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Five topics that shaped trade finance in 2021. While global trade volumes have bounced back from the doldrums of last year, 2021 remained a turbulent period for trade and trade finance. (Global Trade Review)

'Erasing history': Russia closes top rights group, capping year of crackdowns. Russia's Supreme Court ordered the country's oldest human rights group to disband on Tuesday for breaking a law requiring it to act as "a foreign agent", capping a year of crackdowns on Kremlin critics unseen since the Soviet era. (Reuters)

Myanmar court postpones verdicts in second case against Suu Kyi. A court in military-ruled Myanmar postponed its verdicts Monday on two charges against ousted leader Aung San Suu Kyi in which she is accused of importing and possessing walkie-talkies without following official procedures, a legal official familiar with the case said. (NPR)

5 places to watch for conflict in 2022. A revisionist China, provocations from Russia and the fraught U.S. withdraw from Afghanistan dominated much of the international space in 2021 – a year defined by the ongoing fallout from the coronavirus pandemic as well as the backlash from the end of a singularly competitive U.S. presidency and the beginning of a new era of supposed “relentless democracy” from Washington. (US News & World Report)

France imposes new virus measures amid spike in infections. The French government announced new COVID-19 measures on Monday in an effort to curb the spread of the coronavirus, yet stopped short of imposing drastic restrictions before New Year’s Eve. (Associated Press)

China-EU trade through Xinjiang ports witnesses rapid growth. China-EU import and export trade through ports in China’s Xinjiang Uyghur Autonomous Region has grown rapidly, with the trade volume in the first 11 months this year reaching 261.82 billion yuan (about $41.1 billion), up 30 percent year on year. (HSN)

Humanitarian crisis unfolds in northern Ethiopia. The fighting between forces of the Ethiopian government and rebels from the Tigray region has had a devastating effect on the civilian population. The UN has warned of a "grave humanitarian situation." (DW)

Despite supply issues and Omicron variant, US holiday sales rise 8.5%. Holiday sales rose at the fastest pace in 17 years, even as shoppers grappled with higher prices, product shortages and a raging new Covid-19 variant in the last few weeks of the season, according to one spending measure. (Business Mirror)

The number of zombie companies is falling despite bites from inflation and covid. In a year when many companies faced severe headwinds from higher inflation, supply chain woes and fresh Covid waves, the ranks of so-called zombie companies -- those that aren’t earning enough to cover their interest payments -- actually declined. (Bloomberg)

Biden urges government agencies to end overseas fossil fuel support. Pressure is building on the Export-Import Bank of the United States (US Exim) to formally cull support for oil and gas, after the Biden administration called for an immediate end to overseas fossil fuel financing. (Global Trade Review)

South Africa court blocks Shell's oil exploration. A South African court has halted oil giant Shell's seismic testing for oil and gas along the country's eastern coastline, pending a final ruling. The decision has been hailed by environmentalists who fear that the sound blasting will harm marine life. (BBC)

Putin to ponder options if West refuses guarantees on Ukraine. Russian President Vladimir Putin said Sunday he would ponder a slew of options if the West fails to meet his push for security guarantees precluding NATO’s expansion to Ukraine. (Business Mirror)

Commodities 2022: Oil demand recovery seen holding course despite omicron threat. Even as cases of COVID’s omicron variant continue to spiral around world, most market watchers remain sanguine that 2022 will be year when global oil demand finally catches up and overtakes pre-COIVD levels. (HSN)

Poll Question

 

Hong Kong Export Growth Set to Slow to 8% in 2022

Hong Kong exports are expected to grow by 8% in value in 2022, down from the 25% expansion experienced in 2021, according to the Hong Kong Trade Development Council (HKTDC). An uneven recovery, lingering threats from the COVID-19 pandemic, global supply chain disruptions and logistics bottlenecks, as well as rising concerns over inflation, are expected to restrain growth.

In the most recent HKTDC Export Index survey, more local exporters (87%, up 20.4 percentage points from the previous quarter) said the pandemic had negatively affected their business. Soaring transport costs (60.2%), disruptions to logistics and distribution (53.2%) as well as difficulties in sourcing raw materials/parts and components (41.4%, up 16.8 percentage points) were cited as major impacts. More than 70% of Hong Kong exporters said they expect 2022 sales will decrease (42.6%) or just be on par (29.1%) with sales this year.

