Inflation! The buzzword that is plaguing our times. Due to massing quantitative easing around the world no one is safe from the eventual devaluation of their national currency. In an effort to reduce spending and therefore curb inflation, most central banks are raising interest rates incrementally but swiftly. All apart from China! The Chinese central bank has continued to slash interest rates in an effort to improve the flow of money through their economy. While they are not exactly close to their interest rates heading into negative territory, currently sitting around 3.65% there is room for them to move.
However, this does beg the question why are they still lowering their interest rates? What does it mean for their economy, their real estate market and ultimately ours?
Well this all started with China’s largest developer Evergrande showing signs it could collapse. In summary this sparked a massive outcry from buyers of Evergrande homes as they stopped paying the repayments. This created mounting pressure on Evergrande as they then began to default on their bond payments. The outcome of this being, banks that had money tied up with Evergrande, some of which to the tune of $10 Billion USD are experiencing serious cashflow problems. Sources inside China can confirm that this in recent weeks has triggered a run on the banks. Where people rush to withdraw as much cash as possible from their accounts because of a fear the banks might fail. While this is a very brief summary of the current situation in China with many more contributing factors you can start to see why the Chinese central bank is still lowering interest rates. Despite their continued use of this economic lever, it appears that the CCP is also trying to squash anything that comes out in the media which could be cause for panic among their citizens. While it is too late, they have probably been able to isolate the panic to certain cities and provinces.
The financial system is wound so tightly in China and indeed around the world that a lot of Economists globally claim that it would not take much for largescale economic collapse. The fact of the matter is that if Evergrande does fail this could cause a chain reaction of failing banks through China. This could ultimately ripple around the world and cause a global recession similar to the one that we saw in 2008. Ultimately will this happen? Who knows? It is likely that the CCP will step in and ensure their large institutions do not fail, mainly because they would hate to be seen as economically weak on the world stage. But ultimately no one knows where this might lead.
