Evergrande is on the brink of bankruptcy. Will gold prices collapse together with the real estate developer or benefit from its default?
Generals are always prepared to fight the last war, while economists are always prepared to fight the last recession. But what if the next economic crisis doesn’t start in the US financial sector, but in China’s real estate?
Naturally, I refer to Evergrande, a Chinese developer with total liabilities of more than $300 billion — around 2% of China’s GDP! A default of one of China’s largest and most indebted companies could entail significant repercussions for the global economy.
Although the Evergrande crisis won’t necessarily be China’s Lehman Brothers moment (I will elaborate on this in the upcoming edition of the Gold Market Overview), it will certainly curb China’s economic growth. Actually, the slowdown has already begun, as the country’s GDP grew just 4.9% in the third quarter of 2021, much less than the 7.9% seen in Q2. It was the slowest pace recorded in a year.
The slowdown is not surprising. After all, China faces a massive energy crunch, shipping disruptions, and a burst of the property bubble. Until recently, the bubble was tolerated or even actively boosted as it drove income and growth, benefiting everyone: developers, authorities, and also ordinary citizens who placed most of their savings in real estate. The property sector has grown so much that it accounts for about 30% of China’s GDP! So, given the size of China’s economy, it has become one of the most important sectors in the world.