In the first 10 months of 2021, Hong Kong exports surged 26.7% year-on-year, albeit from a low base. The impact of COVID-19 (32.5%) remains local exporters’ top concern, followed by a stuttering economic recovery (15.7%) and borders remaining closed (11.6%).

COVID-19-related delays in shipments and issues related to port closures and congestion have adversely impacted the global supply chains in many areas. While 71.3% of respondents reported delivery delays, 39.8% experienced production schedule disruption and 38.4% passed extra shipping costs on to customers. Many exporters (62.4%) expect logistics costs to continue rising in the first quarter of 2022, with 39.8% anticipating an increase in the range of 10-30%.

Manufacturers may reserve more buffer time for production in the pandemic recovery period, Nicholas Kwan, HKTDC director of research. “Take the automobile industry as an example, where companies are switching from a ‘just-in-time’ strategy, with semiconductor chips, parts and components only delivered as needed, to embracing a ‘just-in-case’ strategy where they stock up on inventory to combat logistics bottlenecks.”

New Products, New Markets

On the bright side, the Regional Comprehensive Economic Partnership (RCEP) agreement took effect on Jan. 1. “With its phased tariff elimination, the RCEP is set to further develop and integrate regional supply chains, as well as encourage production specialization in Asia. This will provide a fresh impetus for Hong Kong to fortify its role as an international trading hub,” Kwan said.

 Considering business strategies in 2022, almost half of the exporters surveyed (46.4%) indicated they planned to develop other product categories, with some opting to develop domestic markets in Mainland China (33.8%) or diversify sales to other overseas markets (30.5%).

 Toy Sector Bearish

Meanwhile, the HKTDC Export Index dropped 1.8 points to 37.2 in the final quarter of 2021, “indicating that growing market uncertainties triggered by COVID-19 variants may continue to undermine local exporters’ confidence in the near term,” said Alice Tsang, HKTDC assistant principal economist (Greater China).

Machinery (44.1, up 0.3 points) was the most promising sector, jewelry (40.7. up 0.8) and clothing (39.6, up 3.5) improved, while toys, down 19.0 points to 25.0, was the least optimistic sector. Exporters were equally cautious on major markets. Mild growth was expected in the Association of Southeast Asian Nations (ASEAN) bloc (45.8, up 1.3) and Japan (48.7, up 0.8), while the mainland market remained stable (47.6, down 0.2) and the United States fell 1.4 points to 42.9.

The Procurement Index and the Employment Index were more or less the same as the previous quarter, at 36.9 and 44.0 respectively. The Trade Value Index (57.0) remained in expansionary territory.

A total of 500 local traders from six major industry sectors including clothing, electronics, jewelry, machinery, timepieces and toys were interviewed for the HKTDC Export Index survey in mid-November. Readings above 50 indicate a positive sentiment, while below 50 is negative.

UPCOMING WEBINARS




Global Debt Reaches a Record $226 Trillio

Vitor Gaspar, Paulo Medas, and Roberto Perrelli, IMF Fiscal Affairs Department

In 2020, we observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis and a deep recession. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation.

Global debt rose by 28 percentage points to 256% of GDP, in 2020, according to the latest update of the IMF’s Global Debt Database. Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99% of GDP. Private debt from non-financial corporations and households also reached new highs.

Debt increases are particularly striking in advanced economies, where public debt rose from around 70% of GDP, in 2007, to 124% of GDP, in 2020. Private debt, on the other hand, rose at a more moderate pace from 164 to 178% of GDP, in the same period.

Public debt now accounts for almost 40% of total global debt, the highest share since the mid-1960s. The accumulation of public debt since 2007 is largely attributable to the two major economic crises governments have faced—first the global financial crisis, and then the COVID-19 pandemic.

The Great Financing Divide

Debt dynamics, however, differ markedly across countries. Advanced economies and China accounted for more than 90% of the $28 trillion debt surge in 2020. These countries were able to expand public and private debt during the pandemic, thanks to low interest rates, the actions of central banks (including large purchases of government debt), and well-developed financial markets. But most developing economies are on the opposite side of the financing divide, facing limited access to funding and often higher borrowing rates.

