Global financial crash warning as China property meltdown risks $1tn hit to world growth
China: Chaos as government asks citizens to stock up on supplies
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With China Evergrande under threat of collapse, economists have warned the property market in the state could wipe 0.5 percent from the global growth rate. However, in its worst-case scenario, the property market in China could wipe $2trillion (£1.4trillion) from the $95trillion (£70trillion) growth rate of the global economy. This could severely damage China’s imports of commodities such as minerals and metals.
The report claimed the crash could spark shockwaves through Asian economies and then spread to South America
USB economists Tao Wang and Arend Kapteyn said: “The main channel of contagion of China’s property downturn is likely through trade, especially imports of commodities, as demand for construction materials, machinery, appliances and automobiles drops.
“Economies most exposed to China’s domestic demand are commodity producers including Chile, Australia and Brazil, and Asian economies including Vietnam, Malaysia, Taiwan and Korea.”
China’s property market is valued at $55trillion in some estimates, which is four times larger than the country’s GDP.
When including construction and property-related goods and services, the annual housing activity accounts for 29 percent of the country’s GDP.
This comes as one of the largest companies in the world and the Chinese property market, Evergrande, is facing debts of $305billion (£221billion).
After the ruling Communist Party introduced measures on borrowing, the company has struggled to pay off debt repayments.
Although it has managed to pay off some interest payments on bonds, it has missed multiple deadlines.
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On Saturday, Scenery Journey Ltd, a company under the umbrella of the Evergrande Group, failed to pay semi-annual coupon payments.
According to sources, the payments amounted to $82.49million (£60million) on its November 2022 and November 2023 dollar bonds.
The company is facing the end of a previous grace period on a bond repayment which is worth up to $148million (£109million) and was due on October 11.
Due to its economic size, and indeed the size of the Chinese property market, there are fears if the company defaults on its payments, it could cause a financial crash.
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Mattie Bekink from the economic intelligence unit told the BBC: “What happens from here is consequential not only to the Chinese economy, where there are concerns about liquidity pressures and stress in the property and interbank markets but for the global economy.”
If the company could not pay off the interest on bond repayments, it may spook lenders which in turn would spark concern in the market.
It has drawn parallels to 2008, when Lehman Brothers filed for bankruptcy and sparked a global financial crisis.
The banking system almost collapsed after many citizens in the US could not afford to repay their mortgages thus causing a credit crunch – whereby companies struggle to borrow due to banks and other lenders having low confidence in the system.
If a credit crunch occurs, global investors may become concerned with the economic situation in such a large economic powerhouse.
The company is also attempting to sell off assets in order to help pay its debts.
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