Finance

The Fed wraps up its meeting Wednesday, and all eyes are likely to gravitate to one small piece of wording that could unlock the future of monetary policy.
A phrase that has signaled the Fed’s willingness to approve “additional policy firming” has underlined its willingness to keep raising interest rates.
Most of the public statements that officials have delivered in recent days point away from a hurry to cut. Markets, however, expect aggressive easing this year.

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., on Dec. 13, 2023.
Liu Jie | Xinhua News Agency | Getty Images

Immediately after the Federal Reserve wraps up its meeting this week, all eyes are likely to gravitate to one small piece of wording that could unlock the future of monetary policy.
In its post-meeting statement, the central bank is expected give an important hint about interest rate moves to come by removing a clause from previous statements that reads: “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time,” followed by an outlining of conditions it assesses.

For the past year-plus, the wording has underlined the Fed’s willingness to keep raising interest rates until it reaches its inflation goal. Remove that clause and it opens the door to potential rate cuts ahead; keep it and policymakers will be sending a signal that they’re not sure what’s to come.
The difference will mean a lot to financial markets.
Amending the wording could amount to a “meaningful overhaul” of the Federal Open Market Committee’s post-meeting statement, and its direction, according to Deutsche Bank economists.
“We heard at the December meeting that no official expected to raise rates further as a baseline outcome. And we’ve heard that Fed officials are beginning the discussions around rate cuts,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, said in an interview. “So getting rid of that explicit tightening bias is kind of a precondition to more actively thinking about when they might cut rates, and to leaving the door open for a March rate cut.”

While the market has accepted for months that the Fed is likely done raising rates, the most burning question is when it will start cutting. The Fed last hiked in July 2023. Since then, inflation numbers have drifted lower and are, by one measure, less than a percentage point away from the central bank’s 2% 12-month target.

Just a few weeks ago, futures markets were convinced the Fed would start in March, assigning a nearly 90% probability to such a move, according to the CME Group’s FedWatch gauge. Now, there’s considerably more uncertainty as multiple statements from Fed officials point to a more cautious approach about declaring victory over inflation.

Reading the tea leaves

Chairman Jerome Powell will have a thin line to walk during his post-meeting news conference.
“They’re going to get a lot of data between the January and March meetings, particularly as it relates to inflation,” Luzzetti said. “How those data come in will be critical to determining the outcomes of future meetings. He’ll leave it open, but will not try to open it any more than what the market already has.”
For this meeting, it will be harder to decipher where the full FOMC is heading as it will not include the quarterly “dot plot” of individual members’ projections.
However, most of the public statements that officials have delivered in recent days point away from a hurry to cut. At the same time, policymakers have expressed concern about over-tightening.
The fed funds rate, currently targeted in a range between 5.25% and 5.5%, is restrictive by historical standards and looks even more so as inflation drops and the “real” rate rises. The inflation rate judged by core personal consumption expenditures prices, a U.S. Department of Commerce measure that the Fed favors, indicates the real funds rate to be around 2.4%. Fed officials figure the long-run real rate to be closer to 0.5%.
“The main thing that they will probably want to do is gain a lot of optionality,” said Bill English, the former head of monetary affairs at the Fed and now a finance professor at the Yale School of Management. “That would mean saying something rather vague at this point [such as] we’re determining the stance of policy that may be appropriate or something like that.”

Preparing for the future

Post-meeting statements going back to at least late 2022 have used the “in determining the extent of any additional policy firming” phrasing or similar verbiage to indicate the FOMC’s resolve in tightening monetary policy to bring down inflation.
With six- and three-month measures showing inflation actually running at or below the 2% target, such hawkishness could seem unnecessary now.
“In effect, that’s saying that they’re more likely to be raising than cutting,” English said of the clause. “I guess they don’t think that’s really true. So I would think they’d want to be ready to cut rates in March if it seems appropriate when they get there.”