Looking at overall trends, we see two distinct developments. In advanced economies, fiscal deficits soared as countries saw revenues collapse due to the recession and put in place sweeping fiscal measures as COVID-19 spread. Public debt rose 19 percentage points of GDP, in 2020, an increase like that seen during the global financial crisis, over two years: 2008 and 2009. Private debt, however, jumped by 14 percentage points of GDP in 2020, almost twice as much as during the global financial crisis, reflecting the different nature of the two crises. During the pandemic, governments and central banks supported further borrowing by the private sector to help protect lives and livelihoods. Whereas during the global financial crisis, the challenge was to contain the damage from excessively leveraged private sector.

Emerging markets and low-income developing countries faced much tighter financing constraints, but with large disparities across countries. China alone accounted for 26% of the global debt surge. Emerging markets (excluding China) and low-income countries accounted for small shares of the rise in global debt, around $1–$1.2 trillion each, mainly due to higher public debt.

Nevertheless, both emerging markets and low-income countries are also facing elevated debt ratios driven by the large fall in nominal GDP in 2020. Public debt in emerging markets reached record highs, while in low-income countries it rose to levels not seen since the early 2000s, when many were benefiting from debt relief initiatives.

Difficult Balancing Act

The large increase in debt was justified by the need to protect people’s lives, preserve jobs, and avoid a wave of bankruptcies. If governments had not taken action, the social and economic consequences would have been devastating.

But the debt surge amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term.

A crucial challenge is to strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation. Fiscal and monetary policies fortunately complemented each other during the worst of the pandemic. Central bank actions, especially in advanced economies, pushed interest rates down to their limit and made it easier for governments to borrow.

Monetary policy is now appropriately shifting focus to rising inflation and inflation expectations. While an increase in inflation, and nominal GDP, helps reduce debt ratios in some cases, this is unlikely to sustain a significant decline in debt. As central banks raise interest rates to prevent persistently high inflation, borrowing costs rise. In many emerging markets, policy rates have already increased and further rises are expected. Central banks are also planning to reduce their large purchases of government debt and other assets in advanced economies—but how this reduction is carried out will have implications for the economic recovery and fiscal policy.

As interest rates rise, fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities. As history shows, fiscal support will become less effective when interest rates respond—that is, higher spending (or lower taxes) will have less impact on economic activity and employment and could fuel inflation pressures. Debt sustainability concerns are likely to intensify.

The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.

The uncertain outlook and heightened vulnerabilities make it critical to achieve the right balance between policy flexibilitynimble adjustment to changing circumstances, and commitment to credible and sustainable medium-term fiscal plans. Such a strategy would both reduce debt vulnerabilities and facilitate the work of central banks to contain inflation.

Targeted fiscal support will play a crucial role to protect the vulnerable (see the October 2021 Fiscal Monitor). Some countries—especially those with high gross financing needs (rollover risks) or exposure to exchange rate volatility—may need to adjust faster to preserve market confidence and prevent more disruptive fiscal distress. The pandemic and the global financing divide demand strong, effective international cooperation and support to developing countries.

Reprinted with permission by IMF Blog. Virat Singh, Andrew Womer, and Yuan Xiang, of the IMF, provided valuable research assistance updating the Global Debt Database.

China’s Moment of Reckoning: The Evergrande crisis

Pushpendra Mehta, executive writer, CTMfile

China's opaque financial system has been a cause of concern for its financial stability and is now keeping overseas investors on edge as its fragile property sector slid deeper into economic angst. 

Fitch Ratings said that two Chinese real estate giants, China Evergrande Group and Kaisa Group Holdings Ltd., have defaulted on US$1.6 billion worth of bonds owed to global creditors. Evergrande is the world's most indebted real estate developer, with a staggering load of more than $300 billion in liabilities. This includes $19.2 billion of dollar debt. "With an illiquid portfolio of property projects financed by $300 billion of liabilities, 80% of them short-term, Evergrande has a huge liquidity mismatch," as per a recent article in The Economist. 

Last month it missed its first foreign bond repayment, and despite a 30-day grace period, it didn’t make good with its creditors. Kaisa, a smaller property company, had defaulted on a $400 million bond payment that was due in the first week of December.  

Fitch has since downgraded Evergrande and Kaisa to a "restricted default" rating over their failure to meet their financial obligations. 

