​The China connection

PHILIPPINES - In Brief 04 Oct 2021 by Romeo Bernardo

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Ongoing efforts by Chinese authorities to rein in excessive leverage in the property sector has had unintended consequences on global financial markets. The financial troubles of heretofore unheard-of Chinese property firm, Evergrande, have not only raised, in a moment of panic, the specter of another Lehman-style crisis, but have revealed how much more sensitive markets have become to the Chinese economy and how closely tied the latter’s growth prospects are to the property sector.A key takeaway from the yet unresolved crisis is that China will not be able to clamp down on high firm-level indebtedness[1] without experiencing a further slowdown in its economic growth. Without further fiscal stimulus, our GlobalSource counterpart in China estimates a possible 2ppt cut in China’s 6% two-year average GDP growth target, reflecting not just the shock to the housing market but the ongoing slackening of growth due to a combination of policy shift away from fiscal stimulus to structural reforms as well as the emergence of the Delta variant.[2] This does not yet consider the possible spillover of the Evergrande crisis on the rest of the economy through, say, drying up of credit as financiers re-assess “too big to fail” assumptions, and wealth effects on home buyers and investors of financial products.[3]China has remained the world’s economic growth engine in the wake of the pandemic. Last year, it was the only major economy that saw output grow, driving an earlier and stronger-than-expected recovery in world trade. This year, multilaterals’ projections show that its GDP growth of over 8% will lead global growth. In the case of the Philippines, China’s importance has increased ...