Officials will be weighing the balance of inflation that is declining against economic growth that has held stronger than anticipated. Gross domestic product grew at an annualized pace of 3.3% in the fourth quarter, lower than the previous period but well ahead of where Fed officials figured it would be at this stage.
Traders in the fed funds futures market are pricing in about a 60% chance of a cut happening in March, the first of five or six moves by the end of 2024, assuming quarter-percentage-point increments, according to the CME Group’s FedWatch gauge. FOMC members in their latest projections in December pointed to just three reductions this year.
The Fed hasn’t cut as aggressively as traders expected absent a recession since the 1980s and that “led to excess investor confidence culminating in the 1987 stock market crash,” Nicholas Colas, co-founder of DataTrek Research, said in his daily market note Monday evening.
Yet, Goldman Sachs economists said they figure the Fed will “remove the now outdated hiking bias” from the post-meeting statement and set the stage for a cut in March and five total on the year. In a client note, the firm said it also figures the committee could borrow a line from the December meeting minutes indicating it would “be appropriate for policy to remain at a restrictive stance until inflation is clearly moving down sustainably toward the Committee’s objective.”
However, a restrictive stance isn’t the same as holding rates where they are now, and that kind of linguistic move would give the committee wiggle room to cut.
Markets also will be looking for information on when the Fed begins to reverse its balance sheet runoff, a process that has seen the central bank reduce its bond holdings by about $1.2 trillion since mid-2022.Don’t miss these stories from CNBC PRO: More

New York Attorney General Letitia James sued Citibank for allegedly failing to protect and reimburse victims of electronic fraud.
The attorney general’s office said the alleged failure cost victims millions of dollars.
In a statement, Citi said the bank “works extremely hard” to prevent threats and assist customers who become victims of fraud.

A Citibank branch in the central business district of Singapore on Feb. 12, 2018.
Ore Huiying | Bloomberg | Getty Images

New York Attorney General Letitia James on Tuesday sued Citibank for allegedly failing to protect and reimburse victims of electronic fraud.
The suit claims that Citi does not have strong protections in place to prevent unauthorized account takeovers, misleads victims of fraud and illegally denies reimbursements, according to a release. The attorney general’s office said the alleged failure on Citi’s part has cost New York account holders millions of dollars, and in some cases, their entire life savings.

“Banks are supposed to be the safest place to keep money, yet Citi’s negligence has allowed scammers to steal millions of dollars from hardworking people,” James said in a statement. “Many New Yorkers rely on online banking to pay bills or save for big milestones, and if a bank cannot secure its customers’ accounts, they are failing in their most basic duty.”
Citigroup, the parent company of Citibank, has struggled with risk management and controls in the past. Former executives have said the bank — the product of decades of mergers that created a patchwork of technology systems — underinvested in its infrastructure. That was evident when Citigroup accidentally sent almost $900 million to Revlon’s lenders in 2020.
Later that year, banking regulators fined Citigroup $400 million and ordered the firm to improve its risk management systems. Since taking over in 2021, CEO Jane Fraser has pushed to improve the bank’s technology and appease regulators.
The New York lawsuit includes specific people who had thousands of dollars stolen from their accounts and said the bank did not reimburse them.
In a statement, Citi said the bank “works extremely hard” to prevent threats and assist customers who become victims of fraud.

“Banks are not required to make customers whole when those customers follow criminals’ instructions and banks can see no indication the customers are being deceived. However, given the industry-wide surge in wire fraud during the last several years, we’ve taken proactive steps to safeguard our clients’ accounts with leading security protocols, intuitive fraud prevention tools, clear insights about the latest scams, and driving client awareness and education,” the company said in a statement. “Our actions have reduced client wire fraud losses significantly, and we remain committed to investing in fraud prevention measures to help our clients secure their accounts against emerging threats.”
James alleged in the lawsuit that Citi must reimburse victims of fraud under the Electronic Fund Transfer Act.Don’t miss these stories from CNBC PRO: More

The International Monetary Fund upgraded its global growth forecast for 2024 by 0.2 percentage points, to 3.1%.
Resilience in the U.S., Chinese fiscal stimulus and a strong performance by large emerging market economies all contributed to the slightly brighter picture.
There are new risks to commodities and supply chains from Middle East volatility, but inflation globally has fallen faster than expected.

