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Richemont Drops on Signs Luxury Demand Is Weakening in US, China

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Richemont led luxury-goods stocks lower amid concerns that demand in the US and China, two of the biggest markets for the industry, is starting to sputter.

The Swiss owner of Cartier reported a surprise drop in revenue from the Americas in the three months through June.

While Richemont’s sales from Asia rose sharply, China reported slower-than-expected economic growth Monday, signaling signs of a possible pullback in consumer spending.

Richemont fell as much as 8.2%, the steepest intraday decline in more than year. LVMH dropped as much as 3.7% and Hermes fell as much as 4.2%.

The luxury-goods industry has been counting on a rebound in China after that country’s reopening would make up for weakness in the US market. Now Richemont and its peers are contending with the prospect that its two main growth motors are weakening.

Last week, Burberry Group Plc said the low end of the luxury market in the US softened.



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Goldman Analysts' Bearish China Bank View Draws Fresh Rebuke

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At stake was a report published by Goldman analysts including Shuo Yang last Tuesday, which highlighted margin risks and potential credit losses from banks’ exposure to local government debt. Yang, a former official at the China banking regulator, estimated that the “implied loss ratio of credit portfolio in debt investment book” could reach 25% for Merchants Bank, compared with 6% on average for lenders under its coverage.

A representative for Goldman declined to comment.

Shares of Merchants Bank have lost 12% in Hong Kong since Goldman cut its target price for the second time in three months with a neutral rating. The US bank now has one of the lowest target prices for the Chinese lender, according to data compiled by Bloomberg.

Merchants Bank argued that Goldman’s report is “illogical” in the way it calculates the potential losses, “lacks basic common sense,” and also overestimates its exposure to the local government financing vehicles. 



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China's Economic Woes Are Multiplying and Xi Has No Easy Fix

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If the government continues to sit on its hands, things could get worse. In a scenario where property construction crumbles, reduced land sales hit government spending, a US recession weakens global demand and China's markets shift to risk-off mode, Bloomberg's SHOK model shows another 1.2 percentage points shaved off growth.

“We’re caught in a kind of vicious circle in the sense that you need a massive stimulus to create a little moderate impact," said Keyu Jin, an economics professor at the London School of Economics and Political Science who wrote The New China Playbook: Beyond Socialism and Capitalism.

“We have to be prepared for slower growth in the future because China is really in transition right now from industrialization to innovation-based growth," she said. "Innovation-based growth is just not that fast.”

To be sure, China's policymakers have defied the doomsayers before and could do so again. A bigger-than-expected stimulus, proactive moves to resolve bad debts, a commitment to support entrepreneurs and extending an olive branch to the US could dispel some of the pessimism.



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China Economy Gloom Worsens With Weak Consumer Spending Data

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China’s consumer-driven recovery is showing more signs of losing momentum as spending slows on everything from holiday travel to cars and homes, adding to expectations for more stimulus to support the economy. 

Domestic travel spending during the recent holiday for the dragon-boat festival was lower than pre-pandemic levels, according to official data released this weekend. Home sales figures are below the level in previous years, while estimates for June car sales showed a drop from a year ago.

The rebound in consumption after China shed its Covid controls has propelled growth so far this year, but confidence is weak and evidence is mounting that the economy may need more help. After the central bank cut policy rates earlier this month, economists raised their expectations for more monetary and fiscal stimulus, and state-run media outlets have also published a series of articles in recent days highlighting possible avenues of support.



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The China-Driven Metals 'Super Cycle' Is Over, Jefferies Says

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“China is more likely to be a headwind than a tailwind for demand over the next decade,” they said. The China super cycle, driven by urbanization and industrialization, is over, and the energy transition and decarbonization cycle has just begun, the analysts said.

Asia’s largest economy has been a crucial support for metals markets over the last two to three decades as the country went on an infrastructure-building binge. However, China’s plodding post-virus recovery shows it may lack the horsepower required to buoy global demand as it transitions to a more service-oriented economy.

That dynamic has been reflected in markets this year, with most metals falling even after Beijing abandoned its Covid Zero policy at the end of last year.

Iron ore declined 0.7% at 12:46 p.m. Singapore time to $110.85 on Friday and was down 2.3% for the week. The steel-making staple has now wiped out all of its gains from earlier in the year as optimism about China’s recovery faded.



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Xi Tells Blinken 'Very Good' That Progress Made on US-China Ties

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Chinese President Xi Jinping told Secretary of State Antony Blinken it was “very good” the two sides had made progress in steadying ties between the world’s two largest economies during his trip to China.

“I hope that through this visit, Mr. Secretary, you will make more positive contributions to stabilizing China-US relations,” Xi told the US diplomat in Beijing on Monday, according to a Chinese Foreign Ministry statement. 

“The two sides have also made progress and reached agreements on some specific issues. This is very good,” he said in a video clip of the meeting posted by state broadcaster China Central Television, without elaborating.



