China Evergrande's EV unit warns it may halt production due to funds shortage

China Evergrande's EV unit warns it may halt production due to funds shortage

© Reuters. FILE PHOTO: A crane stands at a construction site near the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China, Sept. 26, 2021. REUTERS/Aly Song

HONG KONG (Reuters) – China Evergrande New Energy Vehicle Group Ltd said on Thursday it was at risk of halting production of electric vehicles (EVs) as it was unable to obtain additional liquidity.

The EV manufacturing unit of the embattled developer China Evergrande Group said if it was able to obtain financing of more than 29 billion yuan ($4.21 billion) “in the future”, it planned to launch a number of flagship models and hoped to achieve mass production.

($1 = 6.8802 )

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Starbucks braced for price war in China as rivals pile into coffee market

Starbucks braced for price war in China as rivals pile into coffee market

Starbucks is placing a further big bet on China — where competition is growing and recent results left a bitter taste — in one of Howard Schultz’s last acts before he stepped down as chief executive this month.

The US chain plans to open a store in China every nine hours to reach 9,000 locations by 2025, up from just over 6,000 currently. It is also opening a $130mn roasting plant this year in the city of Kunshan, its first in Asia, as it embeds itself more deeply in the market it entered a quarter-century ago.

China provided $2.5bn of Starbucks’s $32bn in global revenue last year. But its same-store sales in the country collapsed 29 per cent year on year in the final three months of 2022, four times worse than expected, as China abandoned Covid-19 restrictions and the virus spread across the country.

Schultz, who handed over the reins to Laxman Narasimhan on March 20, appeared undeterred. “We are still only in the early chapters of our growth story in China,” he said on an earnings call. “Our confidence . . . and our aspirations for the market and our partners has never been greater.”

As with many consumer brands in China, Starbucks’s expectations of a big rebound rest on projections for a huge market opportunity, but they are tempered by increased competition from international and domestic rivals and often fickle consumer habits.

Tim Hortons, a Canadian chain whose franchise rights in China are owned by a Nasdaq-listed company that is backed by private equity firm Cartesian Capital, opened its 600th store in January. Yum China, in partnership with Italian brand Lavazza, aims for 1,000 stores by 2025.

Luckin Coffee, a Chinese company derailed by accounting fraud in 2020, opened more than 2,000 stores on a net basis as part of its revival in the 2022 fiscal year, it said in its annual report.

Manner Coffee, originally backed by Chinese private equity firm Today Capital, started with a single store in Shanghai in 2015 and had 150 stores nationwide by 2021, according to Daxue Consulting. Cotti Coffee, which former Luckin executives launched in October, has already opened 1,300 stores and is aiming for 10,000 by 2025, surpassing even Starbucks, according to local media reports.

“It’s a very crowded market,” said Shaun Rein, managing director of the China Market Research Group. “The success of Starbucks was huge, and it transformed how coffee companies viewed China.

“Basically it’s become a price war,” he added. “The private equity money has come in.”

Many small independent stores charge a fraction of the price at Starbucks and other international competitors, which are also trying to grasp shifting consumer appetite across a varied market.

Customers “are very dynamic, they’re very demanding . . . you need to stay actively innovating”, said Peter Yu, managing partner of Cartesian Capital, the majority shareholder of Tims China. “The Chinese consumer is learning what they like about coffee.”

He said Tims, which runs Tim Hortons in China, introduces a product every two weeks and aims to have 2,700 stores nationwide by 2026.

Coffee chains’ growth forecasts are based on the view that Chinese consumption will develop into a daily routine rather than predominantly a social activity with friends. Yu said Tim Hortons would target a “price point where coffee is not a semi-luxury good that you treat yourself to once a week but becomes a daily pleasure”. The chain, which charges Rmb20-Rmb25 ($3-$3.60) for a latte, is also selling in petrol stations and convenience stores.

