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Barry Sternlicht says the ‘deck is stacked’ in China and he’s not a fan of investing there

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Global investor Barry Sternlicht told CNBC on Wednesday he continues to hold a cautious view on investing in China.

“We’re not investors directly in China,” the chairman and CEO of Starwood Capital Group said in an interview on “Squawk Box.” “It’s not a China thing, so much as countries where we think the deck is stacked or we can’t underwrite the political risk of the investment. It’s just, why bother?”

Sternlicht’s comments Wednesday follow Beijing’s recent regulatory crackdown on all manner of industries, including technology and private education firms. The developments thrust back into the spotlight concerns many overseas investors have had about operating in China, where the communist government can be unpredictable in exerting its far-reaching power over businesses.

Sternlicht, whose firm largely focuses on global real estate, has for years warned about the challenges of investing in China. For example, in a 2015 Bloomberg interview, he said the Chinese government’s central planning is “not always that obvious to the foreign investor” and suggested he wouldn’t get enough return for the risk he’s taking on.

Starwood Capital has, however, partnered with Chinese developer Shimao Property Holdings to operate a hotel joint venture in the country, which is home to the world’s second-largest economy. According to a 2017 press release, Shimao owned 51%, while Miami-based Starwood owned 49%.

Beyond that Shimao venture, Sternlicht told the travel news site Skift last year that his firm was “not ready to be adventurous” in China. “It’s not my comfort zone,” he added then.

More broadly, Sternlicht said he holds concerns about the economic implications of U.S.-China relations right now, particularly as it relates to Beijing’s recent encroachments on Taiwan.

Earlier this month, the U.S. State Department said in a statement it was worried about China’s “provocative military activity near Taiwan” and urged Beijing to “cease its military, diplomatic, and economic pressure and coercion” toward the democratic self-ruled island.

Taiwan holds a key place in the global economy because of its dominance in the semiconductor industry. However, China claims Taiwan as part of its own territory.

While saying the U.S. is unlikely to go to “physical war” with China over Taiwan, Sternlicht worried that the Biden administration may ratchet up economic sanctions and intensify the trade war that began under former President Donald Trump.

“It would strategically be a nightmare for the United States,” Sternlicht said. “Semiconductors will be more important than oil for this country,” he added. “Forget reserves. We need a semiconductor reserve because your washing machine will stop working. It’s a serious issue.”

“That is, really, the risk to the equity market because we will most likely start with a sanction, global sanctions against China. They think in 100-year intervals. We have investors that buy companies for weeks, not even months, so they will wait us out,” he added. … They have a huge competitive advantage.”

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Evergrande has made $83.5 million bond interest payment: Chinese media

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China Evergrande Group started returning a small portion of the money owed to buyers of its investment products, weeks after people protested against missed payments at its Shenzhen headquarters, pictured here on Sept. 30, 2021.

Gilles Sabrie | Bloomberg | Getty Images

Evergrande has remitted the funds for a key interest payment that was due Sept. 23 — ahead of a 30-day grace period that ends Saturday, according to Chinese state media Securities Times.

The $83.5 interest payment on Evergrande’s March 2022 offshore bond had been closely watched by investors since the heavily indebted property developer warned twice in September that it may default.

The Securities Times report said Evergrande has remitted the $83.5 million through Citibank. Citibank declined to comment on this report.

Evergrande has missed four other coupon payments in September and October.

The property giant, which is buckling under the weight of more than $300 billion in debt, has been struggling to raise funds.

The report said Evergrande plans to make the interest payment in time for the Oct. 23 deadline.

— This is a developing story. Please check back for updates.

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China may move toward easy monetary policy, but must tread carefully

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People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 

Jason Lee | Reuters

BEIJING — China’s central bank is poised to move carefully toward easing monetary policy, even as the U.S. is on its way to tightening policy.

In moving in the opposite direction, the People’s Bank of China will need to strike a delicate balance, as policymakers keep a firm eye on inflation and the rising cost of U.S. dollar-denominated debt.

Analysts say that easing monetary policy may not come in overt moves like cutting the amount of cash that banks must hold as reserves, or the RRR — one of many policy tools that the central bank holds. Instead, China will likely seek targeted moves.

Here’s why.

For one, divergence with the U.S. could have many consequences for the market.

Jefferies’ analysts pointed out in a note Monday that many Chinese companies, especially property developers, have raised large amounts of U.S. dollar-denominated debt. That’s going to become more difficult to repay when the U.S. dollar climbs or U.S. yields start to rise on the back of the Federal Reserve’s planned reduction in asset purchases.

The Fed released meeting minutes last week that showed the U.S. central bank is on its way to tightening, potentially as soon as next month. The move comes as U.S. policymakers worry about whether inflation will persist.

China faces the same challenge. The producer price index, a measure of production costs for factories, rose by a record 10.7% in September from a year ago.

“Persistent inflationary pressure limits the potential scope of monetary policy easing,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

But it’s become clearer than ever to many economists that China will need to ease.

[China’s] growth slowdown has hit levels policymakers can no longer ignore and we expect to see incremental loosening across three pillars – monetary, fiscal and regulatory.

