March 25, 2023

China’s G.D.P. Growth Slows As Government Changes Gears

HONG KONG — China’s new tough-love approach to overhauling its giant economy showed through in weak economic data released on Monday, underlining just how rapidly growth in the once-sizzling economy has cooled.

China’s economy grew 7.5 percent in the second quarter of this year, compared with the same period a year earlier, the national statistics office reported. That was in line with economists’ expectations, and extended a progressive slowdown from 7.7 percent gross domestic product growth in the first quarter and 7.9 percent in the final three months of 2012.

Industrial output data for June, also released Monday, came in weaker than forecast, with an increase of 8.9 percent from a year earlier — down from 9.2 percent in May.

Retail sales, however, were better than expected, rising 13.3 percent in June from a year ago. May’s reading was 12.9 percent.

Sheng Laiyun, the spokesman for China’s National Bureau of Statistics, told reporters in Beijing that the data were within the bounds of official expectations, but he acknowledged headwinds affecting the economy.

“Viewed overall, national economic performance in the first half of the year was generally stable,” Mr. Sheng said during a news conference broadcast live on Chinese television Monday morning, “and the main indicators remain within the reasonable bounds for the annual forecast. But economic conditions are still complex and changeable.”

Senior Chinese officials last week set the tone for a more measured approach to economic expansion by declaring confidence in government growth targets, yet stressing the need for changes to ensure that growth.

On Friday, a meeting of the State Council Standing Committee — or China’s cabinet — that was chaired by Prime Minister Li Keqiang said that “innovation and expansive thinking are needed to expand domestic demand.”

“There needs to be both effective and stable growth and also structural adjustment, ensuring that there is action while maintaining stability,” read an official summary of the meeting, according to state-run media.

In an apparent effort to dispel jitters about the economy, China’s state-run media have also featured commentaries saying that the government’s economic policies remain on track, including the target of 7.5 percent G.D.P. growth for the whole year.

To a large degree, China’s recent slowdown has been engineered by authorities in Beijing, who are trying to steer the Chinese economy from an increasingly outdated growth model toward expansion that is more productive and sustainable, if slower.

While this slowdown has been happening for more than two years, a flood of comments from policy makers in recent months has made it increasingly clear that the new leadership that took the helm in March is serious about tolerating significantly slower growth in return for longer-term gains.

For years, China has relied on cheap credit, heavy manufacturing, infrastructure investment and exports as economic drivers — a combination that produced double-digit annual growth rates for much of the past 30 years.

Increasingly, however, this growth model is running out of momentum. China’s population is aging and its labor force is shrinking, meaning that labor productivity has to be raised to make up for the shortfall. Rising wages and a stronger renminbi have eroded China’s competitiveness and are undermining its status as the blue-collar factory floor of the world. At the same time, demand in key export markets remains slack.

Aware of these pressures, the new leadership in Beijing has said it wants to shift the economy more toward domestic consumption, reduce inefficiencies and environmental degradation that came with headlong growth and permit more competition and market liberalization in formerly state-controlled areas.

Recent pronouncements from policy makers and a days-long cash crunch in the banking system last month have created an impression that Beijing is prepared to tolerate some pain.

“The fact that we have not seen moves toward more stimulus seems to show that they are comfortable with seven-ish growth rather than nine or 10,” said Paul Gruenwald, chief economist for Asia-Pacific at Standard Poor’s, at a media briefing last week. “It suggests that the authorities understand that there is a trade-off between growth and financial stability.”

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Santander to Absorb Banesto in Bid to Cut Costs

MADRID — Banco Santander said Monday it would absorb Banesto, its main domestic subsidiary and once one of Spain’s leading banks, as part of a plan to cut 700 branches, or about 15 percent of its retail network.

Santander, Spain’s largest bank, said it would offer €293 million, or $384 million, to buy out minority investors in Banesto, in which it already owns 90 percent of the equity.

The offer values the shares of Banesto at €3.73 each, a premium of 25 percent over their closing price Friday. The shares, which had been suspended Monday morning pending the announcement, traded later in the day at €3.58.

Santander predicted its absorption of Banesto would yield €520 million in savings by the third year through the branch cuts and economies of scale from centralizing back-office operations and management.

The bank said it would also absorb Banif, a private banking subsidiary that has been operating under its own brand name.

The decision to unify Santander’s main brands and reduce its network to about 4,000 branches in Spain comes amid a banking crisis that has forced the country’s banks to slash their bloated retail networks in order to offset tumbling domestic earnings.

In October, Banesto reported a decline of 83 percent in third-quarter earnings as it was forced to raise its provisioning against bad loans.

