Last week, a Hong Kong court ruled that the largest indebted property developer in the world, Evergrande, would be liquidated, two years after the company defaulted on its debt in late 2021.
Much of the media reporting on the decision focused on whether foreign creditors would ever recoup their losses from Evergrande, as the Chinese government has already said it will prioritize completing the group’s existing projects, though how this will happen is less clear. But beyond the question of who will get repaid, Evergrande’s liquidation opens up a slew of larger and more profound questions about the future of the Chinese economy, especially the relationships between the central government, local governments, the private sector and households. The liquidation of Evergrande is not an accident. It is part of a larger crackdown on the private sector and government collusion that President Xi Jinping launched at the very start of his term, beginning in 2013 with the Anti-Corruption Campaign, which has become one of the most consequential and longest-running campaigns in the history of the People’s Republic of China. Taken as a whole, this crackdown has fundamentally changed the relationship between the Communist Party and the business community, creating deep distrust and fear, while leading to capital flight and a deep downturn in confidence. The Anti-Corruption Campaign was followed by other policies that put the private sector on notice that old patterns of behavior would no longer be tolerated. Xi’s “new normal” would include more discipline and oversight. Xi’s confidence in the ability of his government to implement this crackdown expanded enormously in late 2020 and early 2021, coinciding with the regime’s successful management of the COVID-19 pandemic before the arrival of the incredibly infectious omicron variant. Xi made numerous speeches and statements at the time about the importance of “common prosperity” and the need to crack down on “disorderly capital,” while also emphasizing his dislike of real estate development as investment, epitomized by his oft-quoted mantra that “houses are for living in.” The “three red lines” policy, which reined in debt-fueled property development and directly targeted firms like Evergrande that were enormously leveraged, dates back to this period. In addition to launching the attack on the over-leveraged property sector, Chinese authorities canceled the IPO of Ant Financial, forced the rewinding of Didi’s listing on the N.Y. Stock Exchange, banned private tutoring and nationalized gray rhinos, as large firms that create systemic risk, such as Anbang Insurance and HNA, are known. At the same time, in his speeches on “common prosperity,” Xi vaguely alluded to new forms of taxation and redistribution so that China would eventually become an “olive-shaped society” with a large middle class and relatively few rich and poor. But crackdowns alone cannot substitute for the deep structural reform that the Chinese economy desperately needs. Any viable solution to the property crisis and to local government’s fiscal health requires that China’s central government take on more responsibility and more accountability. Xi must shift from being a disciplinarian to accepting that these problems are not only rooted in the bad behavior of corrupt officials, greedy capitalists or overextended households. All of these actors were responding to incentives set up by China’s development model, which grew increasingly dependent on real estate and land development for growth. So while Xi talks frequently about high-quality development as the “hard truth” of his administration, this is unlikely to be achieved without a fundamental shift in responsibility upward toward the central government. In other words, it’s not just local governments and private entrepreneurs who must change their behavior—the central government must as well. Given the scale of the current crisis—over 1.5 million home purchasers are still waiting for residences that they have already paid Evergrande for—it’s possible that local governments will still be held responsible for finding other viable real estate developers to take over the unfinished projects in their regions. But local governments are themselves deeply in debt for both related and unrelated reasons. Local governments were caught up in the same frenzy of real estate development and land sales for years. But they are also reeling from debt related to COVID-19 management and testing, as well as from the basic structure of their fiscal relations with the central government, which leaves them with many mandates to fund social security and public goods like education, but without enough resources to do so. This fiscal imbalance is one of the primary reasons that local governments became so reliant on land speculation and real estate development in the first place, because in a period of ever-rising property prices, it provided much-needed revenue. It was also, not coincidentally, an excellent mechanism for local officials to collude with real estate developers to become personally wealthy. As a result, local governments are implicated in the accumulated problems of overinvestment and corruption. But any long-term solution will require changes to the tax system, so that they have sufficient tax revenue to pay for the disproportionate amount of governance they are tasked with. This will by necessity include more directly taxing both the wealthy and property, and directing more tax revenue to localities instead of the central government. Requiring local governments to find “viable developers” to take over Evergrande’s unfinished homes also ignores how Evergrande’s problems are only the tip of the iceberg of real estate development debt. It is not even clear which developers are viable enough to take on the burden of finishing the homes Evergrande has already been paid for, while also attempting to make money on new development, given China’s significant overbuilding and declining property values. A new International Monetary Fund report on the Chinese