As Evergrande goes, so goes China — at least short term, at least in certain sectors of the economy, particularly financial services.
But it might be the case that as money flees the swollen real estate vertical, it will move toward other industries, which, in at least one possible scenario, benefits innovation across a slew of other industries and smaller firms seek to modernize and digitize the way consumers interact with businesses and businesses interact with one another.
Right now, though, all eyes are on Evergrande, in a case of “will they or won’t they” make their interest payments on outstanding dollar denominated bonds. Defaults, of course, signal at least some contagion risk around the world, and as The Wall Street Journal noted, it’s hard to gain a sense of just what vulnerabilities lie where. The initial impact (even as Beijing might step in with a bailout) would be to the real estate industry, and its suppliers, of course, and capital tends to go where perceived risk is lower (even if rewards might not be as heady as they once were). Property sales have already been on the wane, reported the Financial Times, and the government has stepped in to curb speculation in past months.
The Ripple Effects
Now, the ripple effect, should Evergrande indeed topple, would likely be this: foreign banks that have had holdings or toeholds in China (particularly through lending to the property developers) might pull up stakes, opting to flee risk if government efforts seek to drastically curb any and all perceived vulnerabilities in sectors as broad as real estate and Big Tech.
In a way, this gives entrepreneurs outside of China an edge. Capital in flight from China would conceivable settle elsewhere. The Peterson Institute for International Economics noted over the summer that even as “global foreign direct investment flows slumped by almost two-fifths, China’s inbound direct investment expanded by more than 10 percent to reach $212 billion.
A pullback here, we would think, would send that capital elsewhere, into countries and companies considered less risky and volatile, but where innovation reigns. Perhaps Latin America and India, among other options may draw renewed interest. That would mean money would flow into sectors other than real estate, to the platforms and incubators, the FinTechs and others who are redesigning and revamping consumer and commercial interactions. That would include payments, yes, but shopping/browsing, too, in the digital age.
There might be a ripple effect that is felt within China, too. Consider the fact that, as noted in this space earlier in the month, Ant Group has disclosed in regulatory filings that it owns 30% of MYbank. “MYbank carries out independent credit assessment as part of its underwriting process. By leveraging our customer insights, MYbank conducts risk assessment on small businesses and then recommends credit terms to third-party partner banks.” MYBank operates as one of Ant’s largest customers.
Overall, Ant said that CreditTech, as a business, enabled loans for more than 20 million small businesses during the 12 months that ended in June 2020, and 1.7 trillion yuan (about $263 million USD) over the same period, or 24% of total sales, as we detailed in an earlier article. Clearly SMB lenders have a vested interest in keeping capital flowing to a range of sectors. In time, then, as China’s property sector continues to lose its luster, others may gain.