Buildings in Pudong’s Lujiazui Financial District in Shanghai, China, on Monday, Jan. 29, 2024. 
Bloomberg | Bloomberg | Getty Images

The International Monetary Fund on Tuesday nudged its global growth forecast higher, citing the unexpected strength of the U.S. economy and fiscal support measures in China.
It now sees global growth in 2024 at 3.1%, up 0.2 percentage points from its prior October projection, followed by 3.2% expansion in 2025.

Large emerging market economies including Brazil, India and Russia have also performed better than previously thought.
The IMF believes there is now a reduced likelihood of a so-called “hard landing,” an economic contraction following a period of strong growth, despite new risks from commodity price spikes and supply chain issues due to geopolitical volatility in the Middle East.
It forecasts growth this year of 2.1% in the U.S., 0.9% in both the euro zone and Japan, and 0.6% in the United Kingdom.
“What we’ve seen is a very resilient global economy in the second half of last year, and that’s going to carry over into 2024,” the IMF’s chief economist, Pierre-Olivier Gourinchas, told CNBC’s Karen Tso on Tuesday.

“This is a combination of strong demand in some of these countries, private consumption, government spending. But also, and this is quite important in the current context, a supply component as well … So very strong labor markets, supply chain frictions that have been easing, and the decline in energy and commodity prices.”

The latest official figures showed the U.S. economy tearing past economists’ expectations in the fourth quarter, with growth of 3.3%.
China has faced a host of issues over the last year, including a disappointing rebound in post-pandemic spending, concerns over deflation and an ongoing property sector crisis. The government has rolled out a host of stimulus measures in response, contributing to the IMF’s upgrade.
However, the IMF’s forecasts remain below the global growth average between 2000 and 2019 of 3.8%. Higher interest rates, the withdrawal of some fiscal support programs and low productivity growth continue to weigh, the institution said.

But restrictive monetary policy has led to inflation falling faster than expected in most regions, which Gourinchas called the “other piece of good news” in Tuesday’s report. The IMF sees global inflation at 5.8% in 2024 and 4.4% in 2025. In advanced economies, that falls to 2.6% this year and 2% next year.
“The battle against inflation is being won, and we have a higher likelihood of a soft landing. So that sets the stage for central banks, the Federal Reserve, the European Central Bank, the Bank of England, and others, to start easing their policy rates, once we know for sure that we are on that path,” Gourinchas said.
“The projection right now is that central banks are going to be waiting to get a little bit more data, they are going meeting by meeting, they are data dependent, confirming that we are on that path. That’s the baseline. And then if we are, then by the second half of the year we’ll see rate cuts,” he continued.
While central banks must not ease too early, there is also a risk coming into sight of policy remaining too tight for too long which would slow growth and bring inflation below 2% in advanced economies, Gourinchas added. More

As investors enter an unprecedented year for elections around the world amid multiple large-scale conflicts at risk of further escalation, Beat Wittmann, partner at Porta Advisors, acknowledged that “politics will remain difficult and confusing,” but that markets will likely be sanguine.
Wittmann also said the outcome of November’s election would be “pretty irrelevant for markets, quite frankly.”

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 29, 2024.
Brendan Mcdermid | Reuters

Geopolitical risks may be mounting, but stocks are still the “asset class of choice,” according to Beat Wittmann, partner at Porta Advisors, who also said the outcome of the U.S. election in November would be “pretty irrelevant” for markets.
As investors enter an unprecedented year for elections around the world amid multiple large-scale conflicts at risk of further escalation, Wittmann acknowledged that “politics will remain difficult and confusing,” but that markets will likely be sanguine.

