Perpetual crisis will hurt Chinese economy: Li Daokui, ex-PBOC adviser

Perpetual crisis will hurt Chinese economy: Li Daokui, ex-PBOC adviser

The Evergrande debt crisis will slow down China’s economic growth, but will have minimal impact on the country’s financial system, according to a former Chinese central bank adviser.

Evergrande is the most indebted real estate developer in the world with total liabilities of around $ 300 billion. The company is struggling to pay its suppliers and has warned investors it could default on its loans, with a principal payment starting this week.

“The impact is on the real economy because with the default of Evergrande, there will be [a] slowdown in the development of many projects, ”Li Daokui, former adviser to the People’s Bank of China, told CNBC’s“ Squawk Box Asia ”on Wednesday.

“Therefore, the financial slowdown for the region as a whole will impact the real estate market’s GDP growth rate for the coming year,” said Li, professor at the School of Economics and Management. from Tsinghua University.

He said Evergrande’s default would have minimal impact on China’s financial system because derivative instruments were not built on the company’s debt.

Derivatives are complex financial securities that derive value from an underlying asset, such as stocks and bonds. Traders use derivatives for a variety of purposes, including hedging a position and betting on the underlying asset.

Evergrande as we understand it cannot exist.

li daokui

Former adviser to the People’s Bank of China

“I think it’s a little too early to guess what the net effect is [of the crisis]. I would just say, by my rough calculations, 1 basis point on GDP growth …

The Asian Development Bank said on Wednesday it was keeping China’s growth forecast for 2021 at 8.1 percent and for 2022 at 5.5 percent. This will improve from the 2.3% expansion last year, when China became the only major economy to grow, as most of the world’s economies were hit hard by the COVID pandemic. 19.

Will Evergrande be dissolved?

Li said the omission of Evergrande would slow the progress of development projects around China, which would affect local economies in mainland China.

The economist said this could prompt local and provincial governments to step in with their own funds to continue these projects.

Li also said he expects the Chinese central bank to add liquidity to target areas to ensure that the fallout from the Evergrande default “does not spread too quickly.”

Lee predicted that in the medium to long term, the ailing company would “dissolve” into four main groups: real estate development, finance, electric vehicles and other business ventures.

“Each of these four subdivisions of Evergrande will be sold to different companies or even local governments,” Lee said. “Evergrande, as we understand it, cannot exist.”

– CNBC’s Weizen Tan contributed to this report.

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