Evergrande crisis spreads and slows Chinese economy sharply, warn UBS and Barclays

  • The Evergrande crisis weighs on Chinese real estate investment and pulls the economy down, UBS and Barclays noted.
  • Both banks cut their Chinese GDP forecasts for 2021, saying the energy crisis will also affect growth.

The current crisis at the real estate developer Evergrande is infecting the wider Chinese economy, according to UBS and Barclays, who have warned that growth will be much lower than expected in 2021.

Both banks have stated that Evergrande imminent default was crushing the wider Chinese real estate sector – which is one of the main sources of economic growth. They also said the power crisis in China would act as a drag.

“Obligation both onshore and offshore markets effectively remain closed for [property] developers while sales, the main source of cash, plummet, “UBS analysts, led by Chinese chief economist Tao Wang, said in a note on Monday.

Barclays analysts, including Chief China Economist Jian Chang, said there had been “a rapid deterioration in housing market sentiment as Evergrande’s financial difficulties [have] spread to more developers in October.”

UBS has cut its 2021 growth forecast for China’s gross domestic product to 7.6%, from a previous estimate of 8.2%. Barclays cut its forecast to 8%, after forecasting 8.5% growth earlier in the year.

China’s economy strongly slowed down in the third quarter, data showed Monday. It increased 4.9% year on year, compared to 7.9% in the second quarter.

Read more: China has at least 65 million empty homes – enough to house the French population. It offers insight into the huge problem in the country’s housing market.

Both banks said Evergrande was one of the two big problems facing the Chinese economy, the other being the global outbreak. energy price and the resulting production stoppages in the country.

Although China has responded to the energy crisis by increasing coal production, the measures will take time to bear fruit, UBS said. “Production restrictions and the power shortage are likely to continue to weigh on fourth quarter growth,” the bank analysts wrote.

China’s central bank said any possible crisis spillover in Evergrande on Friday would be controllable because it sought to reassure investors and homeowners that the real estate market as a whole is safe.

Still, Barclays said Monday: “Data for September points to a faster than expected deterioration in leading indicators for real estate investment, including home sales, land sales and house prices.” This is worrying for the Chinese economy as it depends much more than other countries on real estate investments for its growth, with the real estate sector accounting for around 29% of the GDP.

Evergrande has so far missed a number of bond payments and could default imminently. Other real estate developers like Fantasia also began to show signs of stress.

UBS said: “We expect new real estate starts to decline 20% year-on-year in the fourth quarter of 2021 and real estate investment to decline 5% or more, which will increase downward pressure on the market. ‘economy.”

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