“There are two transmission mechanisms. One is energy prices — will the trouble in the Middle East be a transmission into higher energy prices, or the war in Eastern Europe? Not really, if you look at how energy prices have developed,” he told CNBC’s “Squawk Box Europe” on Tuesday.
“And the second thing is really international trade and trade routes. We have seen it brutally in Covid and we see a bit of it of course — traffic through Suez, insurance companies putting up costs, etc.— but that’s all digestible.”

He added that markets had “gotten used to trouble in geopolitics” over the last five years, so the impact on asset prices of any further bad news would be somewhat limited.
Last year offers some support to this theory. Despite the breakout of the Israel-Hamas war and Russia’s invasion of Ukraine showing no sign of abating, along with a host of other simmering geopolitical tensions around the world, the S&P 500 gained 24% in 2023.
However, much of the momentum was driven by the outstanding performance of the so-called “Magnificent Seven” mega-cap tech stocks, leading to some concerns among investors about concentration risk. Wittmann acknowledged that risk, but remains bullish about broader upside potential in stocks.

“I think it’s on track, of course expectations get ever higher, so there will be at some stage disappointments here and there, but stock-specific.”

“But technology clearly has real mania potential, and there could be even a melt-up in the market led by technology.”
Monetary policy emerged as the key driver of a huge rally toward the end of the year after the Federal Reserve signaled that at least three interest rate cuts were on the table in 2024, offering a particular boost for high-growth stocks. The Fed releases its next monetary policy decision and forward guidance on Wednesday.
Wittmann suggested the only risk to this momentum would be if inflation proves stickier than the Fed expects because of some unforeseen geopolitical risk coming into play, resulting in interest rates being kept higher for longer.

But he believes that would be a problem only for fixed income and the growth stocks that have enjoyed much of the recent rally, and would be positive for value stocks — those trading at a discount relative to their financial fundamentals — meaning if “in any doubt, I think equities are really the asset class of choice.”

U.S. election ‘irrelevant’ for markets

Much of the conversation at the recent World Economic Forum in Davos, Switzerland, focused on the possibility of Donald Trump returning to the White House, and whether his erratic decision-making and radical policy proposals, such as sweeping 10% tariffs on all imports, would be material for investors.
Wittmann said the outcome of November’s election would be “pretty irrelevant for markets, quite frankly.”
“If you have such a strong position as an economy, which the U.S. has in a supreme way, controlling and basically dominating finance, dominating technology, dominating aerospace defense, having achieved strategic autonomy in energy, for example, then it’s really difficult, so no matter whether he gets elected or not, he will also not be able to surprise,” he said. More

Alibaba-backed augmented reality glasses company Xreal said it received $60 million in new funding, giving the company a valuation of more than $1 billion.
Augmented reality (AR) technology allows digital images to be imposed over the real world.
Xreal’s latest AR glasses model, the Air 2 Ultra, is set to start shipping in March and is available for pre-order at $699, a fraction of Apple’s price tag of around $3,500 for the Vision Pro.

Xreal Air 2 in action. Xreal’s augmented reality glasses is compatible with gaming consoles and can allow users to play games on a large virtual screen

BEIJING — Alibaba-backed augmented reality glasses company Xreal said Monday it received $60 million in new funding, giving the company a valuation of more than $1 billion.
That valuation gives the startup unicorn status, the first in the AR glasses industry, Xreal claimed. It did not share who participated in the latest funding round.

Augmented reality (AR) technology allows digital images to be imposed over the real world.
Apple’s Vision Pro virtual reality headset, set for release in the U.S. on Feb. 2, also allows users to see the real world using what the company calls “spatial computing” technology.
Xreal’s latest AR glasses model, the Air 2 Ultra, is set to start shipping in March. It is available for pre-order at $699, a fraction of Apple’s price tag of around $3,500 for the Vision Pro.
On Jan. 8, Xreal said it had shipped 350,000 AR glasses since the company was launched in 2017. That’s compared to 250,000 units as of October, and 150,000 units as of May.
The startup said it plans to use the latest funding for research and development, as well as factory expansion. Total backing from investors has now reached $300 million, Xreal said.
— CNBC’s Arjun Kharpal contributed to this report. More

Employee confidence touched its lowest point since 2016 in January, according to career site Glassdoor.
That’s likely because of recent layoff announcements, one expert said. They’ve come from prominent companies including Amazon, BlackRock, Citigroup, eBay, Google, Microsoft and Universal Music Group.
While the job market has cooled from red-hot levels, it’s still robust, economists said.

