The China Evergrande Group, said to be the second largest property developer in China according to its sales, is under a threat of collapse according to several US news articles (including NBC News and the Wall Street Journal).
With China Evergrande under such a threat, The Federal Reserve warned that such a collapse would likely trigger a contagion that could wipe $1 trillion off of global growth.
Chinese Indebted Property Market and Evergrande Crisis
China’s biggest corporate headache, China Evergrande Group, is grappling with a debt burden of more than $300 billion, keeping global markets on alert about the fate of the country’s second-largest property developer.
Real estate in China has continued to grow because investors, developers, and homebuyers are convinced that the sector is too crucial to the economy to allow any significant correction. Officials in the country have sought to reassure investors that the crisis will not spiral out of control and these officials will protect creditors’ interests. Still, the long-term effects on China’s economy and property market remain unclear.
In the event of Evergrande’s collapse, other developers will undoubtedly follow. With housing and construction accounting for 29% of China’s economic output, setbacks in this sector could devastate global economic growth. China’s housing market could collapse in 2022 due to a lack of vacant property to house 90 million people and impact the US as well.
Potential Impact on US Housing Markets
If there were a severe economic slowdown in China, the Fed warned that there would be “spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite.”
US home prices have already increased by a record 19.8% over the past year. Regardless of your economic background, we all know that the current rate of growth, which happens to be faster than the run-up to the 2008 financial crisis, is not viable. With a housing debacle that unleashed the most profound crash since the great depression in the US, it is no surprise that the Evergrande crisis could produce similar results.
However, emerging economies suffer from the immediate impact of the global rise in food and energy prices. The problem is particularly pronounced in developing countries where staples occupy a larger share of household spending.
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