Evergrande and the end of China’s ‘build, build, build’ model

Financial Times/James Kynge and Sun Yu

Repost from 9-24-2021

Graphic image of a gold king chess piece surrounded by downed pawns

“Evergrande, for all of the high drama of its meltdown, is merely the symptom of a much bigger problem.”

USAGOLD note 1: The point of this editorial is that the Evergrande meltdown is not an isolated event. Instead, it is part of a broader collapse of the Chinese property market brought on by an over-extension of credit. As such, because building and real estate are such significant components of China’s domestic economy, the consequences extend to the global economy as a whole. “The risks that spring from the Evergrande saga,” says Financial Times, “encompass both financial contagion — especially in the offshore US dollar bond market — and the prospect that a flagging property sector will strike at some of the vital organs of the Chinese economy, potentially depressing GDP growth for years to come.”

USAGOLD note 2: The problems in China might be what’s behind the gold market’s malaise of late, given the obvious knock-on effect of flagging demand for commodities in general and the disinflationary impulses it is likely to generate. If so, investors could quickly switch from an inflation mindset to disinflationary, even deflationary thinking, given China’s position as an engine of growth for the world economy. Though it might force an adjustment in current market psychology, that prospect would likely elevate gold demand among investors concerned about systemic risks much as it did in the aftermath of the 2008 financial crisis – and not just in China.

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