Evergrande is a Lehman-style lesson for China

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YesGlobal markets suffered a sell-off on Monday, as investors worried that the collapse of a major Chinese property company could have a contagion effect and undermine financial stability in the world’s second-largest economy.

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Evergrande, a large property developer in China that has exceptionally large debts, is struggling financially in the wake of government efforts to cool a hot property market. As credit rating company S&P Global Ratings said in a report this week that the company was close to defaulting on debt as of Thursday, concerns over the company’s stability climbed a notch.

Investors fear that Evergrande is a sign of wider troubles in China’s property market, which shows signs of what may be a bubble – economic jargon when asset prices have risen sharply and reached a level that seems volatile. When these bubbles burst, it has an effect often called a crash: a sharp and sudden drop in asset prices.


Given China’s relative size, this is a major concern for investors who are exposed to China’s wealth as well as the global economy. The country is expected to account for a fifth of global growth from 2021 to 2026, according to forecasts published by the International Monetary Fund, the lender of last resort, in April this year.

The woes of property companies have caused alarm in particular as the real estate sector accounts for a significant portion of China’s economic output. Investments in real estate accounted for 13 percent of China’s GDP in 2018, according to the US Department of Commerce’s Bureau of Economic Analysis. Historically, it accounts for about 5 percent of GDP in the US compared to investments in real estate.

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In 2020, economists Ken Rogoff and Yuanchen Yango Calculation A 20 percent drop in housing sector activity could lead to a 5-10 percent drop in GDP.

Some economists and market analysts suspect this is a repeat of the 2008 financial crisis, but that doesn’t mean it isn’t a sign of serious problems ahead. A bumpy ride, or even a crash in the overcooked construction and property market in China, will accelerate a recession in the country, which has already failed to bounce back from the pandemic as some predictions have shown. was suggested.

It all smacks of a Ponzi scheme. What’s worrying is that Chinese officials don’t try hard enough to stop it properly in the first place, because they can’t assess the problem, because it’s such a complex web.

Freya Beamish Chief Asia Economist at Pantheon Macroeconomics

It is not yet clear what steps the Chinese government will take, but its central bank has already taken steps to boost liquidity, in a sign that cash can flow through the financial system. It is trying to calm the nerves of investors and bankers.

Tommy Wu, chief economist for Asia Pacific at Oxford Economics, pointed out that if Evergrande defaults, it will hurt large financial companies and banks, which have previously held assets associated with the firm. Granthshala.

“There are different stakeholders to the Evergrande position. There are homeowners buying homes from Evergrande, there are retail investors who have purchased products from Evergrande, the other stakeholders will be banks, bondholders and suppliers,” Wu said.

Wu said the top priority, as far as the government in Beijing is concerned, is to minimize the impact of Evergrande’s potential collapse on homeowners. But for the rest of the world, Wu and other economists are grappling with the question of whether any government intervention manages to prevent widespread “fire sales” in China’s property sector.

S&P believes China’s government will only act if there are signs of a widespread contagion “with many major developers failing and posing systemic risks to the economy”, rather than saying the impact was limited to Evergrande.

“We think the government will create a managed restructuring, even if it won’t bail out Evergrande and investors,” Wu said.

Some economists are shying away from calling it the ‘Lehman Moment’ of China – the US bank whose collapse triggered widespread financial turmoil in the financial crisis. According to Simon McAdams, senior global economist at Capital Economics, such a narrative is “extremely pervasive.” While any situation involving debt and assets brings back disturbing memories for investors, it is a different kind of problem in a different kind of market.

“The closest parallel is [South] Korea in 2003, instead of Lehman,” explained Freya Beamish, chief Asia economist at Pantheon Macroeconomics. Granthshala. “The final difference is from a global perspective: China is not at the center of the global financial system, whereas the US was and is very much.”

Guangzhou Evergrande Football Stadium under construction in Guangzhou

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Guangzhou Evergrande Football Stadium under construction in Guangzhou

in South Korea, cReddit card lending exploded in the late 1990s and early 2000s. This moved families from being determined savers, to spending and accumulating debt. Credit card purchases as a percentage of consumption increased from 15.5 percent to 24.5 percent between 1999 and 2002.

The parallel matters as China faces a complex web of financial leverage created by a boom in its asset sector, Ms Beamish said. This will take time to unravel and may even prove impossible to measure over time.

Excess savings, a problem in South Korea in the late 1990s and a well-documented issue in China, which has had one of the highest rates of savings relative to GDP in the world in recent years, fuels according to some economists. Bubbles can help. handjob Including Ben Bernanke, former chairman of the US Federal Reserve. He believes that the glut of global savings created in 1996-2006 helped fuel the 2007 financial crisis.

Beamish thinks a similar effect may have occurred in China in recent years, where a wall of money-hungry companies has clashed with another wall of money created from household savings. The result: an asset and construction bubble.

“In that sense, the driver of these Evergrande crises is similar to the Lehman moment, but China and the US have very different roles in the global financial system, so the results will not be parallel.”

“For the real economy, the danger is a boom in fire sales by not only Evergrande but other property developers. These people have long been perpetual. This is an endemic phenomenon within the property sector,” said Beamish.Read More Evergreen is often used in finance to describe companies that avoid default by taking out loans.

“It all smacks of a Ponzi scheme. What’s worrying is that the Chinese authorities don’t try hard enough to stop it properly in the first place, because they can’t assess the problem, because it’s such a complicated trap.” What is unfolding in China’s property sector is another reminder of the confusion after the fall of Lehman.

This makes the outlook a bit sad now

Chief Economist for Asia Pacific at Oxford Economics

If, as Beamish and others expect, Beijing moves quickly to try and slow any widespread decline of the property sector, it could lessen the impact of widespread confidence in financial markets, real estate. Market-based broad-based fires could prevent sales and have “bad” effects on household finances, she said.

Evergrande’s situation is not ultimately indicative of a financial collapse in the wider financial system in China, but there are spillovers to consider.

“In terms of the contagion side of things, I think it’s mainly a China issue,” Wu said, “but commodity prices for products like steel, iron ore and coal may be affected by the slowdown in Chinese manufacturing.” can. Even though it can be mitigated to some extent by government intervention to promote infrastructure creation.

Banks such as HSBC and Standard Chartered that make significant amounts of money from trade finance involving Chinese imports and exports, or other Chinese assets, could also be hit by a broader economic slowdown in the coming months.

And while Evergrande is not at the center of the world’s financial markets as Lehman was, this potential decline is symptomatic of a wider concern. Even if the crisis is avoided – through the state-led restructuring of Evergrande – Chinese manufacturing is in decline, McAdams said, slowing China’s GDP growth to 2 percent by 2030. This was also, as was Lehmann, a symptom of an excess of savings and a subsequent bubble.

Simply put, Wu said, “it makes the outlook a little bleaker now.”


Credit: www.independent.co.uk /

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