Raphael Stevens

“Enough is enough,” declared a Hong Kong judge on January 29th of Evergrande, a failing Chinese property behemoth, and its two-year struggle to avoid repaying its creditors. In a landmark ruling, the court ordered a liquidation of the company, which, with more than $300bn in liabilities, is the world’s most indebted real-estate developer. A provisional liquidator will be appointed, assuming management of the company. Now foreign creditors must attempt to recoup their losses from a firm that holds most of its assets in mainland China. The ruling could pit Hong Kong’s courts against a Chinese government determined to restore public confidence to a struggling market.No firm has been more central to China’s property crisis, which kicked off when Evergrande first showed signs of weakening in mid-2021. Government rules meant to wean developers from debt eventually pushed the company to default later that year. Since then a majority of China’s listed property developers have either failed to pay their investors back or have been forced into restructuring. Their access to credit has been virtually cut off, causing builders to stop working on projects across the country. Prospective homebuyers have delayed purchases, leading to a 6.5% decline in the value of sales, year on year. This has unnerved a population that stores most of its wealth in property.Until relatively recently policymakers had hoped that a successful restructuring of Evergrande could pave the way for a slow but steady revitalisation of the market. Instead, Evergrande missed important deadlines for producing a restructuring plan and, when it did offer one, underwhelmed investors. Its proposal, which was panned by bondholders, involved giving creditors a stake in some of Evergrande’s other businesses, such as its electric-vehicle line. Far from restoring confidence, the battle became increasingly ugly. At one point a group of bondholders demanded that Hui Ka Yan, Evergrande’s chairman, put up $2bn of his own money. Mr Hui was later detained by Chinese authorities. His whereabouts are unknown.The housing crisis has drained global investors of confidence in Chinese policymaking. It is now doing similar damage to Hong Kong’s reputation. For decades, foreign investors have gained access to China through Hong Kong. One of Hong Kong’s distinct features has been a legal system, separate from China’s, that is based on common law. But court rulings in Hong Kong have no guarantee of being upheld in mainland China, where almost all of Evergrande’s assets are based.
The liquidator appointed by a Hong Kong court will be forced to deal with local authorities that may not recognise an order drawn up outside China’s legal system. Although a pilot project to recognise cross-border rulings was set up in 2021, qualification requirements are tough and the scheme is only recognised in a few cities. Hong Kong rulings can easily be shot down by mainland courts if they have the potential to disturb public order.Indeed, as Tommy Wu of Commerzbank, a German lender, has written, a full liquidation of Evergrande’s Chinese assets would probably send a shock through the Chinese economy. Property developers have sold many properties to ordinary Chinese folk that they have not yet provided. Investors’ claims on Evergrande’s projects or any cash holdings it still has could get in the way of their delivery. This would work against Beijing’s best efforts to restore confidence in the market. Any such activity would be viewed by policymakers as unacceptable, almost guaranteeing that the liquidation process will be long and drawn out.The latest Hong Kong ruling leaves room for restructuring, with the judge noting that Evergrande can still offer this to creditors. The company says that it aims to produce a new plan, possibly by March, and since a liquidator will be taking over negotiations there may now be a better chance of a deal. But it will not be one that includes many Chinese assets. And for a firm that mainly owns Chinese property, that is a problem. Evergrande’s liquidation marks a new low in China’s property crisis—it is far from the end of it. ■ More

Ukraine formally started the screening process to begin EU membership last week, and faces stringent conditions on addressing its historic corruption problem.
The Zelenskyy family income fell almost threefold between 2021 and 2022, according to the declaration on the presidential website.

Ukrainian President Volodymyr Zelenskyy speaks with CNBC’s Andrew Ross Sorkin at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 16th, 2024.
Adam Galici | CNBC

Ukrainian President Volodymyr Zelenskyy published his income for the first time on Sunday as he looks to promote transparency and tackle corruption as part of the country’s push for EU membership.
Ukraine formally started the screening process to begin EU membership last week and faces stringent conditions on addressing its historic corruption problem.