Coming less than a week after China Evergrande Group and Kaisa Group Holdings Ltd. were officially labeled defaulters, there was a sudden drop in Shimao Group Holdings Ltd.'s bonds and shares. Shimao is China's 13th biggest developer by contracted sales. 

The fallout in China's property sector is showing no signs of abating, as more developers face the threat of default. "There is extreme stress in the market with about half the developers in the country in deep financial distress and pricing in high default risk," observed Jenny Zeng, co-head of Asia Pacific fixed income at AllianceBernstein. 

According to Moody's estimates, real estate and related industries account for about a quarter of China's GDP. Most property companies built their empires on borrowed money, primarily from bondholders, banks and construction contractors.

For more than a decade, Evergrande rode China's epic property boom that urbanized large areas of the country for its rapid economic growth, the likes of which the world had never seen. They minted money and expanded aggressively into new areas to become one of China's biggest companies, but imprudently, ended up with more debt than they could pay off - they borrowed more than $300 billion. The People's Bank of China (PBC), China's central bank, has blamed Evergrande's "own poor management" and "reckless expansion" for the problems it faces. 

Why are the real estate developers in trouble?

First, in the summer of 2020, the Chinese regulators imposed curbs on excessive borrowing in the real-estate industry to bring financial discipline, avoid enormous debt build-ups that threaten financial stability, and rein in rampant speculative buying. The property industry was squeezed by the tightening credit conditions forced by the government authorities to limit reliance on debt. 

Second, by July 2020 there was a fall in the housing sales, and the advent of Q3 2021 brought about a significant contraction in the Chinese property and construction business. The weak demand, declining sales and discounted prices (offered to homebuyers to keep the business afloat) contributed to an overall slowdown in China's economic growth, exacerbated the real estate crisis and added to the deteriorating cash flows of developers. Companies that accrued exorbitant debt to expand began struggling to complete housing projects and meet domestic and foreign repayments. 

Will Evergrande escape calamity? 

Is Evergrande too big to fail? Will it be allowed to fail, sold off to other Chinese companies, or offered a bail out? Will it become China's Lehman moment? These questions loomed over Evergrande and the global financial system and its key stakeholders for months. And now the Chinese government has made it clear that the real estate behemoth is headed for one of China's largest-ever debt restructurings. 

In recent times, Beijing has shown greater proclivity to let companies stand on their own or fail to control China's debt problem. This massive restructuring exercise will entail Evergrande's overhaul of its balance sheet without a government bailout - a process that will represent a serious risk to the Chinese economy. 

According to a recent article in Bloomberg, the government is now taking a more hands-on role at Evergrande. A seven-member "risk management committee" to restructure Evergrande, including officials from state-owned enterprises, has been constituted at the behest of the authorities. Only two executives from the company are on the committee, including its founder, Hui Ka Yan. 

Two weeks ago, PBC released $188 billion (1.2 trillion yuan) of liquidity through a cut in the reserve requirement ratio for banks. This was done by China's central bank to limit the real estate crisis fall out and to extend financial support to the housing market. 

"An orderly restructuring, where the company can run its operations as normally as possible and refrain from distressed asset sales will substantially help contain further damage across the sector," commented Jim Veneau, head of Asian fixed income at AXA Investment Managers. 

Evergrande said in a brief exchange filing on December 3 that it plans to "actively engage" with offshore creditors on a restructuring plan. However, Evergrande's bondholders have said that they expect international investors to be near the bottom of the queue for repayment. 

"Evergrande is complex and has entities in companies both inside and outside the People's Republic of China," remarked Daniel Anderson, a partner at the law firm Ropes & Gray in Hong Kong. "There isn't a clean, single legal mechanism that can be implemented to restructure the group. As a result, it will have to be across jurisdictions, which will make it highly complex." 

What happens next is really in the hands of the Chinese government authorities - will it be bankruptcy, a sale, or some other option - that remains unknown. "We all expected that Evergrande was not going to be able to pull a rabbit out of their hat," noted Michel Lowy, chief executive of SC Lowy. "Now, the ball is in their court to come up with some form of restructuring proposal," he added.  Yi Gang, the central bank governor, has indicated that Evergrande is not likely to get a bailout. 

