Transcript: China’s not so Evergrande

This is an audio transcript of the FT News Briefing podcast episode: ‘China’s not so Evergrande’

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Marc Filippino
Good morning from the Financial Times. Today is Tuesday, January 30th and this is your FT News Briefing.

Binance customers are looking for some security. And a major Chinese property developer is going under. Plus, Brazil’s president is returning to an old and controversial playbook to get the economy back on track. I’m Marc Filippino and here’s the news you need to start the day.

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Binance will let some of its customers hold assets with a third party. The cryptocurrency exchange caved to pressure. Its larger customers want to keep holdings at independent banks. The head of a crypto trading firm told the FT that in theory, it’s safer to park money in a bank because it has oversight from regulators. The move highlights just how uneasy traders have become about Binance. The US Department of Justice fined the exchange last year and its CEO pleaded guilty to federal crimes.

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China’s Evergrande is going to be liquidated. It opens a new and unpredictable phase for the world’s most indebted property developer. Evergrande’s official default two years ago triggered a cash crunch for other developers, and it’s still hobbling the world’s second-largest economy. I’m joined now by the FT’s Shanghai correspondent Tom Hale. So, Tom, just give us the details. What exactly happened on Monday?

Thomas Hale
So a Hong Kong court has ruled that Evergrande, or at least its holding company in Hong Kong, should be liquidated. That comes after just over two years of negotiations with international creditors, which ultimately failed to find any kind of common ground with the company itself. The complication is the extent to which this order will involve the liquidation, not just of the Hong Kong entity of Evergrande but its hundreds of entities across the Chinese mainland that relate to its core homebuilding business. 

Marc Filippino
So, Tom, how could that actually play out? 

Thomas Hale
Yeah, well, according to the Evergrande operations in mainland China, this ruling is not going to affect what remains of their day-to-day business. But the complication is that the liquidation order in Hong Kong could potentially be submitted to three courts in mainland China. Those are courts in Shenzhen, Xiamen and Shanghai. And if it is accepted by those courts, then the company’s entity in Hong Kong may have the capacity to make claims on assets in the Chinese mainland that could not only disrupt the proceedings of the business, but also pave the way for conflicts with mainland creditors who have enormous claims on Evergrande and have sat on those claims for several years now. But there are huge uncertainties right now as to what exactly the Evergrande entity in Hong Kong owns in relation to the many, you know, the hundreds if not thousands of Evergrande projects and project-level companies that exist across China. 

Marc Filippino
Wow. So what could be the greater significance here for the Chinese economy?

Thomas Hale
The whole episode, at the very highest level, is a strong evidence that the property boom that sustained a lot of growth in China for several decades has reached a crucial turning point. And the information that comes out of the liquidation process, at least in Hong Kong, is potentially gonna provide more information about the exact nature of these projects that Evergrande has, the extent to which they are abandoned projects in ghost cities, or the extent to which the company’s projects were less problematic than its management of its cash flows. So the process of discovery that’s gonna take place through the liquidation order in Hong Kong is likely to provide much needed detail and nuance on what exactly has gone wrong with the Chinese property sector. 

Marc Filippino
Now, if you’re kind of following this from a long way away like I am, and you’re not necessarily a creditor either in China or in Hong Kong, what’s the real significance of Evergrande’s bankruptcy ruling?

Thomas Hale
Well, I would say that for anyone with an international perspective on China, it’s going to shed light on the way in which the Chinese legal system and the Chinese bankruptcy system interacts with international claims outside of the country, or truths about the direction in which the country is moving, whether it’s becoming more or less open, which is a topic that’s widely discussed in post-Covid China. It’s also, as has been the case since the default of Evergrande in late 2021, it’s going to be a test case of what happens when the kind of legal norms of international finance clash with the highly opaque world of Chinese property. 

Marc Filippino
That’s the FT’s Shanghai correspondent Tom Hale.

