As Evergrande goes, so does China – at least in the short term, at least in some sectors of the economy, particularly financial services.
But it may be that as money flees the inflated real estate vertical, it will shift to other industries, which in at least one possible scenario benefits innovation in one. many other industries and small businesses are looking to modernize and digitize the way consumers interact with businesses and businesses interact with each other.
Right now, however, all eyes are on Evergrande, in the event that “are they or not going” to make their interest payments on the outstanding dollar-denominated bonds. Defects, of course, signal at least some risk of contagion around the world, and as The Wall Street Journal noted, it is difficult to get an idea of the location of the vulnerabilities. The initial impact (even if Beijing could step in with a bailout) would be on the real estate industry, and its suppliers, of course, and capital tends to go where the perceived risk is lower (although the rewards may not be as captivating as they are) once were). Real estate sales are already down, reported the Financial Times, and the government has stepped in to curb speculation in recent months.
The ripple effects
Now, the ripple effect, if Evergrande does fall, would likely be this: Foreign banks that have had holdings or footholds in China (especially through loans to real estate developers) could increase their holdings, choosing to flee the risk if government efforts seek to reduce any perceived vulnerabilities in sectors as broad as real estate and big tech.
In a way, it gives entrepreneurs outside of China an edge. Capital flight from China could move elsewhere. The Peterson Institute for International Economics noted over the summer that even though “global foreign direct investment flows have fallen by nearly two-fifths, China’s inward direct investment has increased by more than 10% to reach $ 212 billion.
A retreat here, we believe, would send that capital elsewhere, to countries and companies considered less risky and volatile, but where innovation reigns. Perhaps Latin America and India, among other options, could spark renewed interest. That would mean money would go into sectors other than real estate, to platforms and incubators, FinTechs and others that are rethinking and reorganizing interactions with consumers and businesses. This would include payments, yes, but also shopping / browsing in the digital age.
There could also be a ripple effect in China. Consider the fact that, as reported in this space earlier this month, Ant Group disclosed in regulatory documents that it owns 30% of MYbank. “MYbank performs an independent credit assessment as part of its underwriting process. Using our knowledge of customers, MYbank performs a small business risk assessment and then recommends credit terms to third party partner banks. MYBank is one of Ant’s biggest customers.
Read also: Ant reconfigures its lending business, Chinese SMEs may see headwinds on credit
Overall, Ant said that CreditTech, as a company, has made loans to more than 20 million small businesses in the 12 months that ended in June 2020, and 1.7 trillion yuan (approx. US $ 263 million) over the same period, or 24% of the total. sales, as we detailed in a previous article. It is clear that small business lenders have a vested interest in continuing to see capital flow into a variety of industries. Over time, then, as China’s real estate industry continues to lose its luster, others may gain.