“We believe the Chinese authorities have the fiscal and monetary capacity to ”shock absorb“ giant real estate promoter Evergrande”, said OECD chief economist Laurence Boone.
Evergrande is China's largest real estate group with interests in other industries, and there are risks it might default, which could trigger a major situation for the Chinese economy and by extension to the rest of the world.
Evergrande has huge debts, some declared US$ 300 billion and the risk of not being able to repay some loans sent shock waves to global markets with some analysts forecasting a Chinese Lehman Brothers, recalling the collapse of the US bank in 2008 which triggered the world financial system crisis.
OCDE estimates that a two-year drop in Chinese demand could reduce world economic activity by 0,5%. The real estate sector is crucial for China representing some 25% of its overall GDP and was fundamental in helping the world's second economy recover from the pandemic.
However, as to the possible impact of an Evergrande crash, economist Boone said that the past has shown that a prolonged economic shock is required in China to have an impact on the rest of the world, while financial contagion channels are limited.
“There are still too few connections between China and the rest of the world to make us overly worried, but it is a risk we are monitoring,” Boone added.
Nevertheless, it all depends on whether the Chinese mega real estate group can honour interests for US$ 84 million on Thursday, and US$ 47,5 million on 29 September.
Shanghai's financial daily Caixin revealed Evergrande has to return some US$ 127,5bn in the coming twelve months, but its liquidity is a mere 10% of that amount.
UK bank Barclays said that if Evergrande does not make the expected payments it will be a heavy pack for the real estate sector, but it is far from being a China Lehman moment event.
We doubt the giant real estate group's debts could represent a systemic risk for the Chinese banking system. Even in a limited situation capital, when markets could be closed to all real estate companies, regulators can force banks to award further loans to keep them afloat, giving themselves sufficient time to find a way out.
Finally correcting the excesses committed by the real estate sector will only have systemic consequences if Beijing allows it to happen, which tradition indicates such circumstances do not occur”