economy estimates that China’s fundamental demand for housing will decrease by 50 percent over the next decade, even as media reports indicate a current oversupply in excess of 50 million homes. The real estate sector cannot deal with these problems alone, but most local governments are in no position to help. An effective solution will require that the central government allow for substantial restructuring of existing firms and perhaps direct bailouts to households currently left holding the bag. The IMF estimates that such measures will cost about 5 percent of GDP but will be offset by avoiding longer-term losses. For households, the real estate sector’s unraveling is hitting their pocketbooks directly. Because of China’s presale model of development, households have already paid for the promised properties, so they cannot be expected to pay more, especially when the value of these future properties are going down. Meanwhile, investments in existing property are the most important source of wealth for China’s urbanites, representing about 70 percent of household wealth. So the contraction in the real estate sector, while necessary, will make many Chinese poorer. Employment opportunities have also worsened, as the real estate decline affects not just construction, but everything else tied to property, from landscaping to interior design. All of these impacts will exacerbate the problem of consumer confidence, inducing households to save rather than spend, an incentive structure that is already reinforced by China’s weak social safety net. This in turn means that China will be forced to look to external markets to absorb excess capacity in everything from building materials to electric vehicles, further exacerbating imbalances that are complicating China’s relations with trade partners. Once again, any effective policy to address the problem of consumer confidence will similarly require more support from the central government and improvements to China’s underfunded and shallow welfare state. The risk of social unrest is still low due to strong state capacity to repress street protests. But Chinese households have already shown ingenious ways to express their displeasure through inaction, such as not paying mortgages and not seeking employment—the practice known as lying flat. Beijing has accomplished much with Xi’s dramatic crackdowns as he seeks to shift China’s development in a new and more sustainable direction. But the crackdowns are only the first step. They need to be followed by increased support for local governments from the central government. So far, Xi has deftly yielded sticks. Much will depend on whether he can now do the same with carrots.
0 Comments
Daily life became 3.2 percent more expensive in January compared to the same month last year, Statistics Netherlands (CBS) reported based on an initial estimate.
According to CBS, it calculated the estimate based on incomplete source data. In December, inflation was still 1.2 percent. The increase was mainly because the influence of energy price developments on inflation decreased in January. The drop in energy prices was much less sharp in January than in December. Energy and fuel together became almost a quarter cheaper, on average, in the last month of 2023 than a year earlier. In January, energy and fuels became only 2 percent cheaper. Excluding energy, inflation was 3.5 percent in January and 3.4 percent in December. The prices of energy like gas, electricity, and district heating strongly influenced inflation for some time. Energy prices increased in 2022 due to the war in Ukraine, and inflation skyrocketed. From January 2023, the government’s energy price cap led to lower energy prices, and partly as a result, inflation was lower in 2023. Because the price cap was introduced exactly one year ago in January, the influence of energy prices on inflation decreased in January 2024. Food, drinks, and tobacco prices increased by over 4 percent in January. In December, that increase was still over 5 percent. Services were 4.8 percent more expensive than a year earlier. According to the European measuring method, which is slightly different from CBS’s, prices rose by 3.1 percent annually in January. In December, that was 1 percent. The method agreed upon within the European Union to measure inflation does not take account of the costs of living in your own home. The inflation rate for the entire eurozone will be announced later in the day. China’s troubled real-estate giant the Evergrande Group has been ordered to liquidate, a move that could deal a new blow to confidence in the world’s second-largest economy. A Hong Kong court made the ruling on Monday after the company failed to convince a judge it had a workable plan to restructure some $300bn in debts. “It would be a situation where the court says enough is enough,” judge Linda Chan said. “I consider that it is appropriate for the court to make a winding up order against the company, and I so order.” The ruling follows 18 months of legal wrangling after creditor Top Shine, in 2022, filed a petition to wind up the developer in a bid to recoup its losses. Evergrande, the world’s most indebted developer, had been granted a brief reprieve in December after arguing it needed time to refine its restructuring plan. Chan said the court had in December “made it very clear it expected to see a fully formulated and viable proposal”. Evergrande Executive Director Shawn Siu called the ruling regrettable but said the group would do “everything possible to safeguard the stability of its domestic business and operation”, which he said is independent of its Hong Kong arm. Evergrande’s default on repayments to international investors in 2021, after Beijing began cracking down on excessive borrowing for real estate, sent shockwaves through China’s property sector, which accounts for an estimated 15-30 percent of the economy. More than 50 Chinese real-estate developers have defaulted or missed payments during the past three years, according to credit ratings agency Standard and Poor’s (S&P).
