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EU-China tensions and its impact on Europe investment deal



Flags of the European Union (left) and China.

Nelson Ching | Bloomberg | Getty Images

China made a “huge strategic blunder” when it retaliated against Europe by imposing sanctions on EU politicians, former top White House trade negotiator Clete Willems said. 

Beijing’s actions killed a major investment agreement between the European Union and China, and the deal is “off the table now,” Willems told CNBC on Monday.

In March, China imposed sanctions on 10 European Union politicians and four other entities. They came as an immediate retaliation for sanctions the EU imposed on China for “arbitrary detentions” of members of an ethnic minority in China.

Xinjiang in northwestern China is home to a Muslim group known as the Uyghurs whom the United Nations and others have identified as a repressed ethnic group. Also in March, the United States, United Kingdom and Canada said China engages in “forced labour, mass detention in internment camps, forced sterilisations” and other abuses against Uyghurs.

China has repeatedly dismissed those claims as “lies and disinformation.”

The European Parliament last month paused the ratification of a new investment pact with China until Beijing lifts sanctions on the EU. 

“It does show that with China, it’s overreaching and overreacting and not addressing legitimate issues like forced labor,” Willems, a former deputy director of the National Economic Council, told CNBC’s “Street Signs Asia.” He is now a partner at law firm Akin Gump.

We’ve still a long way to go. And we need to see Europe continuing to be more muscular.

Clete Willems

Partner, Akin Gump

The EU-China Comprehensive Agreement on Investment had been in the works for seven years and was finally agreed by negotiators in December. It would have put EU companies on an equal footing in China and cement Beijing’s status as a trusted trading partner. It would also have given each party’s businesses greater access to the other’s markets.

“The question that the U.S. always had with Europe though, is they are much more dependent on China as an export market — and so the question is how tough will they really be,” Willems pointed out.

The EU parliament “demands that China lift the sanctions before dealing with [the investment accord]”, it said in its resolution, which is not legally binding but is now the assembly’s official position. “EU-China relations may not continue business as usual,” the EU parliament said.

However, Willems said Europe needs to take a tougher stance on China.

“I think we’ve seen some positive signals, but I think the amount of pressure that the allies are (putting) on China to get them to change their practices … We’ve still a long way to go. And we need to see Europe continuing to be more muscular,” he said. 

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Tokyo Olympics: WHO Director-General addresses IOC



World Health Organization (WHO) Director-General Tedros Adhanom Ghebreyesus attends a daily press briefing on COVID-19, the disease caused by the novel coronavirus, at the WHO headquaters in Geneva on March 11, 2020.

Fabrice Coffrini | AFP | Getty Images

The world is in the early stages of another wave of Covid-19 infections and death, World Health Organization Director-General Tedros Adhanom Ghebreyesus said Wednesday.

Speaking to International Olympic Committee members in Tokyo, Tedros said the global failure to share vaccines, tests and treatments is fueling a “two-track pandemic.” Countries that have adequate resources like vaccines are opening up, while others are locking down in a bid to slow the virus’ transmission.

“This is not just a moral outrage, it’s also epidemiologically and economically self-defeating,” Tedros said, adding that the longer the pandemic drags on, the more socioeconomic turmoil it will bring.

“The pandemic is a test and the world is failing,” he said.

A celebration of hope

The Tokyo Games are set to open Friday after being postponed last year due to the pandemic.

Rising Covid-19 cases in Tokyo have overshadowed the Olympics, which banned all spectators from the games this month after Japan declared a state of emergency.

Cases around the Japanese capital have risen by more than 1,000 new infections daily in recent days. Nationwide, Japan has reported more than 848,000 Covid cases and over 15,000 deaths amid a relatively slow vaccine rollout.

The first positive Covid-19 case hit the athlete’s village over the weekend and, so far, more than 70 cases have been linked to the Tokyo Games.

On Wednesday, Tedros said the games are a celebration of “something that our world needs now, more than ever — a celebration of hope.” While the pandemic may have postponed the games, he said it has not “defeated them.”

Vaccine discrepancies

Tedros criticized the vaccine discrepancies between wealthy and low-income countries. He said 75% of all vaccine doses have been administered in just 10 countries while only 1% of people in poorer nations have received at least one shot.

The global health body has called for a massive worldwide push to vaccinate at least 70% of the population in every country by the middle of next year.

“The pandemic will end when the world chooses to end it. It’s in our hands,” Tedros said. “We have all the tools we need: we can prevent this disease, we can test for it, and we can treat it.”