That kind of adoption is particularly critical in smaller regional cities. In big ones such as Beijing, Shanghai and Guangzhou, people drink about 300 cups of coffee a year, close to US levels. But across mainland China as a whole, the average is just nine cups, according to Deloitte data.

“The market is far from saturated,” said Jason Yu, greater China managing director at Kantar Worldpanel.

One rival area of beverage competition is with tea chains. Kantar’s Yu points to Mixue Bingcheng, a bubble tea company that has expanded into coffee under the brand Lucky Coffee. With thousands of stores in its franchise, it charges just Rmb5 for an Americano compared with Rmb30 at Starbucks.

While lockdowns under zero-Covid put severe pressure on consumer industries in China, analysts suggested well-financed coffee chains were better able to weather the policy compared with independent counterparts. John Zolidis, founder and president of Quo Vadis Capital, said there was a “land grab mentality” among venture capital and private equity-backed food and beverage chains, which took the chance to expand while rents were still cheap.

Alex Huang, a 30-year-old office worker in Shanghai, said he had been drinking coffee regularly since 2016 and usually spent around Rmb30. “Compared to milk tea, coffee is a bit expensive,” he said.

Yu at Kantar noted that 10 years ago coffee was seen as an “exotic western beverage” that conveyed a western lifestyle, but now there were many Chinese brands.

“Their product is good in terms of where it is sourced and they are much more agile,” he said. “All the Chinese brands source their coffee from Africa, from South America, so it’s really the same.”

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The slumped housing market reaches a critical juncture

The slumped housing market reaches a critical juncture

But the worst of the storm might be behind us. At least for builders.

On Wednesday, KB Home reported that its cancellation rate was 36% in the first quarter of 2023. On one hand, that’s still an elevated share of sales under contract being cancelled. On the other hand, it’s a deceleration from the 68% rate last quarter, and a sign that aggressive builder incentives, like mortgage rate buydowns, alongside home price reductions are slowly bringing back buyers.

“As we entered the spring selling season during the quarter, we began to see an increase in [housing] demand. This reflected in part the targeted sales strategies we deployed, together with a stabilizing mortgage interest rate environment. As a result, we achieved a sequential improvement in our net orders in both January and February, and net orders have remained strong in the early weeks of March. Although there are still considerable interest rates and economic uncertainties, we are encouraged by this progression,” Jeffrey Mezger, CEO of KB Home, told investors on Wednesday.

Among publicly traded homebuilders, KB Home got hit the hardest by the so-called housing correction. The reason being that KB Home has a high concentration of its new home communities in overheated Western markets where the housing correction has been particularly sharp.

Why did KB Home’s cancellation rate drop so quickly?

Here’s the long winded answer: During the Pandemic Housing Boom—a time with seemingly unlimited housing demand—builders like KB Home achieved frothy profit margins as they quickly raised new house prices. That came in handy: As the housing market slumped last year, builders like KB Home had the breathing room to reduce margins (i.e. cutting prices and/or aggressive rate buydowns) in pursuit of finding the market, or the price point at which buyer demand would return.

The drop in KB Home’s cancellation rate suggests the builder is, well, “finding the market.” And the firm isn’t alone: Homebuilders across the country are seeing their cancellation rates improve.

Builders surveyed by John Burns Real Estate Consulting in February had an aggregate cancellation rate of 10.8%. That’s far below the peak of 24.6% hit in October, and just slightly above the 7.3% hit at the height of the Pandemic Housing Boom in February 2022.

Simply put: Homebuilder cancellation rates are normalizing—quickly.

“Our gross margin declined… as we adjusted the price of both our new home sales and homes in [the] backlog to market to promote deliveries and reduce cancellation rates,” Stuart Miller, executive chairman of Lennartold investors earlier this month.

By offering those incentives and price cuts, Lennar’s first quarter gross profit margin on home sales declined from 26.9% to 21.2%.

