A quick way to try to explain new crises is to refer to traumatic events that have happened before. The confined Wuhan was compared to the radioactive Chernobyl, and in the midst of the debt crisis there was no lack of comparisons between Spain frightened by the risk premium and rescued Greece. The Chinese real estate company Evergrande, suffocated by a huge debt, and the defunct investment bank Lehman Brothers, now a symbol of the excesses of capitalism, are the latest pair to participate in this game of mirrors. But if analogies are the shortest way to give dimension to a crisis, they are rarely the most exact: the experts consulted agree that the possible bankruptcy of Evergrande will be far from unleashing a global financial panic in the style of Lehman Brothers,although his descent into hell will not be free either in China or outside its borders.
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The world's most indebted real estate company, China's Evergrande, collapses
A ticking bomb
At first glance, an Evergrande bankruptcy has the ingredients to seem like a threat of the first magnitude: as with other firms in the Asian giant, it does not stand out for its transparency, it has a debt of 305,000 million dollars - about 260,000 million euros, the 2% of Chinese GDP - distributed by the second largest economy in the world, pending invoices with thousands of suppliers, and is part of an over-indebted sector in a country that in recent years has already given several scares to the markets, and to which many they point out as an incubator for bubbles and the probable origin of the next great crisis.
The reality, however, is that it takes much more than that to bring the system back to the brink of collapse. Last Tuesday, the chief economist of the OECD, Laurence Boone, insisted that the Chinese financial system is little connected with the outside, and defended that Beijing has monetary and budgetary margin to cushion the blow of the bankruptcy of the second largest real estate company in the world. country. Two days later, the chairman of the Federal Reserve, Jerome Powell, also took the iron out of the problem as markets went through a roller coaster of emotions looking to China. Powell recalled that the US has little direct exposure, and even downplayed the implications for large Chinese banks.
Ignacio de la Torre, Arcano's chief economist, explains that a developer, by definition, is not as interconnected as a large North American investment bank. And even when the crisis pollutes the banking sector, the situation is likely to be manageable. “China is an economy with a closed capital account. That is, there is no freedom to buy and sell Chinese financial assets. Neither the Chinese can freely invest their savings abroad or vice versa. This implies that the contagion of an eventual banking crisis towards the rest of the world would be very limited ”.
Natixis IM analysts are even more forceful in their diagnosis, which shows a certain weariness with the apocalyptic prophecies of the last days.
“This is not Lehman.
It is not the end of the world and it is not something we have to take cover for.
The financial liabilities affected are simply too small and too spread out to pose a systemic threat on a global scale. "
Evergrande, despite its colossal size, represents only 0.2% of the total exposure of Chinese bank loans.
Last Monday, the end of the world did not seem near, but it was not unreasonable to think of the beginning of a severe correction in global markets.
The unknowns about its bankruptcy, the role of the Chinese government in the restructuring, and what will happen to the 1.5 million homes to be handed over to owners who have already paid for them have not disappeared, but the fire burned down as the week passed , to the point that the main world indices have already recovered what they lost.
Nobody rules out that in the current climate of volatility and uncertainty, the fire could reignite among investors.
The beginning of the Chinese slowdown?
Although Evergrande does not seem to be starring in the
Chinese
Lehman moment
, the aftershocks of its debacle will be felt abroad as well. A report by BBVA Research anticipates a default scenario, and De la Torre is of the same opinion: he estimates that the question is not whether it will fail, but when it will. The blasting of the giant, controlled or not, will mark a before and after in the Chinese real estate sector, which will probably not be the same again. According to JP Morgan, it now represents 14% of GDP, a figure that rises to 25% if its indirect contribution to activity is taken into account. "The economy would be affected if the real estate sector were to slow down dramatically," says a report from the US bank.
The predictions are not flattering. De la Torre foresees that the advance of Chinese GDP, one of the great engines of global growth in recent decades, will slow to rates below 4% per year from 2023. And Fitch has already rushed to lower its forecast of three tenths of growth for this year, from 8.4% to 8.1%. The premise is that if construction loses part of its enormous weight — plagued by debts, the oversupply of millions of empty houses, and less exodus from the countryside to the cities — unemployment may increase and consumption may be reduced. All this in a context of demographic weakness that has led Beijing to allow families to have a third child.
The slowdown would have immediate effects, and not just for Western companies with interests in China. Without new cities to build, the need for raw materials, many of which are purchased abroad, would be reduced. But it is not necessary to wait to find effects of the Evergrande earthquake, as Celso Otero, manager of Renta 4 funds points out. “The price of iron has fallen more than 50% since mid-July because China is the largest consumer in the world [buys 75.4% of the total]. It is an economy of 1,400 million people, it is very difficult that it does not affect others indirectly ”. The demand for steel, copper, zinc, aluminum or nickel, of which China is also the main consumer, also threatens to suffer, and alerts have already begun to jump in Latin America, where countries like Brazil,Chile and Peru are among the major producers of these raw materials. As a positive side effect, falling prices could make housing construction cheaper.
Europe is also one of its great trading partners.
According to ICEX, the EU was the largest supplier to China in 2020 (12.6% market share), followed by Taiwan (9.8%) and Japan (8.5%).
Spain, with 0.5%, rose to 35th place from 40th, after sending goods and services worth 8,169 million euros.
14,509 Spanish companies exported to China last year.
It is complex to measure the amount of the global impact.
The OECD estimates that an eventual 2% drop in Chinese demand in two years would reduce global economic activity by 0.5%.
Evergrande may not be Lehman Brothers, even though some of its worst vices resemble it - debt, exposure to a housing bubble - but its collapse is not just Beijing's concern.
