The collapse of the Chinese real estate giant Evergrande. How it will affect the economy of China and the world / Article

The collapse of the Chinese real estate giant Evergrande. How it will affect the economy of China and the world / Article
The collapse of the Chinese real estate giant Evergrande. How it will affect the economy of China and the world / Article
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The decline of the company has now become a symbolic story of the years-long crisis of the Chinese real estate market.

The turmoil in the Chinese real estate market increases the risk that the domino effect may affect the wider world and Latvia as well.

The tip of the iceberg

China is the world’s second largest economy, whose development even exceeded 14 percent per year even in this century, but is currently slowing down.

Although the growth of a few percent registered last year does not look bad against the world background, China cannot be proud of it. A major reason is the real estate market, which accounts for about 25 percent of the country’s entire economy.

Experts note that the problems with “Evergrande” could be only the “visible part” of the iceberg, as other companies in the industry also have financial difficulties.

“The bad scenario is that it’s just further evidence of a big property bubble in China. And you know, the collapse of Evergrande was in many ways a consequence of that. Just as Beijing was reducing lending to property developers in 2020/21, Evergrande really got into serious trouble,” explains Richard Holden, an economist at the University of South Wales Business School.

The Chinese leadership will have to make a tough decision

The first news about “Evergrande’s” inability to settle with creditors came out more than two years ago. Since then, the situation has not improved, and it is now estimated that the total amount of the company’s debt has reached about 300 billion US dollars.

“Evergrande and its creditors have been struggling for a long time to reach an agreement to resolve the situation. Apparently they have not succeeded and that is why the Hong Kong court has ordered their liquidation. But there are legal issues involved which may not always apply to the same extent in the wider in China,” says Holden.

Namely, the decision to order “Evergrande” to be liquidated in Hong Kong does not automatically mean that it will have to be done in the rest of the country as well, as it has a separate jurisdiction.

In addition, it should be taken into account that 90 percent of the company’s assets are located in the rest of China.

It will still have to be decided by other Chinese courts, whose rulings could also have a great influence on the country’s ruling Communist Party. It has a big decision to make – save the company or let it sink.

China’s problems may spread

“China is in a similar situation as the USA was in 2007, when there is a potential quite significant cause of problems. If the government does not get involved and does not control this process, it can really develop into a sufficiently massive source of turbulence both in the Chinese economy and in politics,” warns “SEB bank’s economist Dainis Gašpuitis.

“Because it’s clear that right now there are 1.5 million Chinese who have these pre-sold homes, who are very likely not going to get their homes. And that’s quite a large number. We’ve seen that there have been some demonstrations before.”

Since this process is expected to have a great impact on China internally, the global economic growth could also be slowed down, the economist explained to LTV’s “World Panorama” program.

This, in turn, would have an impact on the demand for goods, which in certain cases can prove beneficial for Latvia.

“This would reduce the prices of many raw materials, reduce the pressure on the costs of many sectors, which would perhaps come as a positive direction,” says Gašpuitis.

However, there would probably be a downside as well.

The Chinese crisis will also affect Germany and Latvia

“The slowdown of China’s economy is a major concern for the German economy. And Germany, in turn, is a very, very important trade partner for Latvia,” says Swedbank’s chief economist in Latvia, Līva Zorgenfreija.

“If Germany’s exports to China shrink, then we, who supply various raw materials, components to the German industrial sector, will also have problems. The demand is weaker. Therefore, in the interim – but yes, we also feel this Chinese influence,” concludes Zorgenfreija.

The “Evergrande” case could also have an impact on the Chinese economy in terms of foreign investment. If the company does not repay the money to the creditors, it will make China less attractive for investment.

It should be added here that the policy implemented by the country in recent years does not help either, which scares off some investors already.

The article is in Latvian

Tags: collapse Chinese real estate giant Evergrande affect economy China world Article

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