Skip to content

A Possible Cataclysm?

It may be said that China is the single largest contributor to the overall growth of the Global Economy. As one of the world’s manufacturing hubs and leading trading nations, the Asian Powerhouse has become a major driver of change in global demand and a virtual regulator of trade of almost every commodity. It is expected that China would contribute to one-third of the global economic growth in 2021. So, if the Chinese Economy slows down, then the Global Economy, too, will be forced to follow it. And if there is a decline in demand of China, prices of everything – from mineral oil to steel – shall fall. Its impact shall be felt everywhere in the market, including the money market.

At one point in time, the richest Chinese businessman, Xu Jiayin, used to own the Evergrande Group, the second largest property developer in China by sales that is ranked 122nd on the Fortune Global 500. In 2018, it emerged as the most valuable Real Estate Company in the world. In June 2021, Evergrande Group started experiencing a default crisis; as the company reported that it became increasingly difficult for the management to pay debts of a total of USD 310 billion. According to analysts, Evergrande is at risk of running out of money and being unable to pay all its debts. It may be noted that about 1.6 million houses are under construction under a project that is being implemented by this Chinese company. Furthermore, Evergrande owns two-thirds of Hengchi (officially Shenzhen Hengchi Automobile Trading Company Limited), which is a Chinese car manufacturer that specialises in developing electric vehicles. Interestingly, the total value of Hengchi had surpassed that of Ford Motors even before manufacturing its first vehicle. When such a company faces a financial crisis, the market trembles.

The share price of Evergrande has fallen by one-sixth in the last one year, while its bond price has fallen to 26 cents per US Dollar. Investors were expecting a quarter of their investment as soon as they noticed signs of partial improvement in Evergrande share price on September 24. The company recently failed to pay its employees, as well as suppliers. Some local administrations have banned the purchase of new apartments built by Evergrande. The scenario might also have an impact on other Chinese property developers, apart from increasing the risk in investing in new bonds in the market. If the supply of credit declines, other Chinese companies shall not be able to continue their operations.

The concerned authorities in China have claimed that it is a temporary crisis, which will be resolved soon. In fact, Evergrande’s USD 3 trillion debt is only a fraction of China’s total debt. The Chinese authorities believe that they will be able to restructure the company, and to sell its unrelated business ventures, like manufacturing of electric cars. The interference of the State to resolve such a crisis may help keep the Global Market calm and protect Evergrande from dangerous consequences.

China’s Debt Ratio grows as its economy loses steam

However, there is another problem. The Evergrande crisis is only part of a big problem, which plunged Beijing into a huge debt trap in 2020. Those loans were not limited to Real Estate Companies only. China’s debt crisis is in a dangerous situation at the moment, as it is about three times the country’s Gross Domestic Product (GDP)! The gap between this ratio has almost doubled in the last few years. In 2020, the Government of China started controlling debt in a strict manner, so that companies, like Evergrande, would stop borrowing money. Beijing also asked several companies to suspend their operations, indicating that it was concerned about the development. It means the Chinese authorities believe that the same thing could happen to other companies, and that would be considered contrary to the policy of economic contraction. Future events shall determine Beijing’s attitude toward economic downturns and systemic risks. In short, if Evergrande’s debt is less than 1% of China’s total debt, then the Chinese Economy may not collapse.

China’s Debt concerns

As long as Evergrande’s crisis remains an internal issue, its global impact will be limited. Nevertheless, it will have an indirect effect. Above all, it should be admitted that a steady flow of debt worked behind the rapid pace of China’s Economic Growth. It may be noted that tighter debt policy affected China’s economic activities during the 2007-08 Great Recession, and inevitably it had an impact on the Global Economy. Even if Evergrande manages to overcome the crisis, it would take time. A section of experts is of the opinion that the event would mark the end of the magic story of China’s path to becoming the world’s Second Largest Economy! It may also become difficult for the Asian Giant to challenge the US, financially and strategically. It has become clear that China may have to soften its tone…

Boundless Ocean of Politics on Facebook:
https://www.facebook.com/boundlessoceanofpolitics/

Boundless Ocean of Politics on Twitter:
https://twitter.com/kousdas?s=09

Boundless Ocean of Politics on Linkedin:
https://www.linkedin.com/company/boundless-ocean-of-politics

Contact us: koushik@boundlessoceanofpolitics.co.in

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: