CNN

Evergrande’s fiasco could damage the global economy

Sep 23, 2021, 7:51 AM

Workers drive their motorbikes in front of the under-construction Guangzhou Evergrande football sta...

Workers drive their motorbikes in front of the under-construction Guangzhou Evergrande football stadium in Guangzhou, China's southern Guangdong province on September 17, 2021. (Photo by Noel Celis / AFP) (Photo by NOEL CELIS/AFP via Getty Images)

(Photo by NOEL CELIS/AFP via Getty Images)

    (CNN) — All eyes are on China’s Evergrande, the heavily indebted real estate conglomerate that’s become a market obsession after global investors tuned in to its mounting problems this week.

What’s happening: The company faces a crucial test on Thursday, when it has a deadline to pay nearly $84 million worth of interest on a bond. My CNN Business colleague Laura He, who’s tracking the story closely, reports that it’s not clear yet whether Evergrande will make that payment. It had not commented by the close of trading in Hong Kong.

Global markets have been rattled by the risk that one of China’s biggest developers could collapse. But the concern may be less about financial contagion, and more about the broader effects on the world’s second biggest economy, which was already slowing.

“China has the means to contain the fallout from the Evergrande situation,” Berenberg chief economist Holger Schmieding wrote in a note to clients Thursday. “However, China is storing up trouble for the future as trend growth slows and as its leaders impose an increasingly authoritarian and controlling regime.”

Remember: Worries about the pace of China’s economic growth have been building in recent months. An official survey of manufacturing activity fell to 50.1 in August from 50.4 in July. That was just above the 50-point mark indicating expansion rather than contraction, but still the slowest rate of growth since the start of the pandemic. Retail sales have also struggled, increasing just 2.5% last month compared to a year earlier.

Chinese authorities have partially attributed slower growth to Covid-19 outbreaks and flooding, which stopped people from traveling and caused them to hold off on summer spending. Economists, however, are increasingly convinced the loss of momentum could persist.

One big reason is China’s property sector. New housing projects, as measured by floor space, fell 3.2% during the first eight months of the year.

On the radar: A tightening of credit conditions as the government tries to ease debt loads has played a major role in the sector’s recent downturn, according to Deutsche Bank analyst Lucia Kwong. Now, there are fears that fallout from Evergrande could make matters worse.

“While funding channels have remained open until now, developers may face additional liquidity pressure due to [repercussions] of Evergrande’s potential default,” she wrote in a research note this week.

As of June, Evergrande itself also had about 200,000 housing units that had been sold but not delivered to buyers, according to an analysis by Bank of America.

Why it matters: China’s property sector is a vital engine of job creation and accounts for an estimated 29% of the country’s economy, which for years has powered global growth. That means a slowdown could have deep economic ramifications — not just for China, but for the world.

The property pullback also comes as Beijing cracks down on private businesses, which Capital Economics said Thursday adds to the research group’s “broad pessimism” about China.

In an event for clients, its economists predicted that the country’s trend growth will slow down to 2% by 2030 from the current level of 4% to 5%.

Japan, South Korea and other economies throughout Asia would suffer from a slowdown in China, according to Berenberg. European countries that export lots of goods to China — Germany, for example — would also be hit.

The Federal Reserve could hike interest rates next year

The Federal Reserve isn’t ready to take its foot off the stimulus gas pedal. That might change soon.

The latest: If the economic recovery continues to progress as expected, the Fed “judges that a moderation in the pace of asset purchases may soon be warranted,” according to its policy update published Wednesday.

The announcement raises the prospects of a November announcement that it will ease $120 billion in monthly bond buys, my CNN Business colleague Anneken Tappe reports.

Investors have been gearing up for this possibility. More surprising was the indication that the Fed could lift interest rates as early as next year, according to updated projections. Previous forecasts had called for a hike in 2023.

That could depend on the trajectory of the economic recovery, however. The Fed, incorporating the effects of the Delta variant into its projections, now expects weaker economic growth for 2021, with output rising 5.9%, compared to the 7% it predicted in June. The growth rate for 2022, however, was revised upwards to 3.8% from 3.3%.

Watch this space: Other policymakers aren’t waiting for the Fed to make a move. On Thursday, Norway’s central bank hiked its benchmark interest rate from 0% to 0.25%.

“A normalizing economy now suggests that it is appropriate to begin a gradual normalization of the policy rate,” Governor Oystein Olsen said in a statement.

The Bank of England, for its part, is sitting tight for now. The central bank on Thursday held its main rate at 0.1%, though two members voted to halt bond purchases.

Is the housing market starting to look more normal?

Outside of China, the housing market has been on fire, with soaring prices cutting out many first-time buyers. Finally, it may be cooling off.

Details, details: US home sales dropped in August, both from July and from a year ago, breaking two straight months of increases, according to the National Association of Realtors.

Surging home prices have been powered by pent-up demand among potential buyers that built up during shutdowns and lifestyle changes people made during the pandemic, all while interest rates remained very low, my CNN Business colleague Anna Bahney reports.