The Zelenskyy family income fell almost threefold between 2021 and 2022, according to the declaration on the presidential website.
Zelenskyy and his family members received 10.8 million Ukrainian hryvnias ($286,168) in 2021, the year before Russia invaded Ukraine, which was down almost 12 million hryvnias from the previous year. The 2021 figure included around $142,000 in income from the sale of government bonds.
“Volodymyr Zelenskyy continues to own a number of trademarks. In particular, in 2021, the process of registering 22 trademarks, which began long before his election as President of Ukraine, was completed,” the president’s first-ever public declaration of income said.
In 2022, the Zelenskyy family income fell to 3.7 million hryvnias due to the “temporary termination of lease agreements on the territory of Ukraine as a result of the beginning of Russia’s full-scale aggression.”
The family’s cash balance at the end of 2022 dropped by almost 1.8 million hryvnias, the declaration said, while its asset, real estate and vehicle ownership was unchanged over the two years.

Zelenskyy has urged all public officials to disclose their incomes as part of a wider effort to promote transparency, and Ukraine’s National Agency on Corruption Prevention last month reopened a register on declared income to public scrutiny.
The U.S. and other allies supplying financial aid and weaponry, along with institutions such as the International Monetary Fund, have also sought assurances about Kyiv’s efforts to eradicate graft in public office.
The Security Service of Ukraine (SBU) revealed on Saturday that it had uncovered a $40 million arms procurement corruption scheme after a two-year investigation.
Five employees from Ukrainian arms firm Lviv Arsenal allegedly conspired with Ministry of Defense officials to embezzle funds earmarked for the purchase of 100,000 mortar shells.
The SBU said five people had been charged and could face up to 12 years in jail if found guilty. More

The initial plan to put China Cinda Asset Management, China Orient Asset Management and China Great Wall Asset Management under the management of China Investment Corp would reportedly happen “in the near future,” Xinhua Finance had reported Sunday.
Beijing’s actions follow a stock market rout amid burgeoning financial risks stemming from a debt crisis in its real estate sector.

Multi exposure of virtual abstract financial graph interface on Chinese flag and sunset sky background, financial and trading concept
Igor Kutyaev | Istock | Getty Images

China state media removed a story that initially reported that Beijing plans to merge its largest state-owned bad debt asset managers with China Investment Corp, one of the world’s largest sovereign fund.
The initial report was published Sunday by Xinhua Finance.

It cited unidentified sources as saying the plan to bring China Cinda Asset Management, China Orient Asset Management and China Great Wall Asset Management under CIC could happen “in the near future” as part of a plan to reform institutions.
No other details were provided.
The original story in Chinese appears to have been subsequently removed from Xinhua’s website later Monday and is no longer available online. China Investment Corp did not immediately respond to CNBC’s request for comment.
This initial announcement, along with another by China’s securities regulator on Sunday that it’s suspending the lending of restricted shares starting Monday, underscores Beijing’s pledge last week to strengthen the “inherent stability” of its capital markets and improve market confidence.
Beijing’s actions follow a stock market rout amid burgeoning financial risks stemming from a debt crisis in its real estate sector. Last week, China’s central bank announced its largest cut in mandatory cash reserves for banks since 2021. It also announced a fresh policy mandate aimed at easing the cash crunch for Chinese developers.

The property market slumped after Beijing cracked down on developers’ high reliance on debt for growth in 2020, weighing on consumer growth and broader growth in the world’s second-largest economy.
China’s real estate troubles are closely intertwined with local government finances since they typically relied on land sales to developers for a significant portion of revenue.
— CNBC’s Evelyn Cheng contributed reporting to this story.

This story has been updated to reflect that the original Xinhua report is no longer available online. More

LVMH results showed that despite some resumption of overseas travel, more of China’s consumers are buying luxury products at home.
The mainland China personal luxury market grew by about 12% last year to more than 400 billion yuan ($56.43 billion), according to consulting firm Bain & Company.
In all, about half the leading brands and several niche brands, have rebounded to 2021 sales levels, the Bain report said, without sharing specific names.

