TheChek News Flow

China tensions loom over $53 billion plan, which raises funds for long-neglected maintenance

TOKYO—Japan’s Defense Ministry on Thursday asked for a $53 billion budget for next fiscal year, a 13% increase, adding antimissile systems and boosting maintenance for a military that long skimped on basic functions.

In yen terms, the ¥7.74 trillion budget request is a record, reflecting rising tensions between the U.S. and China. Prime Minister Fumio Kishida has pledged to lift the defense budget to 2% of Japan’s gross domestic product by fiscal 2027, after many years in which the figure, calculated slightly differently, was around 1%.

In the footsteps of the late former Prime Minister Shinzo Abe, Kishida has eased away from Tokyo’s traditional defense-only posture to take a more active role in regional security in support of the country’s main ally, the U.S.

The country has scrapped its self-imposed ban on the possession of offensive weapons by moving to acquire longer-range missiles that reach enemy territory. That includes 400 U.S.-made Tomahawk cruise missiles that are scheduled to be deployed some time after April 2026. On Monday, the U.S. approved the potential sale to Japan of up to 50 extended-range air-to-surface missiles for an estimated cost of $104 million.

Japan is domestically developing a few types of standoff missiles, meaning they can be launched from beyond the typical firing range of attacking forces such as enemy ships.

The defense plan also calls for spending the equivalent of $2.6 billion to build two of a new type of ship, 623 feet long, equipped with Aegis antimissile systems. Japan had initially planned to install land-based Aegis systems but scrapped the plan in 2020 amid local opposition.

Taiwan has also been racing to beef up its military readiness, and the island’s president in August ordered another substantial jump in military spending.

Japan has been rattled by frequent North Korean missile tests, including the launch of two ballistic missiles late Wednesday.

Tokyo has named China as its biggest strategic challenge, citing issues such as Chinese tests of hypersonic glide weapons that fly on evasive paths and are hard to shoot down.

Japan is working with the U.S. on a new type of interceptor aimed at hypersonic glide weapons envisioned to be ready by the 2030s. President Biden and Kishida announced the collaboration on Aug. 18 when they met at the president’s Camp David retreat.

The cabinet will decide the final defense budget for the fiscal year beginning April 2024 by the end of this year, and it typically gets approval by Parliament in March.

Amid all the equipment, one of Japan’s most significant changes is its focus on logistics. Since its foundation in 1954, Japan’s postwar military, called the Self-Defense Forces, tended to play down bread-and-butter functions such as maintenance and ammunition replenishment because it didn’t face a real threat of war.

The military asked for the equivalent of $16 billion, up 15.5% over last year, to sustain and maintain equipment, and is increasing its ammunition budget.

Last year, Japan’s Defense Ministry said it had only about 60% of missile stockpiles deemed sufficient to intercept enemies’ ballistic missiles. It also said that in the year ended March 2022, its air force had over 3,400 cases of parts cannibalization, the removal of a working component from one aircraft to install it on another.

Takashi Fukuyama, a retired lieutenant general in Japan’s Ground Self-Defense Force who wrote a book about logistics, said the neglect of supplies and maintenance harked back to the imperial Japanese military’s failures in World War II.

He recalled the 1944 Battle of Imphal in eastern India, when Japan sent its troops to mountainous terrain with food and ammunition that would last for just three weeks. The battle lasted four months. Of about 100,000 Japanese troops who fought the battle, about 30,000 are believed to have died, according to the Japan Center for Asian Historical Records.

With the new funding, Fukuyama said, “the Self-Defense Forces, which used to be a paper tiger, have taken a step forward toward a military that can fight.”

Bank kept attracting rich clients after buying troubled rival in March

UBS UBS 0.60%increase; green up pointing triangle booked a record $29 billion net profit last quarter after it integrated Credit Suisse into its books. But the gargantuan gain comes with an equally large challenge to meld the banking giants.

On Thursday, UBS provided a clearer picture of its future form, saying it will keep Credit Suisse’s large domestic arm in Switzerland rather than spin it off. It also showed strong inflows from rich clients, a sign that the world’s wealthy haven’t been turned off by the deal.

The large net profit reflected Credit Suisse’s knockdown price. UBS paid $3.8 billion in stock for the smaller bank, while acquiring additional equity via a $29 billion accounting gain. That type of gain occurs when a company buys assets for less than they are worth—typically in a distressed situation.

UBS bought its smaller rival in a Swiss government-engineered rescue in March, putting it in control of much of the country’s lending and deposits. On Thursday, UBS said it expects to make more recurring net fee income this year from customers who are adding more assets and rising market valuations.

Credit Suisse officially became part of UBS in June. UBS’s quarterly results included Credit Suisse as of June 1. On its own, Credit Suisse’s quarterly loss was around $10.6 billion.

Rich clients added $16 billion in net new assets at UBS in the second quarter, after a $28 billion inflow in the first quarter. The new money offset some of the cash leaving Credit Suisse, which since last October has handed back $200 billion to customers, including around $44 billion in the second quarter. The inflows and outflows are being closely watched by investors to project UBS’s future earnings power.

UBS said it decided to keep and integrate Credit Suisse’s bank in Switzerland, after considering alternatives to appease Swiss politicians who want to keep two big banks in the country. Before the combination, they employed around 37,000 in Switzerland.

The acquisition is the largest combination of financial institutions since the financial crisis and enlarges UBS’s already hefty role in managing the wealth of the world’s rich. By adding Credit Suisse, UBS manages around $5 trillion in client-invested assets.