“Builders have taken their medicine for the most part right now on pricing. And we think nationally, home prices—on the new-home side, net of incentives—are down about 10% from peak,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, said in a video posted in February. “There’s probably not a ton of runway there left.”

Unlike homebuilders, who need to cut prices in order to move unsold inventory, existing homeowners are usually more resistant to such cuts. That resistance is why existing-home prices usually bottom out last in a housing market downturn.

“We still think that there’s more [home] price correction to come on the resale side, though. And the resale market is always stickier to the downside when it comes to [home] prices,” says Palacios.

Want to stay updated on the housing market correction? Follow me on Twitter at @NewsLambert.

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Yellen promise on community bank deposits sparks relief in small-town America

Yellen promise on community bank deposits sparks relief in small-town America

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WASHINGTON — The brewing U.S. banking crisis seems far removed from the northeastern Vermont town of St. Johnsbury, but local Passumpsic Bank executive Daniel Kimbell grew concerned when he heard U.S. Treasury Secretary Janet Yellen’s congressional testimony last week.

Yellen told a U.S. Senate hearing on March 16 that uninsured deposits would only be guaranteed in banks deemed a contagion threat, raising fears that banks like Passumpsic, with $900 million in assets, might see business deposits above the $250,000 insurance limit flee for perceived safety to far larger institutions.

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“A lot of us were kind of offended at what had come out, that the Treasury was going to guarantee all of the deposits for the larger banks — the too-big-to-fails — and us smaller banks were going to be on our own,” Kimbell told Reuters at an American Bankers Association conference in Washington.

While big banks have dominated headlines, the country’s 4,258 community banks, which are more risk-averse, actually account for more than 90% of all chartered banks.

They held just 11% of the $23.6 trillion in U.S. banking assets at the end of 2022, but nearly half are chartered in counties with populations of 50,000 or less, making them a key source of capital for small-town America and minority urban communities alike.

Yellen, President Joe Biden and the Federal Reserve and Federal Deposit Insurance Corp boards had invoked “systemic risk exceptions” after the failures of California’s Silicon Valley Bank and New York’s Signature Bank that allowed them to protect uninsured deposits, including those of wealthy technology executives and cryptocurrency investors.

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Yellen on Tuesday shifted her emphasis, vowing to safeguard deposits at smaller banks and saying that the Treasury and regulators were prepared to intervene if further deposit runs threaten more banking contagion.

She put a particular emphasis on community banks, saying they were a key part of a vibrant, competitive banking market and essential to serving rural and urban markets across the United States.

“The community banks in this country, we know, are strong and resilient. And I think banks need to reassure their customers, that they are strong and resilient, and the government needs to do exactly the same thing,” she said.

Kimbell, who heads wealth management at Passumpsic Bank, said her reassurances “took the anxiety out of the room” over deposits, which was shared by banks large and small.

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A spokesperson for the Independent Community Bankers Association (ICBA) said that member banks did not experience deposit runs amid the recent turmoil because customers perceive them as safely run and want to bank with local institutions.

Community banks play an important political role — there are often dozens of such institutions in every congressional district, and the Biden White House is concerned about further consolidation in financial services. They were a key pillar in COVID-19 pandemic programs to keep small businesses afloat and their employees paid during health lockdowns.

ICBA President Rebeca Romero Rainey, who had previously called for equal treatment for SVB and Signature, said Yellen’s remarks “recognize that if policymakers decide to provide unlimited deposit insurance to some institutions, they cannot leave others out — certainly not the community banks that have, as always, operated on a safe and sound basis.”

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Aaron Klein, a former U.S. Treasury official who helped craft the 2010 Dodd-Frank financial reform law, said it was hard to imagine the Treasury and regulators allowing depositors in a “Main Street” community bank to take losses in a failure after guaranteeing deposits for extremely wealthy individuals and businesses with funds in SVB and Signature Bank.

