STANDARD TRENDS:
With 29 percent of China’s GDP in property-related industries, a bursting bubble would be catastrophic, although Taiwan appears protected
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By Chen Yu-fu and Kayleigh Madjar / Staff Reporters, with Staff Writer
Corporate debt defaults and a widening real estate bubble have weighed on China’s economic prospects, although risk to Taiwanese markets remains low, the Mainland Affairs Council said in a report released in February.
The report, which assesses the potential impact of Chinese economic conditions on Taiwan, is part of a series of briefings on China and cross-strait issues commissioned by the Council.
China’s financial markets have been rocked by a wave of defaults by state-owned enterprises since November 2020, wrote lead author Li Chi-keung (李志強), associate professor at Tamkang University’s Graduate Institute of China Studies.
Photo: Reuters
Available data shows at least 143 defaults last year, totaling 185.45 billion yuan ($29.14 billion), a 30 percent year-on-year increase and a new record, Li said, adding that the trend is expected to continue this year.
Meanwhile, it remains unknown whether the collapse of troubled developer China Evergrande Group could end a real estate bubble, the report said.
Evergrande’s 1.9 trillion yuan in debt is “just the tip of the real estate iceberg,” Li said.
As of June last year, developers had accumulated a total of 32.5 trillion yuan in debt — about 28.4 percent of China’s GDP — of which 960.3 billion yuan is due this year, he said.
Real estate likely accounted for 6.8 percent of China’s GDP last year, Li said.
If construction is included, the share rises to 13.8 percent, including related services such as distribution to 29 percent, he said.
Once the bubble bursts, the financial impact will be as extreme as it was after the US subprime mortgage crisis of 2007, Li said.
Even if house prices don’t collapse, the sluggish market would dampen China’s economic growth this year, calling its 5.5 percent growth target into question, he added.
Despite these risks, Li said he sees no major or imminent impact on Taiwan.
A full-scale financial crisis is unlikely in the near future given the nature of China’s state financial system and strict capital outflow restrictions, he wrote.
China and Taiwan also have relatively independent finances, meaning a financial collapse in China would have limited direct impact on Taiwanese markets, he said, adding that outstanding debt to Taiwanese supply chain companies poses the biggest challenge.
However, Chinese risk reduction efforts may have some impact on Taiwanese companies, Li said.
Beijing will drive deleveraging through tightening credit and monetary policies, further depressing business investment, with a knock-on effect on demand for raw materials and components from Taiwan, he said.
The impact would vary by industry, with steel, concrete and plastics suffering the biggest losses, he wrote, citing a 21.9 percent drop in steel exports to China and Hong Kong in December last year.
However, demand in the electronics industry remained stable, he added.
In terms of investment, the manufacturing capacity of Taiwanese companies has been gradually shifted out of China amid the US-China trade dispute and the COVID-19 pandemic, the report said.
Taiwanese firms invested US$5.86 billion in China last year excluding Hong Kong, down 0.7 percentage points from a year earlier, it said.
Given China’s carbon and electricity restrictions, coupled with financial risks and a slowing economy, the downward trend is expected to continue this year, he added.
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