The euphoric return to normality after the vaccination campaigns that began in practically all the industrialized powers since the equator of the first quarter, took a cruising speed between April and June, and gave a notable boost to world economic activity in the summer period, has been diluted since the beginning of autumn. Until almost entering a climate of deep concern. The markets have revealed it. LThe second Chinese real estate company, Evergrande, has been the trigger for this new autumn staging, closer to tragedy than comedy. Because the bankruptcy of the financial and construction emporium seems only the tip of an iceberg that threatens the brilliant – and precipitous – economic takeoff of China. The first global power to emerge from the Great Pandemic and settle into the post-Covid business cycle.
The potential bankruptcy of the 300,000 million debt accumulated by Evergrande is not a passing chapter. Rather, an episode that has recalled the nationalization of Lehman Brothers, in September 2008. The tensions that Evergrande has generated in the international financial architecture have brought to light the threats to a new black swan by certain analysts. Although another part of the economic literature speaks of a gray rhino, a close term with which the risks that must be taken into account are cataloged, but which are not considered to have enough telluric power to trigger a tsunami. At least, until its horn does not interfere with global stock market developments.
Shane Oliver, chief Australian economist at AMP Capital, is one of the voices who thinks that Evergrande’s size is precisely what makes its possible downfall “enormously dangerous”. The debt of this emporium represents 6.5% of the entire Chinese real estate sector and its collapse and liquidation will have a systemic impact as Lehman Brothers had at the time – he explains – with liquid and resource injections on the housing and financial markets and the whole of the Chinese economy. Through state interventionism with “small blows of effect over time”; that is to say, without the forcefulness that their colleagues expect. Too The Financial Times reports that, since 2013, the abandonment of housing developments has occurred in several cities in the country. “Real estate scars are visible in a score of large cities,” says the economic newspaper, before specifying that Evergrande is “the real estate firm with the highest current indebtedness on the planet.” With liquidity difficulties that “could be terminal.” A symptom of the drama to come. Given that the housing sector contributes 29% to the national GDP and is one of the engines of its dynamism.
Evergrande has less than a month to certify payments and avoid default. While the market holds the air to avoid the onslaught of the Chinese rhino. In the midst of three other factors of deep concern. The high voltage of Sino-US relations is one of them. With a latent and added risk of contagion in their capital markets due to the Evergrande crisis, as has already been detected in the assets of several US technology companies. Waiting for the already imminent revelation of the White House’s diplomatic policy towards Beijing, and that its chief of operations, the representative of Commerce, Katherine Tai, does not rule out that it continues to be built on tariff rates. “The era of economic deepening with China has ended and will never return ”, Ian Shepherdson, Pantheon’s chief economist, dares to presage. An affair typical of a Cold War that could lead to a decoupling -un-anchoring of the business cycles of both superpowers-, to a delay -at different rates- in the reestablishment of value chains, and to create a competitive race for be the supplier to the US and European countries, also devastated by the productive bottlenecks that the Great Pandemic has left as a sequel.
To which we must add the destabilization that energy prices are causing in the global economy. In the heat of the rapid increase in global demand after the lifting of restrictions due to the health crisis. In Europe, the price of natural gas, at record levels, has increased by 500% compared to last year. While the barrel of crude, which is already following in the wake of gas, has also risen in value above 90% in year-on-year terms. A sudden phenomenon, although already detected at the beginning of the summer, which has led to a monetary rethinking. Central banks such as the Federal Reserve, the ECB or the BoE have questioned in their latest official minutes whether the prolongation of the stimulus programs and the stage of interest rates close to zero should not come to an end. Before the announcement by its authorities to the markets. In general, in the last section of 2022.
Because, in addition, the specter of stagflation – economic slowdown with continuous price increases – is one of the most difficult to digest cocktails. It was already so in the 1970s, with the oil crisis, which led to the impoverishment of millions of households in middle- and high-income countries. And that now poses a risk to job creation and economic dynamism rates. Given the, As Jerome Powell, Fed Chairman, admits, production and supply bottlenecks “are one of the cyclical aspects in which regulators have no control.”. Powell clarified in the Senate Finance Committee that this thorny issue is what is pulling inflationary indicators around the world; suggesting that price rises are ceasing to be a conjunctural element as interpreted up to now by the Fed’s Open Markets Committee.
With the price of natural gas – the main cause of the increase in energy bills in homes and companies – at unknown levels in seven years and at the highest levels in a decade, according to the Bloomberg Commodity Spot Index. Which, for analysts such as Pictet’s Supriya Menon, “has caused inflation has returned to the stage with an excess of prominence on which central banks pretend to see”. With the pertinent “destruction of global demand”, the loss of commercial vigor in the international order and the delay of industrialized and emerging GDP to the limits prior to the health crisis. As the OECD has just recognized.
As if that were not enough, the Evergrande crisis could constrain the Chinese real estate market, twice as large as that of its American rival, in which, ironically, 20% of its park is empty. The emporium has 1.6 million homes on its balance sheets. Amid a battle by the Beijing regime to prevent the collapse of its entire real estate system, which Goldman Sachs estimated at $ 52 trillion in 2019; within a rampant urbanization process, with a rate that exceeded 60% of the population before the epidemic, with an exponential rise in the demographics of the cities. But in which 65 million homes remain unoccupied. As much as the census of France. A second element of great concern.
In Business Insider they affect the collective subconscious that reigns in the country: investing in brick “is always a safe value.” But this third collateral component of the presumed fall of Evergrande leaves an eloquent data. In capital cities such as Beijing, Shanghai or Shenzhen, the cost of housing has been fourteen times above the average salaryaccording to a recent study by the Lincoln Institute of Land Policy. While other reports such as Moody’s estimate that the financial effort that families spend to pay for their properties is between 70% and 80% of their purchasing power.
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