BlackRock Investment Institute

Third-quarter GDP data released Monday showed China’s economy slowed more than expected. A power shortage has restricted factory production. Tighter regulation on debt in the real estate industry has cut into a sector that’s contributed to a quarter of China’s GDP.

“The growth slowdown has hit levels policymakers can no longer ignore and we expect to see incremental loosening across three pillars – monetary, fiscal and regulatory,” BlackRock Investment Institute analysts said in a note Monday.

Earlier this year, Beijing was more focused on addressing social issues, such as high child-raising costs in a country with a rapidly aging population. A regulatory crackdown over the summer included an abrupt order that after-school tutoring companies must drastically cut their operating hours.

Read more about China from CNBC Pro

Sun Guofeng, head of the monetary policy department at the People’s Bank of China, emphasized to reporters last Friday how the central bank’s monetary policy remained “prudent.” He said producer prices would likely remain high, but moderate by the end of the year.

Sun also said the central bank was aware of the Fed’s statement. He did not discuss whether U.S. actions would affect China’s, and repeatedly said China had many monetary policy tools.

Targeted monetary policy adjustments

Analysts have long pointed out that China’s unique economic structure relies more on an array of monetary policy levers, rather than a single interest rate.

“Monetary policy will be loosened appropriately,” Zong Liang, chief researcher at the Bank of China said Tuesday in Mandarin, according to a CNBC translation.

While keeping overall monetary policy at a “normal” level, he said the central bank could ease policy for specific sectors. For example, the PBOC could help businesses struggling to bear the high cost of raw materials. Zong also expects support for stable economic growth will include a boost to infrastructure.

He said China wants to avoid a situation in which policy support causes a rise in costs for ordinary consumers as well as for businesses.

While producer prices surged 10.7% in September compared to a year ago, the consumer price index remained muted and climbed just 0.7% year-on-year.

When it comes to monetary policy changes, many economists have lowered their expectations for China to cut the reserve requirement ratio (RRR) by the end of this year.

“We think the weak Q3 data will prompt Beijing to further dial back growth-restraining policies,” said Aidan Yao, senior emerging Asia economist, AXA Investment Managers.

Seeing a broader and long-lasting slowdown of the real estate sector is probably [the] largest downside risk that we need to monitor.

Francoise Huang

senior economist, Euler Hermes

He said the likelihood of a broad-based RRR cut has declined following the latest PBOC comments, but “a targeted move is still possible if growth falters further.”

On the fiscal side, Yao expects local governments to deploy about 1.3 trillion yuan ($203.3 billion) in cash from special bond sales in the next two months, which should “provide strong support” for investment in infrastructure.

Letting the property market shake out

However, Yao noted that Beijing’s tight control over traditional channels of implementing monetary policy – including the housing market – will limit the overall stimulus effect of policy easing.

The greater drag on China’s growth still lies in the property sector. Beijing has increased its efforts in the last year to curb the industry’s reliance on debt for growth, sending property investment and new home sales falling in September.

“Seeing a broader and long-lasting slowdown of the real estate sector is probably [the] largest downside risk that we need to monitor,” said Francoise Huang, senior economist at Euler Hermes, a subsidiary of financial services firm Allianz.

She said policymakers are trying to “phase out the most indebted, or illiquid, or insolvent companies, in the meantime limiting contagion to other sectors.”

Huang doesn’t expect Beijing to allow the economy to slow down so drastically that China can barely meet its GDP target of 6% growth this year. Most economists expect growth of around 8% this year.

But with policymakers’ focus this year on addressing longer-term problems in the economy, Beijing may not be as inclined to stimulate growth as much as before, she said. “Their tolerance for slowdown and their tolerance for risk may be higher than in the past.”

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S&P 500’s record close overnight, Evergrande Group, oil

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SINGAPORE — Shares in Asia-Pacific slipped in Friday morning trade start despite gains overnight on Wall Street that took the S&P 500 to a record closing high.

The Nikkei 225 fell 0.29% in early trade while the Topix index declined 0.39%. South Korea’s Kospi shed 0.05%.

Australian stocks were also lower as the S&P/ASX 200 slipped slightly.

MSCI’s broadest index of Asia-Pacific shares outside Japan traded 0.07% lower.

Investors will continue to monitor shares of China Evergrande Group, with the debt-ridden developer inching closer to a technical default on the coupon payment of a dollar-denominated bond that was due Sept. 23. Its 30-day grace period ends this weekend.

Stock picks and investing trends from CNBC Pro:

S&P 500 record close

The S&P 500 rose 0.3% overnight on Wall Street to a new record close of 4,549.78. The Nasdaq Composite also gained 0.62% to 15,215.70 while the Dow Jones Industrial Average lagged, slipping 6.26 points to 35,603.08.

Currencies and oil

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 93.745 as it struggles to recover after slipping from above 94 earlier this week.

The Japanese yen traded at 113.84 per dollar, still stronger than levels above 114.4 seen against the greenback earlier this week. The Australian dollar changed hands at $0.7464 after yesterday’s drop from above $0.75.

Oil prices were lower in the morning of Asia trading hours, with international benchmark Brent crude futures slipping fractionally to $84.57 per barrel. U.S. crude futures declined 0.12% to $82.40 per barrel.

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