The Evergrande collapse will not be another 2008 crisis, but China’s economy will slowly decline in the long-term.
China’s structural problems are much deeper than what many observers realize, Autonomous Research observer Charlene Chu said. Chu, former analyst at Fitch’s Rating, had a lengthy interview with Barron’s on China’s economic difficulties.
Continued deflation, decreasing trading activity, plummeting internal demand, and, as a cherry on top, a real estate crisis might signal that China has, indeed, stopped its legendary economic growth.
With the collapse of Evergrande, China’s largest housing producer, many are wondering whether there will be a “Lehman Brothers effect” on the country’s economy. Chu does not believe this to be the case.
“In the past few years, six trust companies have declared bankruptcy without causing a systemic crisis,” Chu said, “There is no indication that this time we’ll see larger problems.”
However, the Evergrande collapse, paired with declining demand, will decrease trust with regular people. Investors will think twice before putting their money into trust funds, and could even start withdrawing them from financial institutions. The exact opposite of what a government wants after two years of pandemic.
Trust companies like Zhongrong and Zhongzhi, whose importance in the Chinese economy is equal if not bigger than Evergrande’s, have declared it increasingly difficult to settle their outstanding obligations.
Their default, Chu believes, will cause a ripple effect in the Chinese economy. In fact, a sudden and immediate collapse like the Lehman crisis is unlikely. What caused the 2008 bubble to burst was a systemic lack of trust among banks, something much more controlled in China as every financial institution answers directly to the state.
In any case, the impact of a Chinese crisis on the global economy will be “modest”. Following the Russian invasion of Ukraine, Western institutions examined their exposition in every key market and analyzed every possible risk.
The end of China’s economic miracle
Charlene Chu strongly believes that China’s unprecedented period of meteoric growth is over. The country will never come back to pre-pandemic levels of growth, following a similar path to Japan and its “lost decades” after the post-war boom.
In fact, Chu argues, China’s halt will be much more consequential than Japan’s. China is a much larger country with an embarrassingly low per-capita GDP. Its demographic crisis is much more severe than Japan’s and the US trade war is isolating China technologically.
According to Chu, there will still be some cyclical moments where growth will resume, but the overall outlook will be downward.
The particular structure of the Chinese state economy will likely prevent a sudden collapse, but the long-term effects will not be very different.