Overall, Santander forecast that Spain’s banking consolidation would shrink the domestic network to 30,000 branches by the end of 2015, a decline of about 16,000 branches, or 35 percent, in the eight years since the financial crisis started.

“This transaction is part of the restructuring of the Spanish financial system, which involves a significant reduction in the number of competitors and the creation of larger financial institutions,” Santander said.

Several other Spanish banks have recently announced significant office closures, led by Bankia, a giant lender whose near-collapse forced the government to negotiate a European banking bailout worth €100 billion in June.

Santander took over Banesto in 1994, after Banesto got entangled in a fraud scandal that forced its seizure by the Bank of Spain and eventually led to a jail sentence for its flamboyant chairman, Mario Conde.

Following Santander’s takeover, however, Banesto continued to operate under its own management. In fact, some of Santander’s leading executives had stints running Banesto, including Ana Patricia Botín, the daughter of Santander’s chairman, Emilio Botín, who was in charge of Banesto until 2010, when she took the helm instead of Santander’s British subsidiary.

Daraigh Quinn, a London-based banking analyst at Nomura, wrote in a note to investors that Santander was making “a strategically good move,” particularly given the challenge facing Banesto of setting aside enough funds for non-performing loans.

“Although Banesto has been able to avoid raising any capital so far during the crisis, the current provisioning needs were maybe a little too much to absorb with ongoing profits,” Mr. Quinn said.

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DealBook Column: Why the Bailout in Spain Won’t Work

Chancellor Angela Merkel of GermanyMarkus Schreiber/Associated PressChancellor Angela Merkel of Germany.

It was not enough. And it may never be enough.

The euro zone’s offer of $125 billion to bail out Spanish banks over the weekend was hailed by finance ministers and officials across Europe as a masterstroke. Germany’s finance minister, Wolfgang Schäuble, suggested no further bailouts would be needed, saying, “Spain is on the right track.” On Sunday, some analysts and investors even applauded, with David R. Kotok, co-founder and chief investment officer of Cumberland Advisors, proclaiming: “Euro zone leaders rose to the occasion.” How wrong they were.

By now, it should be apparent that the bailout has failed — or is at least on its way to failing.

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After a brief rally Monday morning, stock markets in Spain swooned. The 10-year Spanish bond — perhaps the greatest indicator of confidence, or in this case a lack of confidence — jumped higher, to about 6.5 percent, demonstrating that investors were now even more anxious about the country’s ability to pay back its debts than they were the day before the bailout was announced. Seven percent was the threshold that preceded the government bailouts for Greece, Ireland and Portugal in 2010 and 2011. The cost on Monday of buying credit-default swaps — or insurance — on Spanish debt spiked, too.

Indeed, it now appears that the bailout could make things in Spain worse, not better. And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

This was bound to happen. That’s because bailing out the banks in each European country individually is a fool’s errand.

Experts often note — wrongly — that TARP, the Troubled Asset Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008. TARP, to some degree, has become the model for Europe.

But we forget history: TARP was only one component of the bailout. Perhaps more important — consider it the unsung hero of ending the crisis — was the government’s unilateral move to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so once deposits and money-market funds had been guaranteed. Keeping your money at Citigroup or Bank of America was relatively indistinguishable from a safety standpoint.

That is not the case in Europe. Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany. Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile. Worse, Spanish banks had been the biggest buyers of Spanish debt (a farce of a way to prop up the economy) and that most likely won’t continue.

As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to its shareholders, not to move its money out of Spanish banks. Of course, money leaving the banks can become a self-fulfilling vicious cycle that virtually no amount of bank bailouts can plug. (By the way, countries like Spain have their own version of F.D.I.C., but it is all but worthless if you believe the country could collapse under its own debt.)

Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zone deposit guarantee system so that there would be no reason for a depositor to withdraw money. European leaders are expected to address the idea, along with regional banking regulation and a way to recapitalize ailing euro zone institutions, at a summit meeting at the end of the month. Oddly enough, such a deposit guarantee would probably be pretty cheap. The psychological effect of such a guarantee would most likely ensure the solvency of more banks than the guarantee would ever have to pay out. That was the experience in the United States.

Of course, there’s a catch. A euro zone deposit guarantee would require agreement from all the countries that use the euro, which is something that the leaders there seem incapable of reaching because ultimately it would mean tighter integration and, yes, a loss of sovereignty.

And here’s another problem with a euro zone deposit guarantee: Unless you believe the euro is going to remain the standard — that countries like Greece or Spain won’t be forced out or secede from the currency — even the guarantee might not be enough, unless the guarantee holds for all currencies. For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he may well move his money.

In the meantime, this piecemeal approach is bound to fail. Kicking the can down the road, to use again an overused phrase, at some point will fail — and that’s what may have just happened.

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