Crisis-hit Chinese property giant, Evergrande, ordered to liquidate

February 5, 2024

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Crisis-hit Chinese property giant, Evergrande, ordered to liquidate

A court in Hong Kong has ordered the liquidation of debt-laden Chinese property giant Evergrande in a recent ruling.

Judge, Linda Chan, declared the order after the troubled developer repeatedly failed to come up with a plan to restructure its debts.

The firm has been the epitome of China's real estate crisis after accumulating more than $300bn (£236bn) of debt.

But it is unclear how far the Hong Kong ruling will hold sway in mainland China. The property giant, which has been in hot water with its creditors for the last two years, filed a request for another three months' leeway at 4pm on Friday.

The slow burn crisis at Evergrande has sent shockwaves through the investment community, with its potential impact likened to the collapse of Lehman Brothers at the start of the financial crisis. 

China's property sector remains fragile as investors wait to see what approach Beijing will take to the court's move.

The decision is likely to send further shockwaves through China's financial markets at a time when authorities are trying to curb a stock market sell-off in an attempt to regain confidence in the economy.

Evergrande shares fell by more than 20% in Hong Kong after the announcement, before trading was suspended the same day.

The liquidators will look carefully at Evergrande's overall financial position and identify potential restructuring strategies. That could include seizing and selling off assets, so that the proceeds can be used to repay outstanding debts.

However, Beijing may be reluctant to see work halt on property developments in China, where many ordinary would-be homeowners are waiting for apartments they have already paid for as a result of the crisis.

Evergrande has come to firmly represent the ongoing trouble of China's property boom and bust, borrowing heavily to finance the building of forests of tower blocks aimed at housing the millions of migrants moving from rural areas to cities. It ran into trouble, and defaulted on its debts in December 2021.

Bank of England inching closer to interest rate cuts

The Bank of England has held interest rates at 5.25% but indicated it is edging towards cutting borrowing costs.

In its latest meeting, the Bank said it had discussed cutting rates, with inflation set to fall quickly this year. But the Bank's governor, however, said it would wait for firm evidence that inflation was under control before looking to act upon this information.

For the first time since the 2020 Covid pandemic, a key Bank of England policymaker voted for an immediate cut. However, whilst some voted to cut rates to 5%, two members of the Monetary Policy Committee (MPC) backed an increase to 5.5%. The remaining six members of the committee voted to keep rates unchanged.

It is the first time there has been a three-way split on whether rates should rise, fall or be held since the 2008 financial crisis. The Bank of England has been raising rates steadily over the past couple of years to try to reduce inflation, with the last rate rise in August 2023.

Higher interest rates cool inflation by making borrowing more expensive, discouraging people and businesses from taking on debt to fund spending.

Inflation has fallen sharply from the 40-year peak observed in October 2022 and currently stands at 4%. The Bank is therefore battling to keep price growth at, or close to, its ongoing target of 2%.

It said in its latest inflation statement that the figure would fall back to that target between April and June this year - quicker than it had previously expected.

The Bank is expecting a slight rebound in inflation over the summer, and at the Bank's news conference, many stated that this would not be an ideal territory to explore rate cuts.

This further suggests that any rate cut may not come as quickly as many expect. There is concern among some economists that the fall in the inflation rate towards the Bank's target is false due to the cut in the energy price cap, and that inflation will rebound somewhat over the summer as global energy prices have picked up as a result.

In addition, the ongoing growth in pay remains strong, with the Bank's latest survey multiple companies pointing to a 5.4% rise in wage settlements this year.

Alongside this, the Bank's new forecasts indicate that keeping rates at their current level could therefore push a barely growing economy into an outright recession.

Federal Reserve holds interest rates at a 23-year high

Officials at the US central bank have left interest rates at a 23-year high, and said rate cuts are imminent as the economic situation continues to develop.

The decision from the Federal Reserve again kept the target range for its benchmark rate, which helps set borrowing costs for mortgages, credit cards and other loans, between 5.25%-5.5%.

That is sharply higher than two years ago, when the Fed started raising rates to fight inflation. Investors expect rate cuts this year. But exactly when the bank will start to reverse course is being closely watched, especially as a multitude of central banks in other countries, including the Bank of England which meets on Thursday, face similar decisions as a result.

At a press conference after the meeting, the Federal Reserve Chairman recently stated policymakers did not expect to cut rates in March, as some investors had been betting. Therefore, it has not raised interest rates since July, with this month's meeting marking the fourth without change.

Supporters of rate cuts argue that the soaring price increases that pushed the central bank to start raising rates in 2022 have slowed.

The inflation rate, which tracks the pace of price rises, was 3.4% in the US in December - and is even lower by some measures, starting to approach the 2% rate the bank considers healthy. Higher interest rates cool inflation by making borrowing more expensive, discouraging people and businesses from taking on debt.

As activity such as home purchasing and business expansion declines, the economy slows and the pressures pushing up prices ease.

Analysts now state the Federal Reserve will not want to leave that pressure on the economy indefinitely, for fear of triggering a recession as a result.

But while growth has slowed and some sectors such as housing have been hit,broadly speaking, the economy has remained unexpectedly resilient, relieving pressure on the Fed to act.

Growth in the final months of the year proceeded at a 3.3% annual rate, while the unemployment rate in December was 3.7%, near historic lows. 

In December, forecasts showed that most members of the Fed's rate-setting committee expected rates to stand 0.75 percentage points lower at the end of this year.

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