Hong Kong-listed shares in Evergrande plunged by more than 20 percent following the ruling on Monday, before the city’s stock exchange halted trading in the stock. The move is the latest in a series of warning signs for China’s $18 trillion economy, whose post-COVID recovery is facing challenges ranging from crackdowns on private industry to a declining population and an exodus of foreign capital. China’s official gross domestic product (GDP) growth of 5.2 percent last year was the worst performance in decades, excluding the COVID-19 pandemic. “Evergrande’s liquidation will pose more challenges to itself and other developers, but it will only have a limited impact on the already battered property sector and the macroeconomy,” Gary Ng, an economist at Natixis in Hong Kong, said. “Household sentiment is already very cautious of units from troubled developers, and it is unlikely to worsen further. However, it may still delay the recovery of the home market and the weaker confidence may linger longer.” After Monday’s ruling in Hong Kong, the fate of Evergrande’s asset sheet is uncertain. While China signed an agreement with Hong Kong to recognise insolvency and restructuring proceedings in the Chinese cities of Shenzhen, Shanghai and Xiamen, it is unclear whether mainland courts would sanction liquidators seizing the developer’s assets in the country. Hong Kong’s common law system, adopted during the British colonial era, is distinct from China’s Communist Party-controlled courts. In 2021, a Shenzhen court recognised insolvency proceedings in Hong Kong for the first time when it accepted the standing of liquidators for the paper manufacturing firm Samson Paper. “As most of Evergrande’s assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders,” Ng said. The Brics grouping has long been distinguished by a consistent failure to live up to potential. The internal contradictions are crippling:
Divergent interests between members make it difficult to develop any shared policies. Brazil, Russia and South Africa are commodity exporters; India and China are importers. Brazil, India and South Africa are democracies; Russia and China only pretend to be. And India and China, as everyone knows, don’t exactly see eye to eye on anything. This year, the bloc has decided to take the bold step of enhancing those internal divisions manifold by admitting five new members: Ethiopia, Egypt, Iran, Saudi Arabia, and the United Arab Emirates. It was supposed to be six; but Argentina’s new president declared, in his usual restrained manner, that he had no intention of “allying with communists” and so won’t get a second Latin American member. Brics made up for that by admitting four members from that tranquil zone of stability and co-operation, the Middle East, and a fifth, Ethiopia, that’s barely a year out of a devastating civil war. More importantly, while the Emiratis and the Saudis are partners, and Riyadh appears happy to give the regime in Cairo billions to stay friendly, Iran and Saudi Arabia have spent the past decade or so struggling for influence in the region. Iran backs the Houthi rebels in Yemen, for example, against whom Saudi Arabia has fought a long and ineffectual war. And there is anger in Ethiopia over the government’s silence on the years of abuse (and, allegedly, “mass killings”) that human rights groups say Saudi border guards have inflicted on Ethiopian migrants. Far from papering over existing cracks in the Brics grouping, the the addition of new members has just increased the number of disputes. It may be hard to see how a group that has always struggled to get much done will be able to create anything substantive if they don’t even like each other. Still, with the addition of the new members, there are a couple of domains that bear watching. There’s a chance that, in these very specific fields, Brics + might prove to be unusually effective. One is infrastructure finance. The only real