A view of a scaled-up mock of a Louis Vuitton bag during a promotional event by the French luxury brand in Shanghai on Dec. 4, 2023.
Future Publishing | Future Publishing | Getty Images

BEIJING — China’s luxury sales are rebounding, and while they’re not back to 2021 levels yet, industry analysts and financial releases from major brands point to new growth opportunities versus pre-pandemic trends.
LVMH was the latest luxury giant to announce 2023 results on Thursday, and noted that fashion and leather goods saw growth of more than 30% in China in December.

The company’s results showed that despite some resumption of overseas travel, more of China’s consumers are buying luxury products at home.
“Regarding the size of stores in China … there are twice as many Chinese customers as in 2019,” Bernard Arnault, chairman and CEO of LVMH, said on an earnings call, according to a FactSet transcript.
“It means that the domestic purchase in China has grown significantly, so we have to meet that,” he said.

The mainland China personal luxury market grew by about 12% last year to more than 400 billion yuan ($56.43 billion), according to consulting firm Bain & Company.
While that’s still not back to 2021 levels, due to soft consumer sentiment and the resumption of some overseas luxury shopping, Bain expects the domestic luxury market to only grow in the coming years.

Luxury purchases in mainland China accounted for about 16% of the global market last year, and is expected to reach at least 20% in 2030, said Weiwei Xing, a Hong Kong-based partner at Bain’s consumer products and retail practices in Greater China.
“All of that data points to the importance of the Chinese luxury consumer and the China market,” she told CNBC.
Cartier parent Richemont said earlier this month that sales in mainland China, Hong Kong and Macao grew by 25% in the three months ended Dec. 31.
In an earnings call, the company’s CFO Burkhart Grund described the Chinese business overall as “rebuilding,” especially in the context of the prolonged real estate slump and the slow recovery of overseas tourism by Chinese shoppers.
Consumers in China have been reluctant to spend in the last few years due to uncertainty about future income and a broad slowdown in economic growth.
Luxury brands have increasingly turned to online channels to ensure customer engagement, said Xing from Bain. She added that companies that did well in 2023 sold luxury goods deemed investible, having iconic aspects that would last over the years.

Niche brands and markets

In all, about half the leading brands and several niche brands, have rebounded to 2021 sales levels, the Bain report said, without sharing specific names.
“Niche brands that have consistently invested in building brand desirability over multiple years have experienced success,” the report said.
As companies compete for a slice of the Chinese consumer market, one emerging segment is bedding and fine linen.
At least four investment deals have occurred in that category in the last 18 months, according to PitchBook data. The latest transaction listed was the acquisition in August of Italian luxury bedding company Frette by investors that included Ding Shizhong, the chairman of Chinese sportswear company Anta.
“Consumer attitudes toward bedding products are gradually changing, with more consumers willing to pay for high-quality bedding and placing greater emphasis on product quality, functionality, and additional services,” said Ashley Dudarenok, founder of ChoZan, a China marketing consultancy.

Read more about China from CNBC Pro

She noted that domestic home textile brands “have been actively pursuing ‘technological innovations’ and exploring the high-end bedding market to meet consumer demands.”
However, the potential market is relatively untapped.
While U.S. consumers account for well over 40% of the global market for high-end bed and bath textiles, Chinese consumers currently only account for about 5% or less, according to estimates from the Beijing-based consumer research institute of ZWC Partners, a venture capital firm.
Their research found that the Chinese luxury and affordable luxury segment of the bed, bath and textile market was about $700 million large in 2023, a tiny fraction of a domestic bedding market that’s about $10 billion large. More