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British businesses are really feeling the pinch from Brexit. The cost of trading with the European Union has soared since the UK left the bloc. A survey found that most UK-based businesses are less profitable as a result of Brexit. Businesses on average have spent nearly £100,000 over the past three years navigating new customs rules. The findings come as the UK government gets ready to phase in new Brexit border checks on most plant and animal products from the EU.

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It’s been about one year since Brazil’s President Luiz Inácio Lula da Silva returned to office. And Lula, as he’s called, has big plans to jump-start his country’s economy. He’s turning back to his old playbook, the one he used when he was in office from 2003 to 2010. And it’s all about state capitalism. I’m joined now by Michael Pooler. He covers Brazil for the FT. Hi, Michael. 

Michael Pooler
Hi, Marc. 

Marc Filippino
So, Michael, tell me a little bit about Lula’s playbook and the sort of economic conditions that he’s operating in. 

Michael Pooler
So Brazil just experienced what some economists call a lost decade. And by that they mean very low growth rates over this period, and living standards that are only where they were about 10 years ago. And so the country has really struggled to drag itself out of a prolonged period of mediocrity. Now, Lula’s answer is to use the might of the state to spur growth and spread prosperity. So Lula has increased welfare payments for the poorest. His government has managed to loosen restrictions on the amount of public spending, and they’ve also laid out some really bold promises to improving infrastructure. This is to be delivered through a major public works program that aims to improve areas like water and sanitation, energy and transport infrastructure. 

Marc Filippino
Now, like I mentioned, Michael, Lula’s tried this kind of state capitalism model before. How did it play out when he was president from 2003 to 2010? 

Michael Pooler
So Lula’s first four-year term was viewed as rather fiscally orthodox. Then in his second term, the global financial crisis struck. And in order to counteract the effects of that downturn, he started spending more and there was greater stimulus. But critics say that this opened the door to what happened under his chosen successor, Dilma Rousseff. She was accused of overspending, of interfering in the economy and creating a fiscal imbalance. And the presidency of Dilma Rousseff was also tainted by the revelation of a huge political bribery scheme, which was uncovered by an investigation called Car Wash. And this showed that billions of dollars was sucked out of the state-controlled oil company Petrobras. And Lula himself was even sent to prison on corruption convictions that were later overturned. 

Marc Filippino
Yeah, I remember that corruption scandal. It took down quite a few prominent politicians and really hit Lula’s party. So how is this time gonna be any different, Michael? 

Michael Pooler
So the government says that its big public works program will have greater private sector involvement compared to those that it run in the past. And one of the key focuses is attracting foreign capital for the green transition — so things like carbon credits, renewable energy and electric car production. However, under previous infrastructure schemes that were launched by Lula’s party while in government, a lot of projects went unfinished and there was a lot of criticisms of waste, incompetence. So that’s led to a lot of concerns that we could see the mistakes of the past repeating. 

Marc Filippino
OK, so then how would we define success for Lula this time around? I mean, what would need to happen in the economy in order for his plan to go smoothly? 

Michael Pooler
So the big concern from mainstream economists and investors alike, and what they’ll always tell you is about the fiscal question. And one of the big variables in Brazil’s economy is the level of interest rates. Its central bank was at the forefront of global moves to jack up interest rates in the fight against inflation. And it has started cutting them. However, the base interest rate is still 11.75 per cent, which is very high. And that’s weighing on economic activity. But the worry among a lot of economists and investors is that if there’s any perception that public spending is getting out of control and there’s fiscal imbalance, then it will make it a lot harder for the central bank to carry on cutting rates, because there could be a knock-on effect in inflation. For Lula’s presidency to be judged a success, we’ll need to see sustainable foundations laid for long-term growth that can reduce unemployment and create competitive industries in Brazil. 

Marc Filippino
Michael Pooler covers Brazil for the Financial Times. Thanks, Michael. 

Michael Pooler
Thanks, Marc. 

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.