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China Stimulus Trade Gains Momentum as Stocks, Yuan Advance

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“The focus will be if the Chinese authorities deliver, and whether what is delivered surpass expectations or not,” said Redmond Wong of Saxo Capital Markets HK Ltd. “Investors have become impatient with incremental measures and want a more expansive and aggressive package in one go.”

The government is finally starting to act — there are the rate cuts, and Beijing is said to be preparing a host of measures to boost the economy and the struggling property sector. The key, though, is that investors and companies want a comprehensive package rather than piecemeal measures.

Strategists and investors are already guessing as to the nature of the measures. Bets are mounting that loan prime rates will be cut next Tuesday. Macquarie Group Ltd. expects a 10-basis-point reduction in the one-year rate and a 15-basis point decline in the five-year. 



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Goldman's Biggest Office Beyond New York Attests to India's Rise

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“Over the last 30 years, while China specialized in becoming the world’s factory, India specialized in becoming the world’s back office,” said Duvvuri Subbarao, a former governor of the Reserve Bank of India. “Over the years, India moved up the value chain,” he said. But it can’t “take its comparative advantage for granted.”

India has roughly 1,600 of the centers, more than 40% of the number worldwide, according to Nasscom, a trade body for the country’s technology industry. Dotted around Bengaluru, formerly known as Bangalore, are the offices of luxury retailer Saks Fifth Avenue Inc., aircraft-engine maker Rolls-Royce Holdings Plc, US bank Wells Fargo & Co. and Japanese e-commerce firm Rakuten Group Inc. Some 66 global companies set up their first GCC in India in 2022. Even the lingerie brand Victoria’s Secret & Co. has a Bengaluru GCC.

The Siemens Healthineers GCC in Bengaluru. India has roughly 1,600 of GCCs, more than 40% of the number worldwide, according to Nasscom.

The offices generated about $46 billion in combined revenue in the fiscal year ended March, more than the output of Nepal. 

The qualities that turned India into the world’s back office starting decades ago are propelling GCCs’ metamorphosis: a vast pool of young people, an education system that emphasizes science and technology, and the lower staffing costs that made India attractive in the first place. Add an unforeseen catalyst: the pandemic, which convinced decision-makers jobs can be done anywhere, including far-flung shores.

“India’s story starts with its demographics and its talent,” said Gunjan Samtani, the country head of Goldman Sachs Services Pvt, the entity that operates the bank’s GCCs in India. A software engineer by trade, he still codes from time to time. “What brought us here even two decades back was our ability to get access to technology and talent.”



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China Shifts to Stimulus Mode With Xi's Options Dwindling

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The new stimulus package under consideration has been drafted by multiple government agencies and includes at least a dozen measures designed to support areas such as real estate and domestic demand, according to people familiar with the matter. 

A key component is support for the real estate market. Regulators are seeking to lower costs on outstanding residential mortgages and boosting relending through the nation’s policy banks to ensure homes are delivered, one of the people said.

The State Council may discuss the policies as soon as this Friday but it’s unclear when they will be announced or implemented, the people said.

“The aim of stimulus this time is to keep growth ticking over, consistent with the relatively conservative ‘about 5%’ gross domestic product growth goal, rather than to spur a round of robust growth,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “Policymakers are still wary of repeating the kind of debt hangover that the Global Financial Crisis stimulus produced and they spent the decade up to the pandemic trying to sort out.”

Property Woes
The weak property market remains a major drag on China’s economy, although policymakers appear reluctant to use its old playbook of driving up investment in real estate as a way to boost growth. Goldman analysts said in a recent report they don’t expect a repeat of the 2015-2018 shantytown renovation program that pumped central bank money into the property sector and sent home price surging.

Beijing is seeking to reduce the economic and fiscal reliance on the housing market, Goldman said, which suggests an L-shaped recovery in coming years.



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China Mulls New Property Support Package to Boost Economy

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A mountain of developer debt — equal to about 12% of China’s GDP — is at risk of default and poses a threat to financial stability, according to Bloomberg Economics. That’s despite a slew of existing support measures for the industry, which include: 

Lower mortgage rates for first-home buyers if newly constructed house prices drop for three consecutive months
A nationwide cap on real estate commissions to boost demand
Allowing private equity funds to raise money for residential property developments
Pledging 200 billion yuan ($28 billion) in special loans to ensure stalled housing projects are delivered
A 16-point plan unveiled in November that ranged from addressing the liquidity crisis to loosening down-payment requirements for homebuyers

Speculation about further policy support helped propel a gauge of Chinese property developers to a more than 6% gain on Friday before the Bloomberg report, the most since December. In the coastal city of Qingdao, the government this week lowered the down payment ratio for first- and second-time home buyers in areas not subject to purchase restrictions, local media reported earlier on Friday.



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