UBS’s purchase marked the end of Credit Suisse’s 167 years of independence and came after the smaller bank lurched from crisis to crisis. Customers started fleeing last year and a last-ditch plan to restructure ran out of time. In March, Credit Suisse had to go on central-bank life support to keep meeting customer withdrawals and was bought by UBS a few days later.

UBS said it expects the integration to be largely complete by the end of 2026.

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Data adds pressure on policymakers to take action to restore growth in world’s second-biggest economy

Activity in China’s manufacturing sector contracted for a fifth straight month in August, according to an official survey, adding pressure on policymakers in the world’s second-largest economy to take action to shore up growth.

The country’s manufacturing purchasing managers’ index was 49.7 for the month. A reading of below 50 indicates contraction compared with the previous month. The non-manufacturing PMI, which covers services and industries such as agriculture and construction, was 51.

A series of disappointing data has fuelled concerns about China’s economy, where a widely anticipated rebound following the lifting of Covid-19 restrictions at the start of 2023 has failed to fully materialise.

China’s property sector, which typically accounts for more than a quarter of the overall economy, has slowed markedly because of a two-year liquidity crisis, while weaker global consumption has weighed on the country’s previously booming export sector. Consumer prices in July fell year on year for the first time since early 2021.

Although Thursday’s manufacturing data remained shy of expansionary territory, it was slightly higher than last month’s reading of 49.3 and exceeded forecasts across analysts polled by Reuters. The non-manufacturing data, by contrast, disappointed expectations.

Sheana Yue, China economist at Capital Economics, suggested the data showed “a slight improvement in economic activity in August” but noted that “overall economic momentum remains weak and more policy support is needed to avoid a renewed slowdown later this year”.

Beijing has set its lowest economic growth target in decades, at 5 per cent for the full year, and taken cautious steps to support the economy. Policymakers have sought to boost consumption, which remains weak, but stopped short of any major stimulus. Authorities last week unexpectedly held a core five-year lending rate amid concerns that deeper cuts would put pressure on the banking system.

This week the cities of Guangzhou and Shenzhen eased mortgage conditions for first-time buyers, a move that could help a property sector that has been hit by dozens of defaults, construction delays and falling transactions.

Country Garden, China’s biggest private developer, missed bond payments this month and on Wednesday disclosed losses of $7bn in the first half of the year. Missed payments at Zhongrong, a major Chinese investment company, have sparked fears that the crisis in real estate might spill over into the country’s savings products.

Goldman Sachs analysts noted that within the non-manufacturing survey, services areas such as transport, accommodations, catering, sports and entertainment were above 55, which they said “suggests that activity in other services industries such as property may have deteriorated further in August”.

Chinese stocks fell on Thursday following the latest PMI readings, with the CSI 300 index down 0.6 per cent and a real estate sub-index sliding more than 4 per cent.

Real estate developer battles to survive as situation show signs of spilling over into investment industry

Country Garden, once China’s largest private property developer by sales, has revealed a record Rmb48.9bn ($6.7bn) loss for the first half of the year as it battles to survive the liquidity crisis afflicting the country’s real estate sector.

The six-month results released on Wednesday represent the highest ever losses for the group, until recently considered safer than many of its peers. They also highlight the dire outlook for an industry typically responsible for more than a quarter of economic activity in China.

The company’s woes are part of a two-year real estate liquidity crisis that began with the default of developer China Evergrande in 2021 and has shown signs of spilling over into the Chinese investment industry.

As the broader crisis has continued, Country Garden’s losses have grown from Rmb6.7bn for the second half of 2022. By contrast with this week’s results, it had recorded a profit of Rmb612mn for the first six months of last year.

The Guangdong-based group said its revenues in the first half of this year increased 39 per cent to Rmb226bn.

But it added that it had “struck a balance between sales volume and selling price at some of its property projects” to “ensure punctual delivery of finished properties” — an apparent acknowledgment that it had cut prices to shift units.

Concerns over Country Garden’s finances grew this month when it missed coupon payments on international bonds. On Tuesday, the developer asked Chinese creditors for a 40-day grace period on a renminbi bond maturing next week.

Country Garden said it had liabilities of about Rmb1.36tn as of the end of the first half of 2023. It said it would “consider adopting various debt management measures to resolve” what it described as “phased liquidity pressure”.

Beijing cracked down on borrowing by China’s developers early in the coronavirus pandemic, but has been forced to ease its approach as the country struggles to reinvigorate its economy.

In a move that reflected the pressure on authorities, the southern cities of Guangzhou and Shenzhen relaxed mortgage lending conditions for first-home buyers on Wednesday.

Caps on bank mortgage lending were originally part of a wider approach designed to address overheating home prices. A prolonged slowdown has since hit housing prices amid collapsing sales and delays to construction of new apartments.

The government has stopped short of any bailouts, but its approach towards Country Garden is being closely watched.

Chinese developers face a $38bn wall of renminbi and dollar bond payments due over the next four months, according to data from Dealogic.

“Developer defaults will certainly continue as almost all private developers face cash flow pressure that isn’t going away any time soon,” said Bruce Pang, chief economist for Greater China at JLL. “Any policy support that does come will take time to feed through to cash flow, home sales and new construction starts.”

Country Garden had planned to raise $300mn from a share offer in late July, but abruptly cancelled the deal at the last minute.

The developer also announced plans on Wednesday to issue HK$270mn ($34mn) of new shares in Hong Kong at a 15 per cent discount to its closing price on Tuesday, with all money raised to be earmarked for repayment of existing loans.

Shares in Country Garden rose 5.7 per cent on Thursday morning in Hong Kong following the company’s first-half results. The stock is down two-thirds in the year to date, reflecting a loss of more than $7bn in market capitalisation.

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