He called on the world’s leading economies to step up by sharing vaccines and funding global efforts to make them more accessible as well as incentivizing companies to scale up vaccine production.

Disclosure: CNBC parent NBCUniversal owns NBC Sports and NBC Olympics. NBC Olympics is the U.S. broadcast rights holder to all Summer and Winter Games through 2032.

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Dr. Vin Gupta encourages J&J vaccine recipients to get a Pfizer or Moderna booster



Intensive-care unit and lung doctor Dr. Vin Gupta told CNBC that he’s already encouraging patients who received the single-shot Johnson & Johnson Covid vaccine to get a Pfizer or Moderna booster shot amid the dramatic increase in delta variant cases across the U.S. 

Gupta, a professor at the University of Washington’s Institute for Health Metrics and Evaluation, told “The News with Shepard Smith” that “AstraZeneca, when combined with a Pfizer or Moderna booster, is showing tremendous levels of protection against delta, in terms of the antibody levels that are generated in patients.”

“I do think that those one-shot J&Jer’s should be given the opportunity, while we complete our clinical trial … I’m already telling my patients to do it, if they can get access to it.” 

Gupta’s comments come on the heels of a new study from a lab at New York University Tuesday that raises serious questions about the effectiveness of J&J’s single-dose vaccine against the highly contagious delta variant. The NYU study is not yet peer reviewed, but found that the antibody levels in those who received the J&J shot may be low enough to be less protective.

CNBC correspondent Meg Tirrell interviewed the lead author of the study, Dr. Ned Landau, who told her that the study suggests, “one should at least consider a second vaccination, a second shot” with the J&J vaccine, either of the same vaccine, or one from Pfizer or Moderna.

J&J told CNBC that its own data showed the vaccine “generated strong, persistent activity against the delta variant and other highly prevalent variants.” 

The Centers for Disease Control and Prevention told CNBC that it stands by its statement earlier this month about boosters that “Americans who have been fully vaccinated do not need a booster at this time.” 

Gupta furthered the case for administering a booster shot when he told host Shepard Smith that his “definition of fully vaccinated is two doses of a vaccine.”

Smith asked for clarification on whether Gupta considers the nearly 13 million Americans who received the J&J dose were actually fully vaccinated. 

“I think you’re protected, likely from the hospital and severe outcomes from say, the delta variant, based on what data we do have,” Gupta said. “I do not think you have the same level of protection to transmit the virus than somebody who received two doses of the vaccine like Pfizer or Moderna. I think that is pretty clear at this point.”

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As debt risks grow, here are 3 warning signs to watch



Signage illuminated at the China Huarong Asset Management Co. headquarters on Financial Street in Beijing, China, on Wednesday, May 19, 2021.

Yan Cong | Bloomberg | Getty Images

BEIJING — Weak spots are emerging in China’s growing debt pile.

National debt levels have climbed to nearly four times of GDP, while an increasing number of corporate bonds have defaulted in the last 18 months.

Although the latest defaults represent a fraction of China’s $13 trillion onshore bond market, some high-profile cases have rattled investors since the common perception has been that the Chinese government will not let state-supported firms fail.

The case of Chinese bad debt manager Huarong has also spooked investors, causing a market rout this year when the firm failed to file its earnings in time and its U.S. dollar-denominated bonds plunged.

Analysts said cases like these signal how the state’s so-called implicit guarantee is changing as the government tries to improve the bond market’s quality — weeding out the weaker firms, and allowing for some differentiation within the industry.

As China’s growth slows, authorities are looking to strike a better balance between maintaining control and allowing some market-driven forces into the economy in order to sustain growth in the long term.

In the first half of this year, the total number of defaulted corporate bonds in China amounted to 62.59 billion yuan ($9.68 billion) — the most for the first half of a year since 2014, according to data from Fitch Ratings. Of that, defaults by state-owned companies contributed to more than half that amount — about 35.65 billion yuan.

For the whole of 2020, bond defaults amounted to 146.77 billion yuan, a huge leap from just six years ago in 2014, according to Fitch. That year, defaults totaled 1.34 billion yuan, and there were no defaults by state-owned firms, the ratings agency said.

As investor fears ramp up, here are three important developments to watch, economists say.

1. Bond default in a grey area of local government

A major milestone to counter the idea of implicit guarantee in China’s market would be a default of a bond issued by a local government financing vehicles (LGFV).

