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China’s shadow banks shy away from real estate to survive By Reuters

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© Reuters. FILE PHOTO: Unfinished apartment buildings stand in a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang Autonomous Region, China on September 17, 2022. REUTERS/Eduardo Baptista

Written by Engin Tham, Claire Jim, and Julie Zhou

SHANGHAI/HONG KONG (Reuters) – For more than a decade, China’s debt-fueled construction boom has taken its toll on the country’s shadow banks, which have been eager to tap an industry desperate for credit and too risky for traditional lenders.

Now, in the wake of the government’s crackdown on the overindebtedness of real estate companies, that demand for credit has collapsed — and so has the single largest influx of revenue for shadow banks, also known as trust companies.

China’s shadow banking industry – worth around $3tn, roughly the size of Britain’s economy – is scrambling for new business, including private equity investment, family offices and asset management.

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It’s also shrinking, as well-paid employees leave for other jobs after looking for new deals. The plight of the industry is a sharp contrast to China’s high-street financial firms, which have yet to be seriously affected by the crisis.

“Everyone was eating rice, living another day,” said Jason Hao, who quit his job this year at a Shanghai trust after his salary dropped from 4 million yuan ($570,000) to about 240,000 yuan. $34,000).

He now works for an asset management company.

Data from industry tracking website Yanglee.com shows that 1,483 trusted real estate-related products were sold in 2022 through the end of September, down 69.7% from 4,891 during the same period last year.

The value of 2022 deals was 117.2 billion yuan, down 77.9% from 531.3 billion yuan. Real estate products accounted for 8.7% of all trust products in September, compared to about 30% in the same month in the previous two years.

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Three people with knowledge of the matter said the National Audit Bureau and China’s banking regulator have been reviewing credit companies’ accounts and deals this year for risk.

The National Audit Office and CBIRC did not respond to requests for comment.

At an internal meeting in October, an executive at Shanghai Trust, a state-owned company that was focused on real estate, said revenue had fallen by about half this year compared to the previous year, according to two people with direct knowledge of the meeting.

One person said the company plans to focus on asset management and family offices to shore up its finances while moving away from lending to developers, once its core business.

The Shanghai Trust did not respond to requests for comment.

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Another trust company employee, like other current employees interviewed for this article, said that the top priority of all trust companies now is “how to transform, what will allow you to survive.”

pollution risks

Trust companies have been called “shadow banks” because of how they operate outside many of the rules that govern commercial banks. Banks in China sell wealth management products, the proceeds of which are funneled via credit companies to real estate developers and other sectors that are unable to tap bank financing directly.

Because of the risks, shadow banks can charge interest rates as high as 18%, much higher than the typical 2% to 6% seen in banks at the height of the boom.

Concerns about the huge exposure of real estate developers have grown this year as the embattled sector in the world’s second-largest economy slows rapidly.

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Beijing has ramped up its support in recent weeks to undo the liquidity pressures that have choked the real estate market, which makes up a quarter of China’s economy and has been a key driver of growth.

Run out of options

In the trust unit of the state-owned China Construction Bank (OTC::) (CCB) and Zhongrong International Trust, formerly one of China’s largest shadow banks, investment such as private equity funds and venture capital are becoming more and more popular, as two people are familiar with first-hand companies said.

CCB Trust wants to invest in leading companies in specialized fields; It recently invested in Beijing Tianyishangjia New Material Corp., which makes materials used in train brakes, said a person who works for the company.

An executive there said Zhongrong International Trust is working with local governments, including Qingdao provincial authorities, to secure early-stage deals in smart manufacturing.

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Jiangxi-based Avic Trust is investing in waste treatment companies, including financing photovoltaic power plants that they then lease, a person familiar with the matter said.

CCB Trust, Zhongrong International Trust and Avic Trust did not respond to requests for comment.

In some cases, trust companies buy projects from struggling developers and hire new managers to make up for their losses, according to corporate records and three people at the trust companies with knowledge of such acquisitions.

Corporate records and company announcements show that Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust have all purchased project companies from struggling developers in the past few months.

Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust did not respond to requests for comment.

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For Hao and other former Trust employees, the companies’ search for stability seems familiar.

“I’m better off now than when I left the trust,” Howe said, “but I’ll never be as good as I was at the height of the boom when I was there.”

($1 = 6.9905 renminbi)

(Reporting by Engin Tham in Shanghai, Claire Jim and Julie Zhou in Hong Kong; Editing by Sumit Chatterjee and Jerry Doyle)

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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