Evergrande fiasco could hurt global economy

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

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

Global markets have been rocked by the risk that one of China’s biggest developers could collapse. But concern may be less about financial contagion and more about the wider effects on the world’s second-largest 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 on Thursday. “However, China is racking up problems for the future as trend growth slows and its rulers impose an increasingly authoritarian and controlling regime.”

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

Chinese authorities have attributed a slowdown in growth in part to the Covid-19 epidemics and flooding, which have kept people from traveling and forced them to suspend their summer spending. However, economists are increasingly convinced that the slowdown could persist.

One of the main reasons is the Chinese real estate sector. New housing projects, measured by floor space, fell 3.2% in the first eight months of the year.

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

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

In June, Evergrande also had around 200,000 homes sold but not delivered to buyers, according to a Bank of America analysis.

Why it matters: China’s real estate sector is a key driver of job creation and accounts for around 29% of the country’s economy, which for years has fueled global growth. This means that a slowdown could have profound economic ramifications, not just for China, but for the world.

The real estate pullback also comes as Beijing attacks private companies, 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 to 2% by 2030, from the current level of 4% to 5%.

Japan, South Korea and other Asian economies would suffer from a slowdown in China, according to Berenberg. European countries that export a lot of goods to China – Germany, for example – would also be affected.

Federal Reserve May Raise Interest Rates Next Year

The Federal Reserve is not ready to take its foot off the accelerator pedal. That could change soon.

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

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

Investors have prepared for this possibility. More surprising was the indication that the Fed could raise interest rates as early as next year, according to updated projections. Previous forecasts predicted an increase in 2023.

This could, however, depend on the trajectory of the economic recovery. The Fed, incorporating the effects of the Delta variant into its projections, now expects weaker economic growth for 2021, with production up 5.9%, compared to the 7% it forecast in June. However, the growth rate for 2022 has been revised upwards to 3.8% from 3.3%.

Look at this space: Other policymakers aren’t waiting for the Fed to make a move. On Thursday, Norway’s central bank raised its key 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 not budging for the moment. The central bank kept its key rate at 0.1% on Thursday, although two members voted to stop bond buying.

Is the real estate market starting to look more normal?

Outside of China, the housing market is on fire, with soaring prices preventing many first-time buyers. Finally, it may cool down.

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

The surge in house prices has been fueled by pent-up demand from potential buyers that has built up during closings and the lifestyle changes people made during the pandemic, as interest rates remained very high. low, reports my CNN Business colleague Anna Bahney.

But now the effects of these trends are fading.

“The housing sector is clearly taking hold,” said Lawrence Yun, chief economist at NAR. “Home sales are trying to get back to a normal level after the strong increase we experienced last year.”

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

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


Darden and Rite Aid restaurants publish their results before the US markets open. Costco and Nike follow after the close.

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

Coming tomorrow: US new home sales data for August.

– Laura He contributed to the report.

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