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According to an ex-advisor to China's central banking, Evergrande's debt crisis is expected to slow down China’s economic growth but have minimal impact on the country's financial systems. Evergrande, the world's largest property developer, is insolvent with liabilities totalling around $300 billion. The company has been having difficulty paying its suppliers and warned investors that it may default on its debts. One key payment is due this week. "The impact of Evergrande's default will have a negative effect on the real economy," Li Daokui, an ex-advisor to the People's Bank of China told CNBC's "Squawk Box Asia” on Wednesday.
Li, now a professor at Tsinghua University’s School of Economics and Management, said that the real estate market would have an impact on GDP growth rates for the next year due to slower finance for the entire sector. A default by Evergrande would have little impact on China's financial system, as there aren’t derivative instruments built upon the debt of the company. Complex financial securities called derivatives derive value from an asset underlying it, such as stocks or bonds. The derivatives are used by traders for a variety of purposes, including to hedge a position or speculate on the underlying asset.
We may not be able to find the Evergrande we know. Former advisor to the People's Bank of China Li Daokui
"It's too early to know what the net effect [of the crisis] will be," said Li. Li said that he would estimate 1 basis point GDP growth right now based on my rough calculations, if things are under control. Wednesday's announcement by the Asian Development Bank stated that its growth projections for China are unchanged at 8.1% and 5.5%, respectively, for 2021-2022. This would be a significant improvement on the 2.3% growth last year, when China was the only major economy that grew while other global economies were ravaged by the Covid-19 pandemic.
Evergrande will pay interest on a $83 million bond on Thursday, the first test of its debt crisis. Market watchers and analysts expect Evergrande not to make the payment.
Will Evergrande be dissolved?
Li said that Evergrande defaults will likely slow down progress on development projects in China. This will impact local economies in China. The economist suggested that this could lead to local and provincial governments contributing their own funds to help keep these projects running.