes EU Liquor, Sinking Shares as Trade Spat Worsens

China is launching an anti-dumping investigation into liquor products like brandy from the European Union, in a relatively modest step after the bloc opened a probe last fall into its electric vehicle subsidies.

The investigation, which Beijing said was prompted by an application from a domestic liquor association, targets French cognac, a niche but lucrative product in China for producers like Pernod Ricard SA and Remy Cointreau SA, and sent their stocks plunging. France was the main backer of Brussels’ probe into Chinese EVs, with French carmakers Renault SA and Stellantis NV particularly exposed to the threat of imports. (…)

The EU’s recent trade actions toward China have extended beyond electric vehicles. Last month, the EU also opened anti-dumping probes into Chinese biodiesel and melamine exports. In November, the bloc imposed provisional anti-dumping duties on imports of some plastics products from China. (…)

Investors Are Rushing to Cash at Record Pace in First Week, BofA Says

(…) While inflows to money markets are typical at the start of each year, the sum was the largest ever for the first week, strategists led by Michael Hartnett wrote in a note, citing EPFR Global data. (…)

For now, cash is maintaining its appeal even after money-market funds received a record $1.2 trillion last year, far above the global inflows to shares, showing investors missed out on 2023’s equity market rally. (…)