Maskot | Digitalvision | Getty Images

Workers are sour on the job market — but that pessimism may be somewhat misplaced.
The Glassdoor Employee Confidence Index in January fell to its lowest level since 2016, when the career site began tracking the metric, it said Monday. The index measures how workers feel about their employer’s six-month business outlook.

The decline suggests job security is a “prominent” worry, said Daniel Zhao, lead economist at Glassdoor. “It’s a signal that employees are concerned heading into 2024,” he said.

Layoff headlines mask ‘very robust’ job market

That deterioration is likely due to a wave of layoff announcements in recent weeks, Zhao said.
So far in 2024, for example, big technology firms including Amazon, eBay, Google and Microsoft have announced job cuts. But it’s not just tech. Others such as BlackRock, Citigroup and Universal Music Group also announced layoffs.
U.S.-based companies planned about 722,000 job cuts in 2023, almost double those announced in 2022, according to Challenger, Gray & Christmas, an outplacement and executive coaching firm.

However, those recent headlines mask strength in the overall job market, economists said.

From a worker’s perspective, things “don’t get any better,” said Mark Zandi, chief economist at Moody’s Analytics.
Despite pockets of layoffs in certain industries such as tech, Zandi said job cuts across the broad U.S. labor market continue to hover near historic lows, where they’ve been since spring 2021.

New claims for unemployment insurance are in line with their pre-pandemic trend in 2019, which economists describe as a period of labor market strength. The unemployment rate has also been below 4% for two years.
Indeed, when it comes to the average annual unemployment rate, 2023 was the sixth-best year on record, ranking only behind a few years in the 1950s and 1960s, said Julia Pollak, chief economist at ZipRecruiter.
“It’s still a very robust and resilient labor market overall,” Pollak said.

Outlook depends on your reference point

While the Glassdoor index shows deteriorating confidence, other measures signal a rosier view about the job market and U.S. economy.
For example, consumer sentiment jumped 13% in January to its highest level since July 2021, according to the University of Michigan. Similarly, a Conference Board poll also found that consumer optimism strengthened in December across all ages and household income levels.
Housing values and stock prices are at record highs and, in relative terms, “everyone’s got a job,” Zandi said.
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ZipRecruiter’s Job Seeker Confidence Index also rose in the last two quarters of 2023, though it remains below early 2022.
Overall worker sentiment likely depends on their reference point, Pollak said.
For example, if workers are comparing outcomes relative to what was expected to happen in 2023 — a year in which many economists had expected the U.S. to tip into recession — then the recent job market looks like “a miracle,” Pollak said.
However, workers are more apt to compare their current outlook to that of a year or two ago, a time when the job market was red hot and workers had record leverage to get better jobs and higher pay. Since then, “things have definitely cooled and slowed,” Pollak said.

The one ‘blemish’ in the U.S. economy

The Federal Reserve raised borrowing costs aggressively to cool the economy and labor market to ultimately tame persistently high inflation.
The inflation rate has decreased significantly from its pandemic-era peak. But the inflationary episode has left consumer costs noticeably more expensive, especially for staples such as food and rent, economists said.
“The only [economic] blemish — and it’s a big blemish — is prices are much higher than they were two to three years ago,” Zandi said.

Arrows pointing outwards

High pandemic-era inflation eroded buying power for the average person in consecutive months for more than two years. While wage growth was historically high, workers’ paychecks bought less.
But that trend has reversed: Wage growth now surpasses the rate of inflation for the average person, meaning workers’ paychecks are growing again relative to the things they buy. If that trend holds, consumer confidence should gradually rebound, Zandi said.Don’t miss these stories from CNBC PRO: More

Too much choice can paralyze investors, causing inertia and other negative behaviors.
Choice overload is a behavioral finance concept that isn’t specific to investing. It can also occur when consumers buy food and apparel, for example.
Investors can overcome choice paralysis by making their decision as simple as possible. Target-date and balanced funds are good options, experts said.