institution it has managed to build is the Shanghai-based New Development Bank. The “Brics bank,” which is currently led by former Brazilian president Dilma Roussef, has a mandate to lend to infrastructure projects that the rest of the multilateral architecture ignores. One of the few things the existing Brics members do agree on is that emerging economies need more project finance. Plus, they want that cash disbursed according to norms designed locally, not in the West. Of the two Beijing-backed financial institutions, the Asian Infrastructure Investment Bank is better capitalized and has been a more effective lender than the NDB. That may be because the AIIB picked up several Western partners with deeper pockets than China’s Brics peers, as well as partners with legacy, Western-led multilateral development banks. The NDB, meanwhile, has not always managed to offer competitive rates to possible borrowers. The very makeup of this alliance can work against its in-house bank. After the Russian invasion of Ukraine, it struggled to comply with the West’s various financial sanctions on one of its founding members. Shortly thereafter, Fitch downgraded it from AA+ to AA. (AIIB, in comparison, is rated AAA by the same agency.) The NDB’s management hopes that the addition of Saudi Arabia and the UAE prefigures an infusion of capital from the petrostates’ ample treasuries. The NDB can help with another thing that Iran, Russia, Brazil, the Saudis, and multiple other members of Brics + have in common: a dislike of the dollar. Forget all the “de-dollarization” talk — as anyone buying oil from Russia or Iran can confirm, we’re still very distant from a world in which trading nations can avoid dealing in dollars. But one thing the NDB does well is creating long-term loans denominated in the developing world’s own currencies. Almost a quarter of its loans are in the local-currency format that these governments far prefer. They aren’t a threat to dollar dominance. But they are a first step towards creating separate, smaller pipelines of cash that aren’t subject to, say, US sanctions. For the current Brics president, that’s a big priority. The Russian Federation took over leadership on Jan. 1, and we should expect Moscow’s priorities to dominate the expanded grouping’s initial agenda. Russia buys drones from Iran, collaborates with the Saudis on oil prices, and is building a nuclear reactor that will provide 10% of Egypt’s power. Brics ’s doubling in size won’t make it a more coherent threat to the West. It might, however, reduce the West’s leverage over countries like Russia or Iran. And, with wars blazing in both Gaza and Ukraine, that’s no small thing.
According to the report, mostly small and medium-sized enterprises (SMEs) were bearing the brunt of the closures in 2023. Businesses, employing up to 250 people, accounted for vast majority of the total, with 55,435 closures. Meanwhile, medium and large firms with over 250 employees, also saw an increase in closures, the regulator noted, adding that their numbers reached 57, doubling from 2022. The negative trend became the most notable in the restaurant and hotel business, where the number of busts surged 44.6% year-on-year, while the sector of information and communication technologies saw an increase of 44.4%. The country’s agricultural sector was the only one recording a drop of 1.3% in the number of bankruptcy filings.
In December, the Financial Times reported that the number of corporate bankruptcies across the world exceeded levels reached during the 2008 global financial crisis. Analysts attribute the surge to higher key rates, as well as self-liquidation of so-called ‘zombie firms,’ which had pulled through the Covid era only thanks to government support. The 20-nation euro currency bloc is expected to see only moderate economic growth, +0.6% in 2024, according to the results of a survey carried out by the Financial Times among 48 economists.
