Evergrande's Liquidation Adds Pressure to China's Economy and Financial Markets
ICARO Media Group
In a significant turn of events, Evergrande Group, the troubled property-development giant in China, has been ordered by a Hong Kong court to liquidate. Failing to reach a restructuring deal with creditors, this decision marks the potential end of a long and tumultuous saga for the company.
The consequences of Evergrande's demise have raised concerns among global investors regarding China's economy and financial markets. Unfortunately, the outcome does not bode well for the world's second-largest economy, as it extends the ongoing drag from the struggling property development sector on overall growth.
According to Arif Haque, an analyst at Piper Sandler, the liquidation of Evergrande is expected to be another hindrance to nominal economic activity. Haque explains that the real estate investment decline of 16% over the past year has resulted in a nominal hit to China's gross domestic product (GDP) of 5 percentage points. This decline in real estate investment has also played a significant role in reducing GDP growth from 10% to approximately 5%.
The negative impact of Evergrande's liquidation does not end with GDP growth. Haque points out that the real estate-related wealth effect will also become a "stiff headwind" for consumer confidence, as a significant portion of Chinese consumer net worth is tied up in housing.
The declines in Chinese stocks at the start of the new year reflect the market's concerns over the property sector, sluggish growth, and strained U.S.-China relations. The Shanghai Composite index has dropped 3.1% in January, while the China CSI 300 index fell 3.7%. Hong Kong's Hang Seng Index hit a 14-month low last week, and the CSI traded near a four-year low.
However, there may be some hope for Chinese equity markets as reports suggest that authorities are considering measures to rescue them. This news provided a brief respite for Chinese stocks last week, as they moved away from their lows.
To counteract the negative impact of Evergrande's liquidation, Beijing is expected to continue easing policy. Piper Sandler's purchasing manager index model indicates lower economic inertia, reinforcing the need for further policy support from the Chinese government.
In an effort to stimulate the economy, the People's Bank of China announced a 0.5 percentage point cut in the reserve requirement ratio (RRR) for banks, effective from February 5. This move is expected to inject approximately 1 trillion yuan ($139 billion) of long-term liquidity into the market. The stability of the Chinese yuan will be instrumental in managing the stimulus measures effectively.
Although Beijing aims to maintain a stable yuan, the recent RRR cut and related currency stability have been viewed as positive news for the government's efforts to support the economy.
As China navigates the aftermath of Evergrande's liquidation, its economic and financial landscape remains uncertain. The world will closely watch how the country manages the challenges posed by the property sector, determines the future trajectory of its GDP growth, and ensures stability in its financial markets.