IW: How big is the crisis in the Chinese real estate market?

A study on the crisis in the real estate market in China was prepared by the Institute of German Economics (IW).

In its conclusions, it states that the risks to the stability of China’s financial market have been the subject of controversial debate for years.

There has been speculation that a serious crisis could ensue. The very high and rapid increase in debt, especially in the private sector, is certainly a clear warning sign. Although the situation is serious, many mitigating factors suggest that China has the tools to prevent a serious crisis.

These include, above all, low external debt, high foreign exchange reserves, capital controls, current account surpluses and low inflation.
The government has recognized the dangers of rising debt and overheating real estate and has been trying to address them for years.

With the introduction of the three red lines for real estate and the financial market, it has taken a much more dynamic step than in the past. As a result, many indebted real estate companies are struggling with insolvency. Large real estate groups, such as the Evergrande group, are on the verge of bankruptcy.

After a boom that lasted for years, today’s indicators show that the real estate market has cooled. However, these challenges will have a negative impact on China’s economic growth, as the real estate sector is very important to the economy as a whole.

In the event of bankruptcy of the Evergrande group and other real estate companies, they fear global domino effects. However, the vulnerability of the global financial market to losses from a real estate crisis in China appears to be manageable for a number of reasons and cannot be compared to the bankruptcy of Lehman Brothers. Global financial markets have not yet reacted particularly strongly to the turmoil in the Chinese real estate sector. On the other hand, the risk of a real economic transmission can not be questioned the transmissibility of a significant slowdown in growth in China.

It would have a negative effect on the exports of its major trading partners and, consequently, on the world economy as a whole, as well as on the economic growth of Germany. However, there is no threat of deep crisis scenarios here.