Prepare for Credit Crunch 2 in 2022 as bankrupt China’s Evergrande Group defaults on repaying debts potentially causing a domino effect like the USA sub-prime mortgage scandals

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Prepare for Credit Crunch 2 in 2022 as bankrupt China’s Evergrande Group defaults on repaying debts potentially causing a domino effect like the USA sub-prime mortgage scandals

Concern is mounting in finance departments across the UK over the impending collapse of Chinese property giant Evergrande in the New Year.

China’s largest property group owes billions of pounds and has defaulted on a series of repayments to lenders worth £1bn this week triggering bankruptcy proceedings by German finance screening outfit Deutsche Marktscreening Agentur (DMSA).

S&P Global Ratings have also agreed with DMSA heaping pressure on the Chinese Government over whether to bail out the giant developer that owes more than $300bn and has failed to pay lenders a series of bonds to stay afloat.

The Chinese President Xi Jinping is facing a dilemma as not saving the company with tax payers’ cash could see a domino effect as Evergrande’s creditors and suppliers follow the firm into liquidation. They include some Chinese banks and numerous businesses tied to the property market which make up two percent of the nation’s GDP.

If that was to happen then many Chinese investors and wealthy families could be hit badly as they are owed fortunes by Evergrande. The fall out could see banks unwilling to lend to Chinese firms as the economy of the People's Republic of China falters for the first time in two generations. That would spook the group of male billionaires who run the one-party state with fears of public demonstrations as hundreds of thousands of workers are left unpaid along with the suppliers. With the financial implications to the London property market, the Chinese economy and those of the Far East. Commentators have routinely suggested that just like the sub-prime mortgage scandal in the early noughties that led to the Credit Crunch of 2008 the effects could end up affecting almost all economies eventually.

The crisis has echoes of the sub-prime nortgage scandal that saw some USA banks fail

As banks around the world are also left with massive debts they would do what they always do and call in current loans to businesses and cease lending at the same time to protect their capital.

Ian Carrotte of ICSM said the situation could ultimately hit businesses in the UK. He said: “Combined with hikes in interest rates, increasing inflation and a stagnant economy caused in part by the pandemic it does not bode well for 2022. Before the ripples arrive in Britain, I advise all businesses to rethink their borrowing and expansion plans to make sure they are secure financially. So many firms in the UK are in a highly fragile state due to the Government’s Covid regulations, the hangovers from CBIL loan and Bounce Back loans and workers under employed due to the furlough scheme.”

A property boom developed in China in the noughties funded by massive loans

The background to the crisis is the Chinese Government’s policy to reduce real estate prices by insisting on tougher rules for property and building firms to meet in their borrowing. Once the rules were implemented two years ago loans to firms like Evergrande dried up causing cash flow problems and an inability to service debt. The Chinese Government believe that they can allow giant firms to fail as it sends a message to other firms not to increase their borrowing. They don’t believe in a company being ‘too big to fail.’ It’s a delicate balance as it could throw hundreds of thousands of workers out onto the streets and lose suppliers millions in lost payment. The Chinese Communist Party is terrified of civil disorder and so it is gamble for them as they try to dampen property prices and call out firms that over borrow.

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