IMF Economic outlook "gloomy," Alibaba lists in Hong Kong, CBDCs selling fear, China's real-estate crisis, Ant Group without Jack.

Note this is a holiday edition so please be forgiving of the editing and graphics. Minimal or no newsletters for the next two weeks.

1. IMF World Economic Outlook: Gloomy

2. Alibaba’s Hong Kong listing

3. CBDCs selling fear

4. China’s real estate crisis

5. Ant Group goes on without Jack Ma

1. IMF’s Economic Outlook is “Gloomy”

The IMF boldly proclaims a “gloomy” outlook for the world economy, with fintech and crypto likely caught in the anti-inflation crosshairs.

The IMF’s Global Economic Outlook is a must-read: here

I rarely venture into high-level macroeconomics, CBDCs are already a big enough “sandbox.” The IMF's economic outlook, however, is so dour that I think we all need to prepare ourselves for the eventuality that "the sun will not come out tomorrow."

Most of you won’t be surprised, pandemic, war, inflation, heat waves, energy shortages, supply chain disruptions, and real estate stress, all have been in the news. Their cumulative impact, however, is neatly summed up by the IMF and it’s sobering.

What follows are a few quotes from the report that hit me:

• The baseline forecast is for growth to slow from 6.1% last year to 3.2% in 2022 and 2.9% in 2023 (graph above)

• Downward growth revisions of 1.4% in the United States due to reduced purchasing power; 1.1% for China due to lockdowns and the deepening real estate crisis; and a “real GDP” drop of 1.5% for emerging and developing Europe due to the war.

• Global inflation: 6.6% in advanced economies and 9.5% percent in emerging market and developing economies.

• Low-income countries, where food represents a larger share of consumption, are feeling the impact of this inflation most keenly.

• 🔥With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers.🔥

• The probability of a recession starting in G7 economies is estimated to be 15%, 4X the norm, and 25% for Germany.

• The slowdown in China has global consequences…reducing demand for goods and services from China’s trade partners.

• A serious risk to the medium-term outlook is that the war in Ukraine will contribute to the fragmentation of the world economy into geopolitical blocs with distinct technology standards, cross-border payment systems, and reserve currencies. (I cover this extensively!)

• The same people who suffered most directly in recent years––those with low wages, precarious employment status, and limited savings or access to credit—are likely to feel the impact of any slowdown the most.

• Instead [of price controls] offsetting the impact on living standards via targeted cash transfers to those with low incomes or at particular risk can be very effective. (Case for CBDCs!)

I have no solutions, all I can offer is the bromide “we’re in this together.” With the focus on fighting inflation it would seem that the fintech and crypto crashes may not be over, just paused. Both sectors have been hard hit by raising rates and it looks as though the pain will continue.

Buckle your safety belts, strive for optimism and we’ll all muddle through as best as we can.

2. Alibaba’s Hong Kong listing

Alibaba’s “dual-primary” listing is a smart move providing a blueprint for managing the risk of delisting in US markets and access to Chinese buyers.

The ongoing feud between the US and China over stock listings remains unresolved, and recent reports hinting that a deal over financial data sharing may be imminent have been denied by Chinese regulators. Add to this the SEC raising the pressure by adding Alibaba to the list of companies to be delisted and it’s clear that “risk management” is required. While I believe that a deal will be struck, the fate of 200+ Chinese companies in the US hangs in the balance.

This is why Alibaba’s move for a “dual-primary” listing in Hong Kong and New York is so interesting and worthy of discussion.

Astute readers will say that Alibaba shares trade in Hong Kong now, what’s the difference? That is correct, but the shares are considered a “secondary listing” to those in New York.

This wouldn’t matter except for two issues. First, if Alibaba were to face delisting in NY it would have to relist in Hong Kong. Now as a “dual primary” listing Alibaba has a backup plan and would be able to make the transition seamlessly. Swapping NY for HK shares would be a breeze with minimal disruption in the event of delisting.

The second issue is that Alibaba wants to give mainland China retail stock buyers access to its shares in Hong Kong. That sounds simple, but there’s a catch.

The only way to do this from Hong Kong is through a program called “stock connect” where shares in Hong Kong, Shanghai, and Shenzhen can be bought on each other’s exchanges. The problem is that in order to qualify for the program shares must have a Hong Kong “primary listing.” So another problem solved!

Mainland retail stock buyers provide an amazing 85% of daily market turnover and would likely love to buy Alibaba stock. As amazing as it may seem Alibaba is not listed on China's stock exchanges. Think of Amazon not listing in the US! This makes Alibaba’s 2014 listing, still the world’s largest, even more amazing because mainlanders never participated!

Alibaba has been hammered by the crackdown on internet stocks and its return to Hong Kong will also be viewed favorably in Beijing. It bolsters Hong Kong’s stock market and likely gives it additional bargaining chips to use in the current negotiations with the SEC as it now has "Plan B."

So Alibaba is as they say “killing two birds with one stone" (一石二鸟). Managing the risk of delisting and gaining access to mainland investors.

The problem I have with this is not in the successful move to Hong Kong, but that talk of delisting and financial decoupling is now so normal, that I fear there is no going back.

Alibaba’s deal is a good one, but it leaves the door open for a decoupling that I genuinely hope never occurs.

3. CBDCs selling fear

Hysteria over central bank digital currency (CBDCs ) is just beginning and isn’t anywhere near its peak as hard-core conservatives and crypto fans unite to spread fear and paranoia.

Liberty Leading the People, Eugène Delacroix, 1830

CBDCs are an attack on liberty! Fear sells and CBDCs are in the midst of a massive fear campaign that will only get worse. Full long-form article on substack: here

Fear sells! It gets eyeballs on an article, convinces people to buy crypto, gold, invest in DeFi, or makes them nervous enough to sign up for a newsletter. It fills the dull days when magazine editors are looking for shock value because the news just isn’t that interesting.

That’s why not a day goes by where I don’t see articles proclaiming that CBDC will be: the end of freedom as we know it, the death of civil liberties, the beginning of communism, or, my favorite, the beginning of social credit scoring.

Read more on my long-form article on substack: here

4. China’s real estate crisis

China’s real estate problems are real, but not cataclysmic, and RMB 1tn ($148bn) in new loans will hopefully get some stalled projects back on track.

The irony of course is that as the focus shifts to completions the gap between starts and completions is actually closing. This is not to make light of the current problems but shows that the problem is being managed.

Links to three helpful articles:

FT: https://on.ft.com/3S6LMN5

CNBC: https://cnb.cx/3zDKvG9

S&P Global: https://lnkd.in/gjvB_Z5c

China’s real estate market is making headlines for all the wrong reasons and there are those predicting and worse some even hoping for a crash that will never come. Good news this week as Beijing announced a new $148bn loan program that should help to provide liquidity that can get China’s stalled real estate projects restarted. We can’t be sure that this will work, but it shows that the gov’t is attentive and managing a problem that is without a doubt a serious one.

🔹 Property sales:

The immediate problem is that China’s property sales are in trouble with S&P Global Ratings calling for a “plunge” in sales of some 30%. Worse than the 2008 crash which saw sales fall by 20%. Still combined with covid this will be a major drag on the economy.

The root of the problem is that many of China’s property developers are underwater and unable to access capital to complete unfinished projects. So while these funds will help get things moving, they are not a fix for the overextended real estate sector.

🔹 Mortgage Strike:

Unlike in the West in China, people buy homes before they are completed and start payments upon signing the contract. This generates cash flow for developers that helps them buy materials to finish the apartments.

The mortgage strike is making it impossible for developers, already starved for capital, to complete any of their projects.

From the point of a Chinese property buyer, they are simply opting not to pay because they don't see progress on their projects. Who can blame them? And by the way, do you still think Chinese people have no voice? Reports are that some 300 homeowner groups in 91 cities are now refusing to pay.

The mortgage strike creates a vicious cycle. Starved of capital even solvent developers can’t finish their construction projects which drives up the number of unfinished projects further reducing sales. Lower sales reduce prices which puts more stress on the entire system. That's why Beijing is jumping in quickly to staunch the bleeding.

🔹 Banks are not going bust

No this isn’t going to drive the banks into insolvency. The mortgage strike impacts only homes which are unfinished. S&P estimated the suspended mortgage payments could affect 2.5% of Chinese mortgage loans or 0.5% of total loans. So bankers aren't going bust, nor is the system at risk.

This is, however, serious business. Make no doubt about it, this will be a drag on China’s growth that will likely last into next year before it's sorted out.

It is, however, not a crash, and given how interconnected and precarious global economies are right now only the foolish would hope that it is.

5. Ant Group life goes on without Jack Ma

Ant Group’s new life as a financial holding company will be greatly simplified by Jack’s departure which was long planned and there is absolutely no rush for an IPO.

Abbreviated holiday article!

What happened: Jack Ma will surrender controlling interest of Ant Group

What it means:

1) Ant is reorganizing and Jack’s departure will greatly simplify Ant’s life as a Financial Holding Company (FHC) if he does not have majority voting control.

2) Pre-IPO Ma had intended to reduce his stake to 34% through a change in the voting agreement. So why the surprise?

3) “A significant key man risk will be removed from the neck of Ant”

4) Missed in much of the reporting is that seven executives from Ant left positions at Alibaba so that the companies could have a greater degree of segregation.

5) There is no rush for an IPO! What in these markets? Ant would have to be insane.

6) As I state in “Cashless” the FHC structure will have a profound impact on Ant’s profitability. Remember the regulatory arbitrage will be gone. Same rules for Ant and banks.

7) At least 2 years of accounts under FHC structure will be required for investors to understand the profitability of the new structure.

8) Stop fixating on the IPO, that ship sailed. A new ship is being built.

9) Still the headlines fixate on gov’t control, which is somewhat ironic....

Takeaway

The irony is that the EU and US are both focusing on the “same risk same regulations” for crypto and fintech. An approach not too dissimilar to what China did with Ant.

Thank you for reading!

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