China Evergrande collapse and falling iron ore prices could hurt Australia’s economy

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With one of China’s biggest real estate developers on the brink of collapse, its crash could have huge ramifications for Australia.

One of China’s biggest real estate developers is on the verge of bankruptcy as it crumbles under staggering A $ 432 billion debt and its collapse – considered inevitable by some experts – will also hurt the economy Australian.

China Evergrande has trillions in assets on its books, including a Fairlyland theme park, an electric car company and even a professional football team, with the company contributing 2% of the entire economy. from the country.

While he delayed his demise by selling assets, he missed another critical deadline last week and experts argue the strategy won’t help him stay afloat in the long run.

A bond interest payment of US $ 47.5 million (AU $ 66 million) has fallen due – a figure that should have been a small change for China’s second-largest real estate company, which boasts ” 1,300 projects in more than 280 cities ”.

Robin Usson, credit analyst with Federated Hermes’ international operations, predicted that the company would eventually file for bankruptcy in the coming weeks and the Chinese government was unlikely to step in to save the ailing real estate developer.

He said the Chinese government would likely allow Evergrande to fail like a “controlled explosion.”

“China’s leadership values ​​order above all else, and we believe it is working behind the scenes to limit the social and economic domino effect of the company’s demise,” he added.

“We expect some companies to be asked to take over unfinished Evergrande projects, while more banks will be tasked with providing loans to companies affected by the contagion.”

However, this contagion is also expected to affect the Australian coast.

Iron-ore

Australia’s export darling iron ore is about to take a hit as Evergrande’s collapse crushes the wider Chinese real estate market.

China is the world’s largest importer of iron ore, accounting for 70 percent of global demand, of which 60 percent comes from Australia. But real estate development could be held back by the collapse of Evergrande.

Finance professor Robert Powell of Edith Cowan University said investors and lenders would be more cautious, which could lead to a credit crunch.

“This could severely hamper real estate development, and therefore the demand for building materials, including steel, made from mainly imported iron ore,” he said in The conversation.

“This trade has made iron ore Australia’s most valuable export commodity, valued at an estimated A $ 149 billion in fiscal year 2020-21. About 75 percent went to China. Any drop in Chinese demand will therefore affect the Australian economy.

The price of iron ore has fallen dramatically in recent months, even dropping below US $ 100 at one point, as China seeks to curb steel production to meet emissions targets .

“Further declines in demand and therefore prices will affect Australian businesses and the 45,600 jobs directly employed by the industry, as well as the thousands of jobs maintained through their wages and government revenues from related fees and taxes. to mining, “added Professor Powell.

Two Australian miners have already suspended operations due to falling iron ore prices.

The Ridges mine in East Kimberley has been placed in “care and maintenance” with 200 jobs expected to be lost and $ 3.5 million in monthly revenue for local businesses.

The weakening of the Chinese economy

Despite a bitter trade dispute affecting everything from wine to charcoal, China remains Australia’s largest export market.

The collapse of Evergrande could cause ripples in the Chinese economy, reducing Chinese demand for other services and goods, Professor Powell said.

“The effect of China’s declining purchases from Australia has been the subject of considerable debate. Some have argued that Australia can compensate by diversifying into other markets, ”he said.

“But such things take time. Economists Rod Tyers and Yixiao Zhou, who simulated the effects of the Australia-China trade closure, argued that the short-term effects could be severe. “

China is the world’s second-largest economy and its real estate sector accounts for 25% of gross domestic product, so the impact could be huge.

Economists argue that the loss of Chinese exports from Australia would force the funding to be spent in other parts of the world.

This could mean the Australian economy would suffer an impact of 6 percent, while real disposable income per capita would suffer a more shocking impact with a drop of 14 percent.

Aother Lehman Brothers?

There has been mad speculation that the collapse of Evergrande could trigger a global financial crisis like Lehman Brother’s – a reference to the financial giant that went bankrupt in 2008 causing the GFC.

However, most of Evergrande’s debt is located in China, but there is still a risk that investors and banks in other markets will be scared, leading to a global credit crunch, Professor Powell noted.

“Australian stock markets have already fallen from their highs in recent weeks, certainly in part because of concerns about the Chinese economy,” he warned.

“The mining sector has seen the real carnage, but there are indicators of general unease with the falls across all sectors.”

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