Evergrande crisis will hurt Chinese economy: Li Daokui, former PBOC adviser

The Evergrande debt crisis will slow down China’s economic growth, but will likely have minimal fallout on the country’s financial system, according to a former Chinese central bank adviser.

Evergrande is the most indebted real estate developer in the world with total liabilities of around $ 300 billion. The company is struggling to pay its suppliers and has warned investors it could default on its debts, with a key payment due as early as this week.

“The impact is on the real economy because with the failure of Evergrande, there will be [a] slowdown in the development of many projects, “Squawk Box Asia” Li Daokui, former adviser to the People’s Bank of China, told CNBC on Wednesday.

“The real estate market will therefore have an impact on the GDP growth rate for the coming year due to the slowing of finances for the whole sector,” said Li, now a professor at the School of Economics. and management of Tsinghua University.

He added that an Evergrande default would have minimal effect on China’s financial system as there are no derivative instruments built on the company’s debt.

Derivatives are complex financial securities that derive value from an underlying asset, such as stocks and bonds. Traders use derivatives for a variety of purposes, including hedging a position and speculating on the underlying asset.

“I think it’s a little too early to predict what the net impact will be [of the crisis]. I would say now, by my rough calculation, 1 basis point on GDP growth… if it’s under control from now on, ”Li said.

The Asian Development Bank said on Wednesday it was keeping its growth forecast for China at 8.1 percent for 2021 and 5.5 percent for 2022. That would be an improvement over the 2.3 percent expansion. last year when China became the only major economy to grow as most of the world’s economies were hit hard by the Covid-19 pandemic.

Evergrande’s defaults are likely to slow the progress of development projects around China, which will hit local economies in mainland China, Li said.

This could prompt local and provincial governments to step in with their own money to pursue these projects, the economist said.

Li also said he expects the Chinese central bank to add liquidity in targeted sectors to ensure that the fallout from an Evergrande default “does not spread too far too quickly.”

Li predicted that in the medium to long term, the ailing company will likely be “dissolved” into four main groups: real estate development, finance, electric vehicles and other business ventures.

“Each of these four sub-parts of Evergrande will be sold to individual companies or even some local governments,” Li said. “Evergrande as we understand it may not exist.”

– CNBC’s Weizhen Tan contributed to this report.