“The inequity of treating uninsured depositors differently at that small bank would be quite a problem, probably greater than whatever legal jujitsu would be required to invoke the systemic risk exception,” said Klein, a senior fellow at the Brookings Institution think tank in Washington. (Reporting by David Lawder and Douglas Gillison; additional reporting by Pete Schroeder; Editing by Heather Timmons and Jonathan Oatis)


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March Fed interest rate decision due today after SVB collapse: Follow for live updates

March Fed interest rate decision due today after SVB collapse: Follow for live updates

Will the Federal Reserve continue to hike interest rates as the banking industry walks on eggshells after the implosion of Silicon Valley Bank and Signature Bank earlier this month?

The anticipation is killing Fed watchers and investors alike.

Today we’ll finally get an answer.

Before the recent bank failures, some economists and policymakers had been calling on the Fed to stop hiking interest rates over fears it could cause a recession. Even with signs that the U.S. economy was cooling off and that soaring prices were slowing, Fed officials, including Chair Jerome Powell, signaled the central bank would likely raise interest rates by as much as a 50 basis point at its March meeting to continue curbing stubborn inflation.

Will the Fed hike interest rates?: 4 reasons Fed will raise rates again amid SVB crisis, 4 reasons it won’t

2023 banking crisis:Close to 190 banks could face Silicon Valley Bank’s fate, according to a new study

But after the recent bank failures, economists at Goldman Sachs said they didn’t expect the Fed to raise rates in March over concerns that it would put undue stress on banks.

However, if the Fed doesn’t change rates, it could risk losing the fight against inflation, which rose sharply on a monthly basis in January and February. The annual inflation rate remains is three times the Fed’s 2% target.

Follow along for live updates leading up to the Fed’s crucial decision today:

What time is the Federal Reserve announcement today?

If the Fed raises interest rates it will announce it at 2 p.m. ET today.

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington.

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington.

When is Powell speaking?

Powell will hold a press conference at 2:30 p.m. ET.

Stock market today

Stocks are moving slightly higher ahead of the Fed’s decision on interest rates. The Dow Jones Industrial Average was up around 0.2% as of 10:32 a.m.

Housing market and rates: Housing market is ‘overly sensitive’ to Fed rate hikes. Experts weigh in on what’s next.

How retirees can cope with a bad market: Recovering from crushing inflation, rate hikes and bank failures

First Republic Bank stock

Shares of First Republic Bank opened lower but turned positive. Late Tuesday night The Wall Street Journal reported that the troubled regional bank tapped Lazard, a financial advisory group, to help it review strategic options that could include a sale according to people familiar with the matter.

This comes a week after First Republic received a $30 billion capital infusion for major U.S. banks including Bank of America, Citi and JPMorgan.

Odds of a Fed rate hike

The consensus is that the Fed will hike interest rates by 25 basis points.

As of around 10 a.m. ET on Wednesday, there was an 86% chance of that happening, according to the Chicago Mercantile Exchange’s FedWatch Tool, which uses future Fed funds futures contracts to inform rate decision forecasts.

Meanwhile, there was around a 14% chance the Fed will hold rates steady, a slight increase from yesterday.

Before the banking crisis unfolded, those odds looked quite different. There was a 24% chance the Fed would hike by 50 basis points and a 76% chance of a 25 basis point hike and a 0% chance of a pause.

2-year Treasury yield

Yields on 2-year Treasury notes are up Wednesday morning. As of 10:33 a.m. ET they hovered above 4.2%. At the onset of the banking crisis around two weeks ago, yields shot up to 5%. The last time 2-year yields were at that level was 2007.

Yields on short-term Treasury notes tend to rise when investors anticipate the Fed will hike interest rates.

Bitcoin price

Even though the banking crisis has roiled the stock market, Bitcoin has performed especially well. It’s up more than 16% for the month as of Wednesday morning and was trading at over $28,000.

ECB rate decision

The banking crisis didn’t deter the European Central Bank from hiking interest rates by 50 basis points at its meeting last week.

