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 th...
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