The outlooks issued by the European Central Bank (ECB) and the International Monetary Fund (IMF) are more optimistic, as analysts from the institutions expect the bloc’s economy to grow 0.8% and 1.2% in 2024, respectively. The experts polled by the FT said that the Eurozone economy won't be able to exceed 0.6% growth in spite of the fact that wages are expected to grow faster than inflation. Two thirds of the respondents said that they see the economy in the euro area slip into a recession. commonly defined as two consecutive quarters of GDP contraction. According to the economists, wage growth in the single currency area is set to total only 4% in 2024, while consumer prices are projected to rise by over 2.5% on average next year and slightly below 2.1% in 2025. The ECB had previously forecast wages and inflation next year to grow 4.6% and 2.7% respectively, which would mark the growth of real household incomes for the first time in three years. The regulator expects consumer prices to grow 2.1% in 2025. Meanwhile, unemployment is projected to rise from a record eurozone low of 6.5% in October to 6.9% at the end of next year, according to most economists polled. High interest rates, probable energy market turmoil and geopolitical instability are expected to lead to a deeper recession, the economists warned, saying that the potential election of Donald Trump as US president along with the possibility of Ukraine losing the military conflict with Russia could send the single currency bloc into a period of even weaker growth. The disruption of cargo ships in the Red Sea due to attacks by Houthi militants from Yemen is causing global shippers to redirect vessels, potentially leading to increased prices for goods.
Swedish furniture giant IKEA announced this week that it was exploring options to secure the availability of its products that are mainly delivered through the Red Sea and the Suez Canal from Asian factories to Western markets. “The situation in the Suez Canal will result in delays and may cause availability constraints for certain Ikea products,” Oscar Ljunggren, a spokesperson for Inter IKEA Group, told Bloomberg. Meanwhile, Abercrombie & Fitch is planning to shift from sea freight to air transport whenever possible to mitigate disruptions, as reported in an email to suppliers. Earlier this week, Danish shipping group Maersk said it had rerouted vessels around Africa via the Cape of Good Hope due to the heightened risk of attacks, reducing the effective capacity of an Asia-Europe trip by 25%. German transport company Hapag-Lloyd followed suit. However, sending vessels around Africa increases a round-trip journey by nearly two and a half weeks, inevitably lowering shipping capacity and raising costs. The Suez Canal is a vital transport artery that handles about 15% of the world’s shipping activity, including nearly 30% of global container trade. The recent attacks, occurring amid the Israel-Hamas war, have triggered a new trade and shipping emergency, reminiscent of the 2021 incident where one of the largest container ships blocked the canal for six days, resulting in a daily cost of $9.6 billion to global trade. Gold Gains Amidst Fed Rate Cut Prospects Gold (XAU/USD) prices are inching higher on Wednesday. The precious metal has remained consistently above the crucial $2,000 level for a week, buoyed by the anticipation of interest rate cuts from the Federal Reserve next year. This sentiment is further fueled by the Fed’s recent signals indicating a possible end to its tightening phase and a shift towards rate reductions in 2024. Treasury Yields and US Dollar Response The prospect of these rate cuts has rippled through financial markets, notably impacting U.S. Treasury yields. The 10-year yield has retreated, aligning with the Fed’s unexpectedly dovish pivot. Concurrently, the U.S. dollar is experiencing a slump against major currencies, trading lower as markets bet on imminent rate cuts. This weakening of the dollar has been a contributing factor to the gold market’s current trajectory. Global Inflation and Monetary Policies The global inflation landscape is also influencing market sentiments. The U.K., for instance, reported a more significant than expected drop in inflation, reaching its lowest annual rate since September 2021. This decline has implications for the Bank of England’s monetary policy, which maintained a hawkish stance in its last meeting, emphasizing the need for a restrictive policy for an extended period. Short-Term Market Outlook In the short term, the market outlook appears cautiously optimistic for gold. The combination of a weakening dollar, declining Treasury yields, and shifting global inflation rates presents a favorable environment for gold prices. Investors, however, remain vigilant, awaiting the U.S. November PCE index report, which will offer further insight into the inflation trajectory and potentially influence the Fed’s policy decisions in the upcoming year. Technical Analysis Gold (XAU/USD) is currently trading at 2044.90, positioned above both its 200-day moving average of 1957.36 and 50-day moving average of 1989.19. This indicates a generally bullish trend. The price is hovering between the minor support at 2009.00 and minor resistance at 2067.00, suggesting a potential consolidation phase. However, it remains below the main resistance level of 2149.00. Given its stance above key moving averages and near minor resistance, the market sentiment for gold appears cautiously bullish. Investors might watch for a breakout above the minor resistance to confirm a stronger bullish trend, or a pullback towards the main support for potential buying opportunities.