Even as Credit Suisse was struggling to raise capital to shore up liquidity, markets generally were unphased by the ECB decision.

“The fact that markets did not react negatively” to the move “will also provide a measure of reassurance” to the Fed, Barclays economists said.

Fed rate hike history

At the Fed’s last meeting, which was held between January 31 and February 1, interest rates were bumped up 0.25 percentage point.

Interest rates were hiked seven times last year. Rates had been hovering near zero during the pandemic’s economic standstill and then were raised by 0.25 percentage point starting in March.

Another increase came in May, this time by 0.50 percentage point, followed by 0.75 percentage point hikes for four consecutive meetings. The Fed ended the year with a 0.50 percentage point hike.

Banks at risk of failure

On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.

That is because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.

Fed report today

In addition to the Fed’s announcement on interest rates at 2 p.m., the central bank is set to release its quarterly Summary of Economic Projections. The report gives an overview of how Fed officials think the economy will fare in the next couple of years based on their projections for gross domestic product, the unemployment rate and inflation and where they believe interest rates will be.

But there’s a chance the Fed may delay releasing the report today because of all uncertainty stemming from the recent bank failures. The last time the Fed delayed the SEP report was in March 2020 at the onset of the pandemic.

Mortgage rates today

At the beginning of the month, the average annual percentage rate (APR) for a 30-year fixed mortgage is 6.77%. This is more than double the 3.22% rate we saw at the beginning of 2022 and up from 6.55% the week prior.

Mortgage rates and the Fed: Housing market is ‘overly sensitive’ to Fed rate hikes. Experts weigh in on what’s next.

Current mortgage rates details: How to shop for mortgage rates, more

What will Powell say after the interest rate annoucement

It’s anyone’s guess what Powell will tell reporters at his press conference following the rate decision announcement.

Economists at Deutsche Bank, who predict the Fed will raise rates by a quarter percentage point, think Powell will use his time at the mic to “emphasize the heightened uncertainty about the outlook given recent events.”

“He will also reinforce that the banking system remains sound and the Fed stands ready to provide liquidity as needed,” Deutsche Bank economists said in a note to clients earlier this week.

JPMorgan economists also believe the Fed will hike rates by a quarter point. They predict he will spend a considerable amount of time during his press conference walking reporters through the Fed’s plan to lower inflation, in addition to addressing the current state of banking.

How many banks have failed in 2023?

Two FDIC-insured banks, Silicon Valley Bank and Signature Bank, have failed this year. The FDIC took over both banks and vowed to make all depositors whole even if their account balances exceeded its traditional $250,000 insurance cap.

I bond interest rate

I bonds, inflation-protected U.S. Treasuries, issued from November through April have a composite interest rate of 6.89%.

Can I purchase I bonds with refund?: What to know about rates, deadline, restrictions

The case for I bonds: Why I doubled down on I bonds to protect my sons’ inheritance from inflation

Current Fed funds rate

The Fed is currently targeting an interest rate range between 4.5% to 4.75%.

Fed meeting calendar

The Fed’s next meeting is May 2-3. Here’s a schedule of the remaining meetings for the year:

  • June 13-14

  • July 25-26

  • September 19-20

  • Oct/Nov 31-1

  • December 12-13

When does the Fed meet to talk rates?The Federal Reserve’s 2023 schedule

Fed meeting agenda:Here’s what to know and when to expect a rate change.

Powell talks inflation: Fed chair testifies before Senate on inflation, speeding up rate hikes

When is the next Fed interest rate decision?

The next Fed interest rate decision will come out on May 3.

Contributing: Paul Davidson, Swapna Venugopal Ramaswamy, Anna Kaufman 

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

This article originally appeared on USA TODAY: Fed expected to raise rates: Live updates on FOMC meeting, stocks

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Nike's holiday quarter plagued by bloated inventory, weak China sales

Nike's holiday quarter plagued by bloated inventory, weak China sales

Nike beats on top and bottom, excess inventory continues to decline

Nike easily beat Wall Street’s estimates for its holiday quarter earnings and revenue, although its bloated inventory continued to weigh on its margins and sales in China fell short of expectations.

