China's financial system could collapse
The Reserve Bank of Australia has made some startling observations about the possible consequences of the collapse of China's second largest property developer, Evergrande.To get more finance news China, you can visit shine news official website.
The central bank made no reference to China or Evergrande in its October Monetary Policy statement, but it's more than made up for that in its latest Financial Stability Review.
The RBA warns: "Vulnerabilities in China's financial system remain elevated and authorities face a difficult balancing act."
The slow-motion train wreck that is Evergrande remains a crucial aspect of those "vulnerabilities".
"If they act too quickly in addressing these vulnerabilities, confidence in the implicit guarantees that underpin much of China's financial system could collapse, which would lead to financial distress," the RBA says."In contrast, if they act too slowly, the probability of more severe financial stress in the future will increase.
"Continued bailouts also risk further entrenching perceptions of implicit guarantees."
In short, the RBA believes China's authorities have found themselves caught between a rock and a hard place on managing the wind-up of the world's second most indebted company, whose "collapse could trigger wider stress in China's financial and real estate sectors."
Financial markets still fear for the future of China's second largest property developer, while another global financial crisis has been considered a distinct possibility.
More immediately though, serious questions are being asked about the health of the Chinese property sector and what that means for countries — like Australia — that are heavily dependent on robust Chinese economic growth.
Another crucial question, then, is: How can Australia achieve strong, sustainable economic growth without significant help from China?Rumblings of a debt crisis began earlier this year, when Chinese authorities demanded several of the country's heavily leveraged property developers rein in their debt exposures.
Developers were told that if they failed to meet one, two, or all of the three debt "red lines", regulators would place limits on the extent to which they can grow debt.The crisis shifted up a gear last month when Evergrande failed to meet several debt payments. It became clear to global financial markets that Evergrande had been relying too heavily on debt for growth.
The fear was that Evergrande was insolvent which, in a worst-case scenario, could lead to a company wind-up, crashing property prices as investors and off-the-plan buyers fled the market, and a Chinese economic collapse — given China's reliance on the property market for economic growth.
However, most analysts agreed China would ensure home buyers and investors would be protected. The Chinese Central Bank also promised it would help ring-fence any local-level banking crisis.But what about Evergrande's offshore debt tentacles?
Bloomberg's David Qu is watching developments closely and says there's little risk of an Evergrande collapse triggering a global financial crisis. "Overseas investors' exposure to Evergrande is limited," Qu says.Investors that are exposed, though, are expected to receive a significant so-called "haircut" on their investments.