Central banks have continued their gold buying spree, with reported net monthly purchases totaling 42 tons in October, the World Gold Council (WGC) has revealed.
According to a report published last week, the figure was 41% lower than September’s revised total of 72 tons, but still 23% above the January-September monthly average of 34 tons. The People’s Bank of China (PBoC) remained the largest bullion buyer, reporting purchases of 23 tons of gold in the 12th consecutive monthly addition to its reserves. This reportedly brings the PBoC’s net purchases to 204 tons during 2023, with its overall reserves amounting to 2,215 tons. “Despite the significant increase, reported gold reserves still account for just 4% of the bank’s total international reserves,” the WGC wrote. The Central Bank of Türkiye also made a significant purchase during the month, buying 19 tons to increase its official gold reserves (central bank plus Treasury holdings) to 498 tons. Beyond these two banks, buying was more modest, the report noted. The National Bank of Poland reportedly continued adding to its gold stockpile, buying another six tons. Its holdings of the yellow metal have now risen by over 100 tons this year, to 340 tons in total. The Reserve Bank of India, the Czech National Bank, the National Bank of the Kyrgyz Republic, and the Qatar Central Bank were the other significant buyers in October. The report also noted that central bank gold purchases have heavily outweighed sales of the metal so far this year. “Even before October’s net buying, we noted that 2023 was likely to be another colossal year of central bank buying. Having started Q4 positively, this year’s central bank demand looks set to climb even higher,” There are almost 2,500 fossil fuel lobbyists at this year's Cop28 climate change summit in Dubai, more than four times as many as last year, according to an environmental analysis. The analysis from the Kick Big Polluters Out (KBPO) coalition examined the presence of delegates from the fossil fuel industry at the UN's flagship climate summit, which has come in for sustained criticism for its host's ties to oil and gas. KBPO found 2,456 fossil fuel lobbyists have been granted access to Cop28, despite reducing or phasing out oil and gas altogether being one of the main aims of climate scientists and leaders from around the world. If the fossil fuel lobby was a country, its numbers of delegates would only be beaten by Brazil, with more than 3,000 in attendance and the host United Arab Emirates with 4,400, KBPO said. Its analysis calculated the fossil fuel industry was given more passes to Cop28 than the combined passes of 10 of the countries across the world that are most vulnerable to climate change, and seven times the number given to delegates from indigenous people. 'Poisonous presence' Alexia Leclercq of the environmental non-profit Start:Empowerment said: "Big polluters’ poisonous presence has bogged us down for years, keeping us from advancing the pathways needed to keep fossil fuels in the ground. They are the reason Cop28 is clouded in a fog of climate denial, not climate reality.”
Cop28 has been dogged by criticism it is greenwashing the climate change summit. President of Cop28 Sultan Ahmed al-Jaber has allegedly been planning secret deals to vastly expand oil and gas production at the event, a direct contradiction of the aim of the event, which is for world leaders and scientists to agree a path to reducing greenhouse gas emissions. Mr al-Jaber, who is head of Abu Dhabi National Oil Company (Adnoc), the 12th largest oil-producing firm in the world, told chair of the Elders Mary Robinson in a contentious online exchange there is "no science" behind the aim of reducing fossil fuels if global warming is to be kept to 1.5C compared to the 1850-1900 age, in direct contradiction to the almost unanimous consensus of global scientists. |
Thank you for choosing to make a difference through your donation. We appreciate your support.
Categories
All
Archives
March 2024
|