Sdi Productions | E+ | Getty Images

Humans like choice. Indeed, it’s a bedrock principle of autonomy and freedom.
But when it comes to investing, having too many choices can be bad.

“Most likely, it will hurt you rather than help you,” said Philip Chao, a certified financial planner and founder of Experiential Wealth, based in Cabin John, Maryland.
The dominant view in economics is that more options are “unambiguously” good.
To that point, a “rich” environment of choice lets consumers “curate an experience tailored to their preferences,” wrote Brian Scholl, chief economist of the U.S. Securities and Exchange Commission Office of the Investor Advocate.
However, in the real world, our experience diverges from this paradigm, he said.
Humans get overwhelmed by too many options, a behavioral finance concept known as “choice overload.”

Often, people — especially those new to something that carries high stakes — are fearful of making a bad choice or regretting their decision, said CFP David Blanchett, head of retirement research for PGIM, an investment manager.
This paradox of choice can have many negative impacts on investors: inertia, or doing nothing; naïve diversification, or spreading money across a little bit of everything; and favoring attention-grabbing investments, wrote Samantha Lamas, senior behavioral researcher at Morningstar.
“These shortcuts can become disastrous mistakes,” she said.

How investors encounter choice overload

Christopher Ames | E+ | Getty Images

It’s not just investing: The choice paradox can extend to things like ice cream flavors and apparel, for example.  
Among the early research experiments: buying gourmet jam at an upscale grocery store. According to that 2000 study, by Sheena Iyengar and Mark Lepper, a tasting booth with a large display of exotic jams (24 varieties) received more customer interest than a smaller one with six varieties. But customers who saw the small display were 10 times more likely to buy jam than those who saw the larger one.
Given these behavioral biases, retailers and others have evolved, making it less likely consumers will experience choice overload “in the wild” today, said Dan Egan, vice president of behavioral finance and investing at Betterment.
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However, let’s say an investor wants to save money in a taxable brokerage account or individual retirement account. They generally have hundreds or even thousands of options available from which to choose, and several characteristics to compare, such as cost and performance.
“There’s literally more choice than would ever be useful to you,” Egan said.
It’s a bit different in the context of 401(k) plans, experts said.

Do-it-yourselfers may have about one to two dozen investment options, at most, from which to choose, reducing the choice friction.
Further, most employers automatically enroll workers into a target-date fund, a one-stop shop for retirement savers that’s generally well diversified and appropriately allocated based on the investor’s age. This eliminates much of the decision-making.
If you don’t give people an easy choice, “it’s really hard for them,” Blanchett said.

Make it as simple as possible

Ultimately, long-term investors who are paralyzed by their available choices should make the process as simple as possible when starting out, experts said.
For most people, that’s likely to be investing in a well-diversified mutual fund like a target-date fund or a 60/40 balanced fund (which is allocated 60% to stocks and 40% to bonds), experts said.
“Either one of those [funds] is an excellent place to start as opposed to putting all money in cash or not investing,” Blanchett said.
Even within TDFs and balanced fund categories, there can be dozens of different options. Experts recommend seeking out a provider like Vanguard Group with relatively low costs. (You can do this by comparing the “expense ratios” of various funds.)
Here’s another approach: If you open a brokerage account at Vanguard, Fidelity or Charles Schwab, for example, use their respective TDFs or balanced portfolios, Blanchett said. In these cases, you’re offloading most of the investment decision-making to professional asset managers, and the large providers generally have high quality, he said.
“Is it necessary to buy all the ingredients to make a cake, or can you just buy a cake and eat it?” Chao said.
Don’t miss these stories from CNBC PRO: More

“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