Evergrande could be the next Lehman Brothers

The Chinese economy begins to be questioned. Its impact on global growth that it has helped fuel for more than 20 years is now hampered by electricity shortages and a major real estate crisis. The difficulties of the real estate sector in China triggered by the problems of the giant Evergrande could pose risks to the world economy and affect the United States, the Federal Reserve warned in its report on financial stability released on Monday. Everything changed tune since September, when Fed Chairman Jerome Powell still believed that the world’s largest economy was not really directly exposed to the difficulties in China.

Evergrande, estimated at around € 260 billion, is one of the largest companies in China. Its financial situation is closely analyzed because its collapse would be a serious blow to the growth of the Asian and world giant. The real estate sector is estimated to account for 25-30 percent of China’s GDP. In October, the International Monetary Fund lowered its expansion projections for China. The effect of not saving Evergrande could be of the magnitude of the crisis suppressed the United States in 2008.

Beyond the housing crisis, many economists had anticipated a slowdown in the world’s second-largest economy, as the Chinese government is eager to reduce debt and that slows down investments by local authorities and tightens conditions for bank loans. China is expected to experience average growth of around 3.5% over the next decade, or about half the growth rate of the 2010s.

Still, “the economic slowdown in China represents a kind of extinction of the engines of the world economy”, said Gregory Daco of Oxford Economics.

However, he noted that “dynamics remain favorable for the time being,” especially as the slowdown in China is partly offset by “relatively robust growth in the United States” and in Europe. “We are witnessing a kind of pendulum effect that prevented a pronounced slowdown in the third quarter of the world economy,” and this effect will undoubtedly continue until the end of the year, Daco said.

The international exchange market keeps the euro trading below 1.1450. Weekly projections hold with EURUSD towards 1.14. The pound for its part below the levels of 1.34 and 1.3450 estimates take the price to 1.33. The dollar would be the candidate of the week for buyers. Both USDCAD and USDCHF are projected higher. Commodities remain bought and the market may hold its ground until China comes to the rescue of Evergrande or not. Gold projects towards 1900 and silver could accompany it up to 27.0.

“Until now, the Evergrande debacle has been contained by the cushioning of the Chinese official sector,” said Padhraic Garvey, regional head of research for the Americas at financial institution ING. But he admitted that there were “unknown risks.” And he said the Fed cannot ignore the fact that “China is up there as a factor given its size and the size of its financial sector.”

In the longer term, the inevitable slowdown in Chinese growth, which is also linked to its aging population, will lead to a reorganization of regional economies. Countries that are currently highly dependent on China, such as Indonesia, Vietnam, or Thailand, should figure prominently in the world economy, as is India already.