China’s Evergrande crisis could hurt the global economy

China's Evergrande crisis could hurt the global economy

A liquidity crisis at a major Chinese real estate developer has rocked global markets, and strategists say it could spill over into the global economy.

But they also say the problem will be contained by the Chinese government before it damages the banking system and is unlikely to lead to a broader global financial transition.

Important questions for investors are how and when Beijing’s leaders will handle the situation and whether they will start restructuring China Evergrande Group, as many market professionals predict.

Investors fear Beijing could allow the company to go bankrupt, hurting shareholders and domestic bondholders. Evergrande faces debt payments on its offshore bonds on Thursday after saying last week it was facing unprecedented hardship.

“Everyone expected Evergrande to be a systemically important company, given that the government would take some sort of resolution,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “She has $ 300 billion in outstanding debt. China is a contagious problem if Evergrande is not resolved. I think that will eliminate some state enterprises with deep pockets. “

Market professionals don’t think Evergrande could lead to the next financial crisis, but it could lead to more volatility.

Rick Ridder, Chief Investment Officer of Global Fixed Income at BlackRock, said: “The difficulty in understanding China in particular is that it’s an opaque system and until you have the answers, you don’t. do not have the answers. ” Eh.”

“The banking system is controlled by the government,” Reeder said. “There is a government intervention that will likely take place. I think right now when you sum everything up there are short term funding issues around some of the other asset entities and when that happens some can create instability and some can create instability. financial contagion. I think the government will work and I think it will be stable.

Rieder said there may be some caution around Chinese real estate companies and multidisciplinary companies at this time.

Some fear that the already sluggish Chinese economy could be further affected and that it could expand to other economies.

Chang said the Chinese government must act quickly as Evergrande started to affect sentiment after being ignored by global markets.

“It could be a self-fulfilling prophecy. This liquidity problem, real estate is so important to the Chinese economy and the financial well-being of so many Chinese families. Homeownership is over 90%, ”Chang said. “So many people buy apartments as an investment, so if this thing is not included, it could turn out to be a real black swan.”

Chang said that the fact that the Chinese economy is so big could affect the rest of the world. “If China had serious economic problems because of China Evergrande, the rest of the world economy would be infected.”

The Dow Jones Industrial Average ended Monday’s trading session down more than 600 points, after stock markets fell sharply in Europe, Hong Kong and other parts of Asia. The 10-year Treasury yield, which moves towards the opposite price, fell to 1.297% as investors sought the safety of the bond.

protect the wider financial system

“I believe that over time the Chinese authorities will take steps to ensure that at least the financial system as a whole does not go into crisis,” said Mark Williams, chief economist for Asia at Capital. Economics. “If you are a real estate developer, you are faced with a few months in advance. I think the main difference is that policymakers will allow real estate developers to face considerable pain, but they will take steps to make sure the banking system is okay.

Jim Chanos, chairman and founder of Kynikos Associates, said it was an important moment for Chinese leaders, who are undertaking a regulatory crackdown on internet companies, education companies, games and others. industries.

Chanos said it would be important to see how Beijing responds to Evergrande.

“We are seeing a distinct change in tone… the way the government treats businesses, business leaders, Western investors. How are they going to handle a bailout that everyone thinks is somehow, fit or fit? He told CNBC. “Will holders of Western bonds be released on bail?” Will this only go to owners who have exceptional apartments not yet built by Evergrande? Will banks get a haircut? “

Pain in the Chinese real estate market?

Chanos said China has tried to curb speculation in its real estate market four times since 2011. “In each of these cases, the economy has stalled very quickly, and officers have lifted the brakes. and stepped on the accelerator again, “he said. .

He added that the residential real estate market is equivalent to 20% of China’s GDP while real estate activity in general accounts for around 30% of GDP. “These are just outsized numbers, and they got worse, not better, under President Xi,” said Chanos, who sold Chinese stocks. We don’t think it’s working out for Western financial markets. “

Williams of Capital Economics said there are about 1.4 million property owners who have paid down payments and Evergrande is awaiting delivery of the properties. “We don’t know if they can build houses, but that doesn’t seem likely,” he said, adding that some housing is already underway and in various stages of construction.

The risk is that if other real estate companies also find themselves in trouble, real estate values ​​will suffer and there could be upheavals in the housing market. Consumers are a big factor in the Chinese economy, and a hit to housing could hurt consumption.

It will also move to other regional and global markets due to a weakening Chinese import market as well as reduced demand for all types of raw materials.

“When you combine that with some regulatory changes in China, the apparent slowdown in growth, this growth as well as the apparent slowdown in demand for commodities, there’s no reason to stop and be patient about it. to what’s going on in the area. It is, ”said Ryder. . “But China’s economic growth and China’s interconnected nature in the global economy are massive, and therefore China as a major market center is not going away anytime soon.”

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