China facing a 'ticking time bomb' with debts says expert
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With China’s Evergrande company facing economic turmoil, Beijing has now admitted some firms have been poorly managed. Despite attempting to allay fears over the financial state of the country, and therefore the world economy, a statement admitted concern over defaults on debt repayments. In an article published by the state-backed Xinhua Agency, a comment piece revealed property companies were facing the risk of defaulting on payments.
While not naming Evergrande, it read: “It should be understood that there will be clues if a property is likely to default on its debts, so the risk of spillover to the financial industry can be predicted.”
It added that property companies were facing debt default issues due to poor management and a failure to adjust their operations to market changes.
Evergrande is one of the largest companies in the world and second-largest real estate company in China but is facing the possibility of failing to repay its vast debt.
Indeed, it owes $300billion (£221billion) in debt repayments, which accounts for two percent of China’s GDP.
Although the Evergrande Group managed to pay $83.5million (£60million) in a bond interest payment on Friday, the company missed a separate deadline on September 23 and two other payments on September 29 and October 11 worth up to $193million (£140million).
Despite being a Chinese company, if Evergrande fails to pay back debt repayments to financial institutions and banks, it will have dire consequences for the global economy.
if such a large company were to short on such a large amount of money this could lead to a shockwave of fear throughout the global financial network and cause lenders to lose confidence in the financial system.
This could incur a credit crunch similar to the 2008 financial crash whereby companies struggled to secure loans due to the low confidence in the system.
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Some financial experts have warned the financial situation in China may actually be worse than initially feared.
According to Indian-based news channel, WION, China may have a debt total of $4trillion (£2.9trillion).
WION presenter Palki Sharma said: “There is a dangerous debt bubble in China, it is a ticking time bomb that Chinese officials have tried to hide.
“China’s overall debt now stands at well over 270 percent of its GDP, you heard that right, let me repeat the figure 270 percent of China’s GDP that’s debt.
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“China’s outstanding foreign debt reach $2.4trillion in 2020.
“Those are the numbers that we know about what’s making the crisis worse is the hidden debt, the numbers that we don’t know about like the borrowings by local governments no transparency there.
“Here’s something you should know, the state is the biggest borrower in China local governments depend on off the books borrowing, meaning those numbers are not on the books they’re hidden.
“In 2018 Standard and Poor’s came out with a report estimated that hidden government debt could be well over $4trillion.
“And this $4trillion bomb now looks set to explode.
“China tried to clean the house quietly but the defaults, have brought the truth.”
If such a large economy were to fall into financial trouble, it would have huge consequences for developing economies around the world, and those economies which rely on China for trade.
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