High debt in the Chinese housing market “has long been a source of unrest in many fields,” according to the central bank governor. By the new year, the Oil Fund had more than $ 400 billion at stake in Chinese stocks.
The crisis of the Chinese real estate giant Evergrande has created waves in the markets recently, with concerns about the consequences on the Chinese economy and the possible contagion effects on the international economy.
The Evergrande crisis briefly explained
– We are closely monitoring the situation, central bank governor Øystein Olsen tells E24 after Thursday’s interest rate decision in which Norges Bank raised the interest rate.
– We ourselves operate in the markets, both as a central bank and as an investor. Both business areas follow what is happening very well, he says.
Olsen is also Chairman of the Executive Board of Norges Bank, which is also responsible for Norges Bank’s management of the Government Pension Fund Global, better known as the Oil Fund.
He had more than 400 billion in shares of China
The fund is exposed to the Chinese market. By the new year, it had invested NOK 419 billion in a total of 736 Chinese stocks.
It included just over NOK 56 billion on Alibaba, NOK 50 billion on Tencent, and NOK 17 billion on Meituan. In the New Year, Chinese equities accounted for 3.8 percent of the fund’s investments.
The fund has also had a small stake in Evergrande.
Evergrande bang of about 390 million for the Petroleum Fund
– We must form an opinion and react when it has an impact that affects our investment opportunities or as a central bank, if it should have contagion effects beyond the Chinese market, says Olsen.
Read on E24 +
Only one person knows how this ends
Struggling with a giant debt
As a small and open economy, Norway is affected by what is happening in the world economy. In the markets, the fear has been that an Evergrande bankruptcy will spread to the rest of the economy and trigger a major crisis.
Evergrande is China’s second-largest home developer with a debt of more than NOK 2.6 trillion, which the company is now struggling to manage.
Nordea Markets believes the Evergrande problem could weaken the crown
One question has been how the Chinese authorities will run the company, after they have hardened the mountain of debt in the real estate sector over the past year.
According to Danske Bank, the Chinese real estate sector accounts for about 25 percent of the economy, including associated industries.
– Bubbles may appear
– Both we and all those who follow China closely have seen that bubbles can emerge in the Chinese property market. Evergrande and other real estate companies have very high mortgages. That is why it has long been a source of unrest in many fields, which we also closely follow, says Olsen.
– So the Chinese authorities have a lot of attention on this, reasonably. One possible scenario is that they will handle the case so it doesn’t spread. But if the opposite happens, we will follow closely, he says.
China’s Evergrande troubles can affect you, even without a chaotic collapse
The central bank governor says the Chinese economy as a whole will be affected by the events.
– But for some decades it has been the strongest emerging economy in the world. There are many indications that through some periods of unrest, things to deal with will continue.
– The advance does not stop, says Olsen.
Think China will intervene in the end
This week began with the stock market turmoil around the world, due to fears that Evergrande would end.
Today, the real estate company has an interest and installment payment term, and yesterday they announced that they had reached an agreement on the yuan bonds. Then there were no announcements about the payment of the dollar bonds, which also have a payment deadline today.
China has asked local authorities to prepare for “a possible storm,” according to Wall Street Journal sources.
Danske Bank expects “things to get worse before they get better.”
“However, we believe that the Chinese government will eventually intervene, as the alternative could be a financial crisis with very serious effects on the Chinese economy and the Chinese people,” chief economist Frank Jullum writes in a note.
– The government must find a balance between, on the one hand, showing that irresponsible behavior has a price and reducing moral hazard problems in the credit market, and on the other hand, not letting a financial crisis develop, he writes.