Evergrande’s debt crisis will slow China’s economic growth but likely have minimal impact on the country’s financial system, according to a former advisor to China’s central bank.
Evergrande is the world’s most heavily indebted property developer with total debt of approximately $ 300 billion. The company struggled to pay its suppliers and warned investors that it would be unable to meet its debts, with an important payment due earlier this week.
“The effects are on the real economy, because with the failure of Evergrande it will [a] Slowdown in the development of many projects, “Li Daokui, a former advisor to the People’s Bank of China, told CNBC Squawk Box Asia on Wednesday.
“So the real estate market will have an impact on the GDP growth rate in the coming year due to the slower funding of the entire sector,” said Li, now a professor at Tsinghua University’s School of Economics and Management.
He added that an Evergrande default will have minimal impact on the Chinese financial system as there are no derivative instruments based on the company’s debt.
Derivatives are complex financial assets whose value is derived from an underlying asset such as stocks and bonds. Traders use derivatives for a variety of purposes, including hedging a position and speculating on the underlying asset.
Evergrande as we understand it may not exist.
former advisor to the People’s Bank of China
“I think it’s a little early to predict the net impact” [of the crisis]. Now, after my rough calculation, I would say 1 basis point of GDP growth … if things are under control from now on, “Li said.
The Asian Development Bank said on Wednesday that it had left its growth projections for China at 8.1% for 2021 and 5.5% for 2022 as the global economy has been hit hard by the Covid-19 pandemic.
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Will Evergrande be dissolved?
Evergrande defaults are likely to slow the progress of development projects in China that will hit the local economy in mainland China, Li said.
That could prompt local and provincial governments to step in with their own money to keep these projects going, the economist said.
Li also said he expects China’s central bank to replenish liquidity in certain sectors to ensure that the spillover of an Evergrande default “doesn’t go too far too quickly”.
Li predicted the hotly contested company is likely to “break up” into four main groups in the medium to long term: real estate development, finance, electric vehicles, and other commercial businesses.
“Each of these four parts of Evergrande are being sold to individual companies or even some local governments,” Li said. “Evergrande as we understand it may not exist.”
– CNBC’s Weizhen Tan contributed to this report.