What will be the impact if Evergrande fails?

The real estate crisis has fueled fears of wider shock waves for the global financial system and spooked investors who fear contagion across China's property and banking sectors, including domestic consumption and international commodity markets. 

If embattled conglomerate Evergrande goes bust, it could affect global financial markets and make it difficult for other Chinese companies to continue to access finance for their business from foreign investors. These investors, unnerved by the troubled Chinese property giant, may pull their dollars out of China to safer quarters and won't return to it as an investor. 

A collapse can also compel the Chinese financial system dominated by banks to turn conservative and lend less. "A failure could result in a credit crunch for the entire economy as financial institutions become more risk averse," said Zhiwu Chen, a professor of economics at the University of Hong Kong (HKU). And a credit crunch in the world's second largest economy will affect global growth. It certainly could have consequences for many countries that are linked to China through trade. 

Many of the housing unit projects were bought and money paid for in advance by individual buyers. Chinese consumers who bought property from the beleaguered real estate company could lose that money if they collapse or go bust. "The Evergrande debacle has probably given homebuyers concerns about whether developers will honor presale commitments," observed Julian Evans-Pritchard, senior China economist at Capital Economics. Also, the construction contractors and suppliers who did business with Evergrande would be at risk of incurring major losses, which could force them into bankruptcy. Notwithstanding, the related loss of millions of jobs would severely impede China's economic activity. 

Foreign investors are owed $1.3 billion in U.S. bond payments in December, according to Bloomberg-compiled data. These investors are worried that the money they are owed may be difficult to recover, and if there are any bankruptcy proceedings, they would be low on the list of creditors to be repaid.

"For global bondholders, the Evergrande default is likely to start a prolonged battle for repayment. Chinese authorities have made it clear the company should put homebuyers, suppliers, and retail investors - who bought the firm's wealth management products - ahead of debtholders. Some 1.6 million homebuyers have put down deposits with Evergrande for properties that have yet to be completed," as has been reported by Bloomberg recently. Evergrande's offshore noteholders included Ashmore Group Plc, BlackRock Inc., Fidelity International Ltd, UBS Group AG, and Allianz SE, according to data compiled by Bloomberg. 

Most likely to be hurt are those holding the company's U.S. dollar-denominated debt, who will face a "haircut" - they will be forced to accept payments of less than they are owed by Evergrande. 

"No matter what the outcome, offshore bondholders are last in line for payment and are certainly going to have to accept haircuts, possibly significant ones," said Andrew Collier, managing director of Orient Capital Research in Hong Kong. 

"With Evergrande's dollar notes trading at about 20 cents on the dollar, the market is already pricing in a haircut of around 80%. The key for bondholders is whether the company can speed up home sales and unload assets to raise cash so it can start settling its liabilities,” stated Gary Ng, a senior economist at Natixis SA.

According to the Federal Reserve, China's real estate travails could spill over into the U.S. financial system. The Fed warned of direct risks to the U.S. in its latest financial stability report (November 2021), commenting, "Financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States." 

“An Evergrande collapse will not come without suffering,” said Dr. Xin Sun, a senior lecturer in Chinese and East Asian Business at King's College London, in a recent article published in Insider.

"The people who suffer most will be the existing shareholders," Sun said. "Their equity will be wiped out. About 70% of the shares belong to the founder's family, and that will all be wiped out."

For the government, the biggest fear is the potential spillover effect that will hit the wider Chinese economy. If Evergrande were to collapse, it would cause a domino effect across the real estate sector, leading to the demise of more developers. UBS asset management estimates there are 10 developers with potentially risky positions with combined contract sales that is 2.7 times Evergrande’s size. In other words, Evergrande is only the tip of the iceberg.

Evergrande’s failure will also have major ramifications in other sectors it is involved with, including consumer electronics, building materials, furniture and electric cars. If Evergrande goes bankrupt, it will need to engage in the expensive task of protecting tens of millions of homeowners and avoiding social unrest.

Moody estimates that 70% of Chinese household wealth is tied to real estate. And Evergrande’s collapse would mean a significant drop in Chinese home prices. That would shrink the primary assets of the world’s largest middle class. And if that happens it will send ripples across the global economy. That will be a problem the world cannot ignore.

Reprinted with permission from CTMfile.

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Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations