China’s Evergrande Ordered to Liquidate

On January 29, a Hong Kong court ordered Evergrande Group to liquidate. Evergrande is a property giant in China and has struggled for years with massive debt and lost more than 99% of its market value in three years. Because it was a Hong Kong court that ordered liquidation, there are several more steps to be taken as 90% of the company’s assets are held in mainland China. China’s courts can stall the process as the CCP will set the timeline. The CCP will likely forestall liquidation for a while as the Spring Festival starts on February 10, and the holiday is associated with settling debts and backpay issues. Foreign creditors will likely get nothing from the liquidation as domestic creditors will be prioritized.
 

Evergrande is not the only large real estate company to be impacted by the broader property crisis in China that was bubbling before the pandemic made it worse. The country is littered with abandoned and unfinished buildings due to the crisis, and even completed projects can remain empty.
 

While all of this is a strong indicator of China’s economic problems (real estate accounts for 30% of the country’s economy), they are unlikely to face a financial crisis because of the collapse in the real estate sector. Unlike the United States, the CCP strictly controls information on finance and has much greater powers to prop up failing businesses. However, that will signal to foreign investors that they should likely stay away from China in the medium term as there will be market losses with no recourse.

Other major negative indicators for China’s economy are a debt-to-GDP ratio sitting at 287% and ten-year bond yields fell to a 22-year low (meaning investors lack confidence in long-term growth). If President Xi can manage the real estate crisis and economic woes over the medium term, then there are likely benefits, such as cheaper housing, lower debt, and less speculation, and that fits with his goal of national rejuvenation. That rejuvenation is looking less likely, though, because managing each of these problems will cause less confidence in China and reduce investment needed for innovation.

Iran-backed Militants Kill Three US Soldiers

Iran-backed militants killed three US troops on January 28 in Jordan, and President Biden is being pressured politically to respond aggressively, though this is unlikely because he does not want to ignite a broader war. Militants connected to Iran have attacked US forces more than 150 times in Iraq, Syria, Jordan, and Yemen since October, but this is the first time US troops have been killed. The United States will most likely retaliate against Iranian forces and Iran-backed militants outside of Iran with extensive air and/or drone strikes, which is a more cautious retaliatory approach. 
 

This will likely be insufficient for more hawkish members of the government. Senator Tom Cotton explicitly stated, "The only answer to these attacks must be devastating military retaliation against Iran's terrorist forces, both in Iran and across the Middle East.” Republicans will likely use Biden’s less aggressive response as political fodder on the campaign trail, but it is unlikely to have any impact on the election.

If the United States were to respond with more than targeted attacks on Iranian proxies, then they will likely go after Iranian naval forces, military leadership, and WMD program. However, this remains unlikely because of the foreign policy views of the Biden administration. Iran has greatly expanded its direct attacks in the region and bolstered its proxies, but the Islamic republic has apparently attempted to limit attacks that could lead to aggressive retaliation because they are aiming to drive the US out of the region. Therefore, the response by the Biden administration is extremely unlikely to be effective as Iran does not view deterrence the same way America does, and they will continue with low-level attacks across the region.

UNRWA Employees Part of October 7 Terrorist Attack

Israeli intelligence now indicates that at least a dozen staff members of the UN’s agency for Palestinian refugees (UNRWA) were connected to the terrorist attack by Hamas on October 7, 2023, and the intelligence assessment holds that six of them actively took part. UNRWA provides humanitarian aid and employed about 13,000 people in Gaza before the attack. The data for the assessment comes from “very sensitive signals intelligence, cellphone tracking data, interrogations of captured Hamas fighters, and documents recovered from dead militants.” In response to the assessment, several countries have stopped funding the organization, but the UN is urging those countries to reverse course. This will not impact the course of the war, but as analysts are looking at long-term issues in Palestine, a defunded UNRWA will make recovery significantly harder in Gaza, and it will complicate negotiations for aid from other organizations.

German Economy Faces Challenges

Germany, a critical economy for Europe, is facing major challenges due to inflation from the pandemic, and now several surrounding countries are suffering economically as well. In the last quarter of 2023, the German economy actually shrank by 0.3%. The auto sector in Germany has taken a significant hit, which is negatively impacting Hungary, Czech Republic, and Slovakia. This is forcing companies formerly dependent on the German auto sector to turn to overseas markets, but it remains unclear if this will be sufficient. Geopolitical risks in Ukraine and the Middle East are also exacerbating these problems. Overall, this strongly indicates that Europe will have major economic problems in 2024, and there are few policy options available because of the ideological constraints of Western Europe and overly complicated regulations from the EU. Corporations should expect at best extremely weak growth if not a recession on the continent.

DOJ, FBI Target Chinese Hacking Campaign

The US government has acknowledged combatting a pervasive Chinese hacking operation that compromised thousands of devices, including those belonging to Western security officials. The group, Volt Typhoon, is noted as especially problematic because they target critical infrastructure, internet service providers, and utilities. In response, the Department of Justice and FBI have received legal authorization to disable parts of the campaign. This event highlights that Chinese-back APTs are likely going to get increasingly aggressive as the great power competition increases between the US and China, and that the US government is willing to take more aggressive steps to combat such APTs. Such cyberattacks are now the norm in geopolitics, and corporations will consistently be targeted or caught in the crossfire between governments.

Federal Reserve Keeps Interest Rates at Current Level

The Federal Reserve decided to leave interest rates unchanged at its meeting on January 31, but the central bank did issue a policy statement that dropped previous references to further hikes. This is an important indicator that the reduction in inflation is expected to continue, but the policy statement did not indicate that cuts were coming in the short term. Importantly, the Fed’s statement held that the bank "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” This is a slightly positive indicator for improved economic conditions in the United States. In addition, the Federal Reserve is currently deciding on the mechanics of reducing its balance sheet and ending quantitative easing, which is another slightly positive indicator for the US economy.

Military Juntas Leave ECOWAS

Three African countries ruled by military juntas – Mali, Burkina Faso, and Niger – have decided to leave the Economic Community of West African States (ECOWAS) because according to the juntas the organization “under the influence of foreign powers” and “betraying its founding principles.” ECOWAS is a 15-member intergovernmental organization intended to increase regional integration, but this decision will likely alter that goal, though the actual exit will take time to negotiate. If the juntas successfully leave ECOWAS, then there will be significant disruption to the region’s trade and services flows and create problems for nationals from those countries living in neighboring countries.

ACLED Conflict Watchlist 2024

The Armed Conflict Location & Event Data Project (ACLED) collects real-time data on armed conflicts throughout the world, and the organization has published a report on the top ten conflicts to watch in 2024. The data is available here. The ten conflicts that ACLED has put on the 2024 watchlist are: Palestine, Yemen and the Red Sea, Sudan, the Sahel, Democratic Republic of Congo, Ukraine, Myanmar, Haiti, Mexico, and the United States. The conflicts will remain important for geopolitical watchers, and ACLED generally keeps useful data for those interested.