Could China’s Evergrande bankruptcy precipitate another world recession?
Chinese economy is skating on thin ice and the bubble of China’s global supremacy is finally bursting.
Is the Chinese economic bubble finally bursting? Economic indicators point out that all is not well with the Chinese economy. The first-quarter economic growth has been slashed and GDP estimates have been reduced from 8 % to 4.9%. A major cause of this steep fall has been the uncertainties in the real estate business which contributes one fourth to the GDP of China. Another reason has been the shortage of electricity which has also caused the steep fall in GDP.
The above analysis is not based on some external economic expert but on China’s National Bureau of Statistics. From the outside, everything looks good and calm but in reality, the Chinese economy is facing one of its biggest crises. Chinese real estate is facing severe strain while the gaming industry and finance sector is also in deep trouble. But, where is the problem? What will be the effect of a crashing Chinese economy on the world economy?
Real Estate in deep trouble
The real estate industry constitutes one-fourth of the Chinese GDP. However, this sector of the Chinese economy is in a deep recession. The Evergrande group which spearheaded the recovery of the Chinese economy after the COVID-19 lockdown is now itself in deep trouble. The Evergrande Group is in the process of bankruptcy and experts are worried if it will do a repeat of the Lehmann Brothers and cause another worldwide recession.
Looking closely at the real estate business in China, it is seen that the engine of growth was fuelled by cheap loans. When the companies were not able to pay back the loans in time, more leans were taken from non-banking financial institutions.
The situation turned more acute when the real estate companies sold bonds to the public to get finance and complete their projects. If the real estate sector becomes bankrupt it will have a cataclysmic effect and take with it the financial institutions, non-banking financial institutions and the general public. The effect will not be local and it will have a ripple effect on the world economy just like the catastrophe which was caused by Lehmann Brothers.
The Gaming Industry Crisis In China
The other sector which is facing an acute crisis is the Gaming Industry which is estimated to be 16.9 billion dollars worldwide. China has a share of 4.2 billion dollars in this market. However, a number of new rules have put the whole gaming industry in a crisis.
The next big factor for the economic meltdown is the massive outages of power which have severely dented the image o the manufacturing sector of China. Blackouts once a rarity is now very common in China. Coupled with increasing pressure worldwide to reduce coal-based energy has also caused a shortfall in energy production since a major part of the electricity produced in china is coal-based.
The crisis in the Chinese economy could blow out o proportions and the communist government could use other tactics to divert the attention of its people from its domestic problems. The Chinese government has become belligerent and is causing a nuisance in Taiwan, Hong Kong, South China Sea and the borders with India.