But now the effects of those trends are easing up.

“The housing sector is clearly settling down,” said Lawrence Yun, chief economist for NAR. “Home sales are trying to return to a normal equilibrium after that big surge we saw last year.”

Sales of existing homes, including single-family homes, townhomes, condominiums and co-ops, fell 2% in August from July, and were down 1.5% from a year ago, according to the report.

And yet: Sales for 2021 year-to-date are 16% higher than in 2020 and up 12% from 2019. And prices continue to rise thanks to low inventory. The median home price in August was $356,700, up 14.9% from a year ago, marking 114 straight months of year-over-year gains in home prices.

Up next

Darden Restaurants and Rite Aid report results before US markets open. Costco and Nike follow after the close.

Also today: Initial US jobless claims for last week post at 8:30 a.m. ET.

Coming tomorrow: Data on new US home sales for August.

— Laura He contributed reporting.

The-CNN-Wire
™ & © 2021 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

We want to hear from you.

Have a story idea or tip? Send it to the KSL NewsRadio team here.

CNN

Senate Minority Leader Mitch McConnell (R-KY) heads to the floor of the Senate for a vote on Capito...

Clare Foran, Morgan Rimmer and Ted Barrett, CNN

Mitch McConnell to step down from GOP leadership position in the Senate

Mitch McConnell will step down as GOP leader in November, the Kentucky Republican announced on the Senate floor Wednesday.

3 days ago

Soldiers carry the coffin of Ukrainian poet and serviceman Maksym Kryvtsov who was killed in action...

Stephanie Halasz and Ivana Kottasová, CNN

Zelensky warns ‘millions will be killed’ without US aid to Kyiv, as Ukrainian troop deaths reach at least 31,000

“Millions” could die in Ukraine’s war with Russia if US lawmakers don’t approve President Joe Biden’s $60 billion aid request.

6 days ago

Kathy Brandel and her husband of 27 years, Ralph Hendry...

Sharif Paget, Chris Boyette and Polo Sandoval, CNN

Family of Americans believed dead after yacht allegedly hijacked in Grenada describe scene of violence

The family of two Americans who may have been killed in an alleged yacht high jacking in Granada hope the couple might be found alive.

6 days ago

Police tape drapes the crime scene on a trail behind Lake Herrick at the University of Georgia in A...

Ashley R. Williams, Raja Razek, Priscilla Alvarez, Isabel Rosales and Jaide Timm-Garcia, CNN

Questions remain in investigation of death of Augusta University student found on UGA campus

As the investigation continues into the death of an Augusta University student, officials confirmed the immigration status of a suspect.

6 days ago

Kenneth Mitchell, here in 2018, has died....

Megan Thomas, CNN

Kenneth Mitchell, ‘Star Trek’ and ‘Marvel’ actor, dead at 49

A native of Canada, Mitchell acquired more than 50 film and television credits over the course of his acting career. He was diagnosed with ALS in 2019.

7 days ago

Charles E. Escalera, 21...

Michelle Watson and Maria Sole Campinoti, CNN

Kentucky man arrested in connection with death of Campbellsville University student

A man has been arrested in connection with the death of a student at Campbellsville University in Kentucky.

7 days ago

Sponsored Articles

Mother and cute toddler child in a little fancy wooden cottage, reading a book, drinking tea and en...

Visit Bear Lake

How to find the best winter lodging in Bear Lake, Utah

Winter lodging in Bear Lake can be more limited than in the summer, but with some careful planning you can easily book your next winter trip.

Happy family in winter clothing at the ski resort, winter time, watching at mountains in front of t...

Visit Bear Lake

Ski more for less: Affordable ski resorts near Bear Lake, Utah

Plan your perfect ski getaway in Bear Lake this winter, with pristine slopes, affordable tickets, and breathtaking scenery.

front of the Butch Cassidy museum with a man in a cowboy hat standing in the doorway...

Bear Lake Convention and Visitors Bureau

Looking Back: The History of Bear Lake

The history of Bear Lake is full of fascinating stories. At over 250,000 years old, the lake has seen generations of people visit its shores.

silhouette of a family looking over a lake with a bird in the top corner flying...

Bear Lake Convention and Visitors Bureau

8 Fun Activities To Do in Bear Lake Without Getting in the Water

Bear Lake offers plenty of activities for the whole family to enjoy without having to get in the water. Catch 8 of our favorite activities.

Wellsville Mountains in the spring with a pond in the foreground...

Wasatch Property Management

Advantages of Renting Over Owning a Home

Renting allows you to enjoy luxury amenities and low maintenance without the long-term commitment and responsibilities of owning a home.

Clouds over a red rock vista in Hurricane, Utah...

Wasatch Property Management

Why Southern Utah is a Retirement Paradise

Retirement in southern Utah offers plenty of cultural and recreational opportunities. Find out all that this region has to offer.

Evergrande’s fiasco could damage the global economy