Central bankers are entering the final stretch of their quest to defeat inflation. Rich-world prices are rising by 5.4% year on year, down from a peak of 10.7% in October 2022. Although it is impressive progress, the last part of the quest—getting inflation from 5.4% to central banks’ targets of around 2%—could be the hardest. That is because labour markets are not co-operating.image: The EconomistNot long ago employers wanted to hire many more workers than they could find, resulting in an unprecedented surge in unfilled vacancies (see chart 1). In 2022-23 global Google searches related to “labour shortage” jumped to their highest ever level. With plenty of other options, workers asked their bosses for big pay rises. Year-on-year wage growth across the rich world doubled from its pre-covid rate to close to 5% (see chart 2), adding to companies’ costs and in turn encouraging them to raise the prices they charged consumers.image: The EconomistTo get inflation under control, wage growth therefore had to come back down. Given weak productivity growth across the world, a 2% inflation target is probably achievable only if nominal wages grow by 3% a year or less. Central bankers hoped that by raising interest rates they would cause demand for labour to fall—ideally bringing down wage inflation without wrecking people’s livelihoods.The first part of the plan has worked. Demand for labour (ie, filled jobs plus unfilled vacancies) is now only 0.4% higher than the supply of workers in the rich world, down from a peak of 1.6%. Searches for “labour shortage” have fallen by a third. Almost everywhere you are now less likely to see “help wanted” signs.Lower demand for labour has also caused surprisingly little damage to people’s employment prospects. We estimate that, in the past year, falling vacancies have accounted for the entire decline in labour demand across the rich world. Over the same period the number of people actually in work has grown. The unemployment rate across the rich world remains below 5%. Some countries are even beating records. In Italy the share of working-age people in a job recently hit an all-time high—the country has swapped la dolce vita for la laboriosa vita.But despite falling labour demand, there is less evidence of the final part of the plan: lower wage inflation. Although American pay growth is down from more than 5.5% year on year to around 4.5%, that is probably still too high for the Federal Reserve’s 2% inflation target. And elsewhere there is little evidence of progress. In recent quarters wage growth across the rich world has hovered at around 5% year on year. British wage growth is more than 6%. “Very early indications for January show negotiated pay deals slowing only modestly,” reported analysts at JPMorgan Chase, a bank, last week. Euro-area pay is growing similarly fast.Is high wage growth, and thus above-target inflation, now baked into the economic cake? Some evidence suggests it is—especially in Europe. Spanish workers, for instance, have used their extra bargaining power to change their contracts, such that the share of workers whose pay is indexed to the inflation rate has risen from 16% in 2014-21 to 45% last year. A recent study by the OECD, a club of mostly rich countries, on Belgium worries about “more persistent inflation due to wage indexation”.More generous wage agreements today could lead to higher inflation tomorrow, leading in turn to even more generous wage agreements. Across the rich world strikes have become much more common, as workers seek higher wages. Last year America lost almost 17m working days to stoppages, more than in the previous ten years combined. Britain has also seen a surge in industrial action. On January 30th Aslef, a union for train drivers, is expected to begin a series of walkouts. Germany’s train drivers began their own strike on January 24th.There is, however, a more optimistic interpretation of these developments. Just as in 2021-22, when wages took a while to accelerate after labour demand rose, so today they could take time to lose speed. After all, companies and workers renegotiate wages infrequently—often annually—meaning that workers may only slowly realise that they have less bargaining power than before. Estimates for America published by Goldman Sachs, another bank, indicate that it can take a year or so for declines in labour demand to show up as lower wage growth—suggesting that the final stretch of disinflation will be annoyingly slow, but will pass. ■ More

China may have trouble attracting investors again this year.
ETF Action’s Mike Akins sees challenges tied to the country’s ability to generate stock market returns.

“It’s kind of the old cliché. Fool me once, shame on you. Fool me twice, shame on me,” the firm’s founding partner told CNBC’s ETF Edge this week. “You’ve got this situation where China’s economy expanded. The stock market went nowhere. It’s been very volatile. There’s been periods where it’s gone way up but also come way down.”
According to Atkins, emerging market ex-China products are among the largest inflows ETF Action is seeing.
“You’ve got a whole new issue that you have to think about when going to that market,” he said. “Is it investible from a standpoint of total return? Or is it really a growth story in the economy alone and not in the actual return of the stock market?”
Franklin Templeton Investments’ David Mann cites another issue for investor hesitancy.
“The geopolitical factor with China is certainly on everyone’s mind,” said Mann, the firm’s global head of product and capital markets. “China was down last year. It is down again this year. Investors are probably looking a lot at the political side.”
The Hang Seng Index is down more than 6% this year and almost 30% over the past 52 weeks.

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