Evergrande's liquidation burdens China but does not trigger an international financial crisis
Rolf J. Langhammer, trade expert at the Kiel Institute for the World Economy (IfW Kiel), comments on the Hong Kong court decision to dissolve the real estate company Evergrande.
The decision by a Hong Kong court to liquidate the Hong Kong-listed real estate company Evergrande is the culmination of a crisis in the Chinese real estate market, which has been smoldering for years and accounts for around one fifth of China's economic output. The crisis therefore has macroeconomic significance for China. Irrespective of the questions of whether and how an insolvency administrator can gain access to the company's assets in the People's Republic and how the Chinese government will behave, the liquidation cannot be compared in terms of its impact with the real estate crisis in the USA, which led to the financial crisis in 2008. A comparison with the turbulences on the Chinese stock market in August 2015 is more appropriate.
The Chinese financial market is isolated from the international financial market due to licensing restrictions and capital export controls. The real estate crisis is therefore basically affecting Chinese investors and home buyers across the board. It is shocking the Chinese stock market, exacerbating unemployment among university graduates who previously found employment in this sector, strengthening attempts by domestic and foreign investors to turn their backs on China by circumventing capital export controls, and exerting devaluation pressure on the Chinese currency. Chinese households are being encouraged to precautionary saving. This will further weaken private consumption and thus domestic demand as a whole.
This is bad news for the German export industry because Chinese import demand will weaken and because a negative price effect could also be added to this income effect: if the Chinese government allows the devaluation, imports will become more expensive. Chinese companies could also take the sluggish domestic demand as an opportunity to utilize their capacities through increased exports. A devaluation could help them. This could put German companies (keyword: e-cars) under even greater competitive pressure.
