The world’s No. 2 economy is flashing numerous warning signs, reports The New York Times.
Flashing warning signs
Investors are watching whether the property developer defaults. But in the background, the world’s No. 2 economy is flashing numerous warning signs.
Global markets have watched anxiously as a huge and deeply indebted Chinese property company flirting with default, fearing that any collapse could ripple through the international financial system.
Deal reached!
China Evergrande Group, the developer, said on Wednesday that it had reached a deal that might give it some breathing room in the face of a bond payment due the next day.
Threat remains unaddressed
But that murky arrangement doesn’t address the broader threat for Beijing’s top leaders and the global economic outlook: China’s growth is slowing, and the government may have to work harder to rekindle it.
Slow sales
Retail sales were much weaker than expected last month in China, led by slow car sales. Industrial production has slackened, particularly for large freight trucks.
Reduced housing projects
And developers sharply reduced new housing projects over the summer, while rushing to finish the projects they had already started.
What keeps China’s economy afloat now?
Heavy government spending on new rail lines, highways and other projects is keeping the economy afloat right now, but may not be sustainable through next year.
China’s “Lehman moment”
Markets have been riveted by the idea that Evergrande could be China’s “Lehman moment,” a reference to the collapse of the Lehman Brothers investment bank back in 2008, which kicked off the global financial crisis.
While many economists in China are pouring cold water over the idea of potential financial contagion, they are pointing to the broad weakness in China’s property market, a mainstay of the economy, and other long-term threats.
“This is not a Lehman moment. This is too sensational,” said Xu Sitao, an economist in the Beijing office of Deloitte. “The question is next year.”
$83.5 million payment due
With Evergrande, it isn’t entirely clear what will happen on Thursday, when bond interest payments are due. On Wednesday, it said in a vaguely worded stock market filing that it had reached an arrangement with Chinese investors to make a payment due the next day, without offering details.
It did not mention an $83.5 million payment due Thursday to foreign bondholders. Bloomberg News, citing bond documents, said the company had a 30-day grace period before a missed payment would become a default.
Step in for rescue
Chinese policymakers could conceivably step in and rescue Evergrande. But that would run contrary to their efforts to get companies to borrow less and to take some of the steam out of the property market, where apartments for purchase are increasingly unaffordable for many Chinese families in a number of markets.
People familiar with Chinese economic policymaking say big companies often carry a lot of collateral on their books, so officials believe lenders won’t get fully burned by a collapse. They also cite the tools Beijing has to unwind debts gradually and limit financial disruptions, such as its control of the banking system.
$18.6 billion in credit markets
Letting Evergrande collapse quickly, on the other hand, risks a broad fall in apartment prices or other potentially unforeseeable shocks to the financial system.
Chinese officials have taken short-term measures to shore up confidence. The central bank announced on Wednesday morning that it had temporarily injected about $18.6 billion in credit markets, part of a broader effort in recent days to make sure that ample cash is available.
Real estate sales
Real estate sales were slowing even before the latest difficulties, in part because of Beijing’s cool-down efforts, depriving Evergrande and other property developers of the cash they need to finish other projects. Sales dropped 7.1 percent by value in July and 18.7 percent in August from the same months last year.
Forecast for China’s economic growth
Overcapacity in many industrial sectors, coupled with a faltering construction sector, have prompted economists to predict slower growth. On Tuesday, Bank of America lowered its forecast for China’s economic growth next year to 5.3 percent from a previous forecast of 6.2 percent.
Growth over 5 percent is still strong by most standards. But it would be a much weaker showing than this year, which many economists project will total 8 percent or higher. It also would be considerably slower than the official growth rates China has posted in recent years.
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Source: The New York Times