These companies are usually wholly owned by local and regional governments in China, and were set up to fund public infrastructure projects. Bonds issued by such firms have been surging amid an infrastructure push as the Chinese economy improved.

“Many LGFV are even worse than so-called Zombie companies, in the sense that they could not pay the interest, not (to) mention the principal on their own,” Larry Hu, chief China economist at Macquarie, said in a June 25 note. Zombie companies are those that are heavily indebted and rely on loans and government subsidies to stay alive. “They could survive only because of the supports from the governments.”

“The year of 2021 is a window to break implicit guarantee, as it’s the first time in a decade that policymakers don’t have (to) worry about the GDP growth target. As a result, they could tolerate more credit risk,” Hu said, noting it’s only a matter of time before an LGFV bond default occurs.

In 2015, electrical equipment manufacturer Baoding Tianwei became the first state-owned enterprise to default on its debt, following the first default in China’s modern onshore bond market a year earlier.

Nomura said LGFVs are a “major focus” of China’s tightening drive, and noted that bonds issued by the sector surged to a record 1.9 trillion yuan ($292.87 billion) last year, from just 0.6 trillion yuan in 2018.

2. Huarong’s ‘big overhang’ on the sector

For investment-grade bonds in China, a major factor for future performance is how the case of Huarong Asset Management is resolved, Bank of America analysts said in a note last month, calling the situation a “big overhang.”

China’s biggest manager of bad debt, Huarong, has been struggling with failed investment and a corruption case involving its former chairman, who was sentenced to death in January.

After missing its March deadline to publish its 2020 results, the firm also said “auditors will need more information and time to complete” the audit procedures. It added, however, that failure to provide the results does not constitute a default.

Huarong’s biggest backer is the Ministry of Finance. China’s economy will need to grow quickly enough to ensure the central government budget isn’t strained further.

If there is a disorderly default of Huarong’s dollar bond, we could see a broad sell-off of China credits, especially (investment grade) credits.

If Huarong’s case is resolved with government support, it should boost China’s asset management sector, as well as other Chinese government-linked entities, says Bank of America.

However, the bank added: “If there is a disorderly default of Huarong’s dollar bond, we could see a broad sell-off of China credits, especially (investment grade) credits.”

Regulators are pushing Huarong to sell non-core assets as part of a revamp, according to a Reuters report in early June.

In the event of a Huarong default, the cost of capital could rise “significantly” for other state-owned companies as “markets re-evaluate perceptions of implicit guarantees by the state,” Chang Wei-Liang, macro strategist at Singapore bank DBS, told CNBC via email. As risks go up, firms have to offer higher returns to draw investors.

Chang said China has enough money on hand to address Huarong’s problems.

However, “the key question is whether the state will choose to intervene by providing support with additional capital, or by imposing losses on equity holders and debt holders first to reinforce market discipline,” he added.

3. Weak points in some provinces and local banks

A fiscally weaker province is probably related to a less dynamic economic situation, (and) a weaker economic situation means there could be more corporate bond defaults.

Francoise Huang

senior economist, Euler Hermes

That could affect the ability of small banks to support local state-owned companies, potentially requiring larger banks to step in to maintain system stability, the report said.

The provinces with greater issues are those exposed to cyclical industries, S&P Global Ratings credit analyst Ming Tan told CNBC.

Authorities need to strike a balance between allowing poorer quality loans to have a riskier rating, and keeping problems from accelerating, Tan said. “There’s definitely risk of mismanagement happening down the road, but so far, what we’re seeing, is this has been managed quite well.”

China’s banking and insurance regulator disclosed last week that in 2020, the banking industry disposed of a record high 3.02 trillion yuan — or $465.76 billion — in non-performing assets. Other data released last week showed China’s GDP grew 7.9% in the second quarter from a year ago, a touch below expectations.

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Some analysts have pointed to weakness at a local level. Pinpoint Asset Management analysis found that consumption declined year-on-year in May for four provincial capitals — Wuhan, Guiyang, Shijiazhuang and Yinchuan.

“A fiscally weaker province is probably related to a less dynamic economic situation, (and) a weaker economic situation means there could be more corporate bond defaults,” said Francoise Huang, senior economist at Euler Hermes, a subsidiary of Allianz.

The longer-term issue is restructuring the economy of these weaker provinces to allow more dynamic ones to grow, she said. “I don’t think the solution would be (to) continue investing into these less-performing sectors just for the sake of keeping them alive.”

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