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Evergrande crisis might harm China’s economic growth

According to a former advisor to the central bank of China, Evergrande’s debt crisis will harm China’s economy and slow it down in growth. However, this harm might be minimal to the country’s financial system.

The world’s most indebted property developer is Evergrande, with total debts of approximately $350 billion. The company struggled to compensate its suppliers, so it decided to warn investors. They notified clients that it might default on its obligations, with one necessary payment at the end of this week.

 

Li Daokui on the matter

 

On Wednesday, a former advisor to the People’s Bank of China, Li Daokui, told CNBC that the situation has a real impact on the economy. He added that there’d be a slowdown in the progress of many projects with Evergrande.

Li Daokui, who is now a professor at Tsinghua University’s School of Economics and Management, said that the real property market would impact the GDP growth rate next year. He explained that the reason for that would be slower finance for the whole sector. 

He added that a default would make a minimal impact on the Chinese financial system. The reason for that is that there aren’t secondary tools (Derivatives) built on the company’s commitment.

Complex financial securities are Derivatives that obtain value from an asset, including bonds and stocks. Merchants use derivatives for hedging trade and risking the investment. Li said that it’s too early to predict the net impact of this crisis.

On Wednesday, the Asian Development Bank said it had sustained its growth estimates for China at 8.2% for 2021 and 5.6% for 2022. That might be an increase from the 2.4% increase last year when China`s economy was the one to grow while the Covid-19 pandemic damaged most economies.

Li tried to predict what might happen between the medium to long-term period. He said that the company would be separated into four groups:   electric vehicles, finance, property development, and other commercial ventures.

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