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The Chinese government wants to stimulate the economy with interest rate cuts. But the real problem child remains the real estate industry. If the crisis spreads further, it could
German companies will be the losers.
While state commercials on Chinese television paint a picture of a promising future and illustrate China’s path to social advancement, the situation in the Chinese economy is becoming increasingly gloomy. Economic output has weakened significantly in the past quarter, exports have collapsed and consumption is suffering. Many Chinese would rather save than spend their money. Experts believe that China will miss its self-imposed growth target of five percent for the current year.
The situation on the real estate market is particularly critical. The real estate group Evergrande has become a symbol for the highly indebted industry. The Chinese construction company is in a deep crisis because it has accumulated debts of around 300 billion dollars that it can no longer service. The group therefore applied for bankruptcy protection in the USA.
There is a risk of bankruptcy
The financial situation at real estate developer Country Garden has recently worsened. For a long time it was considered solid on the stock exchange. But now Country Garden has failed to make certain dollar interest payments. Stay for just under three weeks, then there is a risk of insolvency. Investors have lost confidence, which is why the share price recently crashed.
“We see that without the political support that used to exist, some of the big real estate companies have stumbled considerably,” says Doris Fischer, an expert on the Chinese economy at the University of Würzburg. And that is currently continuing: Even companies from the second tier are now telling their employees that they can no longer pay them wages, according to Fischer.
Loans should become cheaper
The Chinese leadership, meanwhile, is trying to calm nervous investors. The Chinese central bank announced that the debt problems, including those of the local governments, would be solved. For example, banks were instructed to increase their lending volumes. In addition, the Chinese central bank lowered its key interest rates again last week.
Large banks have now followed suit and also lowered their reference interest rate for one-year loans. The hope is that companies will invest more again in this way and that the economy will pick up speed again. Financial experts had hoped for more decisive action by the central bank, including on the five-year loans that are so important for real estate loans. However, this interest rate was not reduced.
Great influence of the state
There is great concern that the crisis in the real estate market could spread to the financial market – as in the financial crisis of 2008. According to the Bloomberg news agency, foreign financial giants such as Blackrock and Allianz also hold bonds in the struggling real estate group Country Garden.
Jörg Kramer, chief economist at Commerzbank, does not fear a “Lehman moment” like in 2008 – the US real estate bank collapsed at the time, which plunged banks worldwide into a crisis. “The influence of the Chinese state, especially in the financial industry, is huge,” says Kraemer. The government is now trying to slowly let the air out of the real estate bubble.
In addition, the Chinese government wants to avoid helping ailing companies with cash injections. The government knows that it is creating incentives for further exaggerations if it pulls many players out of the crisis, says Krämer.
Meanwhile, it is becoming increasingly difficult for experts to correctly assess the current situation in China. One example is youth unemployment. According to official figures, more than 20 percent of 16 to 24-year-olds in the cities were unemployed in June. However, the Chinese statistical authority has not published any new figures since July.
DAX companies are suffering from a weak economy
More and more German companies are also worried about China. The German and Chinese economies are closely intertwined. Many DAX companies are dependent on exports to China. China has been Germany’s largest trading partner for many years. “Seven percent of all exports go to China,” says Felix Huefner, chief economist at UBS Bank. “This is an enormous headwind for the industry in Germany.” He points out that a weakening can already be seen in the ifo index for the German business climate or the purchasing manager index.
The weakening business in China is therefore “also one of the reasons why German growth is so weak at the moment,” said Huefner. In any case, the economic problems in China cannot be solved quickly, which is why many experts assume that demand for German export goods will remain weak in the coming months.