Evergrande test: To what extent will a slight slowdown in China’s economy endanger the markets?

Evergrande test: To what extent will a slight slowdown in China’s economy endanger the markets?
Evergrande test: To what extent will a slight slowdown in China’s economy endanger the markets?

| Amir Kahanovitz, Chief Economist of Excellence Investment House

The sharp upward trend in the world during the corona period, which relied on an outbreak of demand, has so far halted in September, in most world markets. The weakness came amid many concerns, including chip and marine transport bottlenecks, the Delta variant, fears of high price effects on consumption, erosion of profitability and the folding of monetary expansion (a Fed decision is expected on Wednesday).

But China has received particularly negative attention, slowing down faster than expected, and perhaps also demonstrating the risks involved in the slowdown, most notably the risks to the real estate market.

The world’s largest real estate debtor, the Chinese real estate company Evergrande Group (HK :), has begun to fall behind in payments to banks, suppliers, debtor holders in China – and on Thursday will face payment of doubtful interest to foreign debtors for the first time, amounting to $ 83.5 million ( In addition to another $ 35 million for locals), and it is still unclear what will happen to him. Negotiations in recent days have eased the concern a bit, but have not yet been resolved.

The point is that the concern over the Evergrand case is not necessarily because of the company’s debt size, which amounts to more than $ 300 billion, but mainly because of how Beijing will deal with the crisis, and how much of a symptom it is for China as a whole and possibly the global real estate industry. To what extent does a slight slowdown in the economy or a slight tightening of financial conditions really endanger the markets today?

Indeed, in an attempt to calm the market, the Central Bank of China (PBOC) has returned to increase its daily liquidity injection to 120 billion yuan, the largest injection since January. Is the Bank’s response in China an example of the speed with which global banks around the world will be willing to quickly return to expansion in the event of a crack in recovery?

The Fed is officially expected to begin bailing out bond purchases, amid a sharp recovery in the economy and warming prices, and despite the continued spread of corona strains and the number of employed in the U.S., which has not yet returned to pre-crisis levels. The challenge for Fed Chairman Jerome Powell will be to sever the link between the reduction in bond purchases and the timing of the rate hike, which he has repeatedly promised to keep low for an extended period of time. But it is possible that those who will sandal him today, will actually be his friends at the Fed, if most of them start watching the quarterly forecast survey (Dots) raising interest rates as early as 2022.

I will mention that in the previous survey, in June, 7 of the 15 members had already predicted an increase in 2022, so it is enough that only one changed his mind to tip the scales for 2022. How did Powell get out of such a sin? Even if Fed members get excited about the possibility of raising interest rates in 2022, it still does not guarantee that it will materialize – and even if it does, it may eventually turn out to be a catalyst for a slowdown, and a renewed reduction in interest rates.

The Bank of Israel is in a “sweet spot”: Although inflation has warmed up a lot, in practice this is also around the target center, which is strengthening on its own and the economy, although it has expanded greatly, is still in a negative GDP gap and is likely to slow down. Justify zero interest.

According to the Helm Consumer Confidence Survey, published earlier this week, the index fell to minus 15% from minus 5% in July, when in the survey question about “the expected change in the economic situation of the household in the coming year”, the weighted answer dropped to a negative level for the first time since October 2020. In our opinion, it is more likely that the future interest rate outline in Israel will be lower compared to the United States and closer to Europe.

The writer is the chief economist of Excellence Investment House. This review is provided as a service to readers only, and should not be construed as an offer, recommendation, substitute for the reader’s professional judgment or investment advice or investment marketing, purchase and / or sale and / or holding of the securities and / or financial assets mentioned or of securities and / Or any other financial assets

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