Nike, like other retailers, has been in the process of offloading a glut of inventory brought on by supply chain disruptions and shifting consumer demands that’s been weighing on its margins.

Gross margin fell to 43.3% for the quarter, a decrease of 3.3 percentage points, due to higher markdowns and promotions the company used to liquidate its inventory.

While Nike CEO John Donahoe told investors last quarter he believes the company is past its inventory peak, the company warned gross margins were expected to take a hit during the holiday quarter.

Inventories were up 16% compared with the year ago period at $8.9 billion, which the company attributed to higher product input costs and elevated freight expenses. Quarter over quarter, Nike offloaded about $400 million in inventories.

During an earnings call with investors Tuesday, executives said they’re “increasingly confident” Nike will exit the fiscal year with healthy inventory levels. They also expect to see “even leaner inventory” than they’d anticipated given sales momentum, the executives added.

Here’s how the sneaker giant performed in its third fiscal quarter of 2023 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

  • Earnings per share: 79 cents vs. 55 cents expected
  • Revenue: $12.39 billion vs. $11.47 billion expected

The company’s reported net income for the three-month period that ended Feb. 28 was $1.2 billion, or 79 cents per share, compared with $1.4 billion, or 87 cents per share, a year earlier.

Sales rose to $12.39 billion from $10.87 billion a year earlier.

On Wednesday morning, Barclays upgraded Nike to overweight from equal weight, citing the potential for growth in China, inventory improvements and potential for margin improvements.

Shares of the company fell more than 1% Wednesday.

The road to recovery in China

Nike has been looking for a sales rebound in China, its third-biggest market by revenue, as the region recovers from the Covid pandemic. But those hopes have failed to materialize.

Sales in the region fell 8% during the third quarter to $1.99 billion, despite the end of the country’s zero-Covid policy that had weighed on operations.

Wall Street analysts had anticipated sales in the region of $2.09 billion, according to StreetAccount estimates.

Sales in China have been soft as consumers contended with sweeping lockdowns and rising infections. While some activity has begun to pick up, consumers aren’t back to pre-pandemic shopping levels just yet, according to a Citi research note.

When asked about its outlook on China’s recovery, Nike CEO John Donahoe said the company feels good about its momentum in the region and saw growth “really pick up” in the second month of the quarter after lockdowns ended.

“The fundamentals of this market are good, right? It is a very large market that’s growing. Sport and wellness is a key trend and tailwind there. There’s a desire for innovation and style. And the key to winning in this market is simply put: having great innovation and connecting with Chinese consumers in a locally relevant way,” Donahoe said.

Outside China, Nike saw double-digit sales increases in all of its other markets. Sales in North America were up 27% and in Europe, Middle East and Africa, revenue jumped 17% compared with the year-ago period. In Asia Pacific and Latin America, sales were up 10%.

Citing its strong performance in the quarter, Nike now expects fiscal year revenue to grow by high single digits, compared to mid single digit guidance it gave in the prior quarter. It expects gross margins to decline by 2.5 percentage points, which is the low end of the previous guidance range given and reflects Nike’s ongoing efforts to liquidate excess inventory, along with other costs.

In the next quarter, Nike expects flat to low single digit revenue growth. Finance chief Matthew Friend said the company is taking a “cautious approach” to planning, given uncertainty about consumer confidence and the economy.

“We have managed through cycles like this before and we will be well prepared for the volatility that is in font of us,” he said. 

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People wearing protective face masks walk past the closed Nike store on 5th Avenue, during the outbreak of the coronavirus disease (COVID-19), in New York City, May 11, 2020.

Mike Segar | Reuters

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