One of the biggest property news stories of the last couple of months has been the troubles of Chinese megadeveloper the Evergrande Group, whose spiralling debts have caused turmoil in the markets and widespread unrest among suppliers and buyers throughout China. The company has been facing issues thanks to new restrictions on home sales issuing from Beijing, coupled with debts of over $300 million, and has been slow to comply with government regulations on the amount of debt a company can hold relative to its assets. Whilst some thought that the company was ‘too big to fail’ and that the Chinese government would bail them out, this looks unlikely to happen, and Evergrande has been selling off assets in a hurry to try and meet interest payments. So far they have stayed just ahead, leading to recent rallying in the markets, but there is still considerable concern that the company might fail to meet future debt payments, prompting a collapse. If Evergrande fails, it’s obvious that there will be wide-reaching effects. Some of these are obvious, such as global market turmoil, a hit to China’s economy, and a lack of investor confidence in other Chinese property developers. However, there are also some more unexpected consequences which might come into play:
An increase in supply of materials in the US & UK
Both the US and the UK are currently experiencing chronic shortages of construction materials. Essentials such as cement and timber are in short supply, which is causing projects to be extended, deadlines to be missed, and delays in completion times throughout the construction sector. This means headaches not only for individuals trying to complete their own building works but also for developers and investors - after all, time is money. The squeeze on materials also means that the costs are also rising, as competition for these scarce resources is leading to price inflation.
Ironically, a slowdown in China’s construction sector could mean good news for property developers elsewhere, as Evergrande’s ongoing issues have had a big impact on China’s $52 trillion property market. It’s reported that the output from construction industries has slowed by nearly 2% since Evergrande’s troubles hit the news, and if these problems continue then developments in China may well slow down even further. This means there’s a silver lining for builders throughout the US and UK, as construction materials otherwise earmarked for Chinese construction projects are freed up for trade elsewhere.
A crash in the crypto market
It seems obvious that Evergrande’s collapse would cause massive shockwaves across markets round the globe - but you might not have considered that the cryptocurrency market would be one of them. Cryptocurrencies are among the most volatile of markets, given to wild upswings and downturns within a very short period of time, in ways that cannot be predicted simply by studying other money markets. This may lead investors to assume that crypto would be immune from general economic shocks such as the fall of Evergrande.
However, this is not necessarily the case. Some forms of cryptocurrencies, called stablecoins, are pegged to currencies such as the dollar, which must therefore be backed up by assets of an equal amount. Often, these assets take the form of short-term debts (known as ‘commercial paper’) - and if these are linked to Chinese firms, it could have a knock-on effect on the value of the cryptocurrency. Examples of popular stablecoins include Tether and TrueUSD - so if you have these in your portfolio, it’s time to keep a close eye on them.
A hit to Australia’s economy
Obviously any collapse by Evergrande would show ripple effects around the world - but Australia might not be the first place you would imagine it would have a big impact. However, China and Australia have some very close ties which could make Evergrande’s decline a big problem down under.
Why is this? Well, firstly, China is a major trading partner for Australia, with nearly a third of Australia’s exports being sold to China. Any issues with China’s economy are therefore likely to hit Australia in a big way, with a lack of demand for goods and services having a real knock on effect on Australia’s economy. And of course, if a general credit crunch is prompted by Evergrande’s collapse, much in the way that Lehman Brothers instigated the financial crisis of 2008, this would not spare Australia.
Secondly, while a slowdown of China’s construction industry might have a silver lining for builders in the US and UK, it’s not so great for Australia. As the world’s biggest steel producer, China uses a lot of iron ore - and it gets most of this from mines in Australia. Iron ore is by far Australia’s biggest export, and it’s a business that makes them nearly $150 billion a year. While other countries will still require iron and steel for building, a lack of demand from China would still have a massively detrimental effect on the Australian economy, with a subsequent drop in price following on from the lack of demand. Not good news for Australia.