Beyond the Troubles of Evergrande, a Slowing Chinese Economy

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BEIJING — Global markets have watched in terror as a huge and deeply indebted Chinese real estate company flirts with default, fearing that a potential collapse could ripple through the international financial system.

China Evergrande Group, the developer, said on Wednesday it reached a deal that might give it some breathing room in light of a bond payment due the next day. But that shady settlement doesn’t address the broader threat to Beijing’s top leaders and the global economic outlook: China’s growth is slowing and the government may need to work harder to rekindle it.

Retail sales were much weaker than expected in China last month, led by sluggish auto sales. Industrial production has declined, especially for large trucks. And developers sharply scaled back the number of new housing projects over the summer as they rushed to complete the ones they had already started.

Heavy government spending on new rail lines, highways and other projects is keeping the economy afloat right now, but may not be sustainable until next year.

Markets were gripped by the idea that Evergrande could be China’s “Lehman moment,” a reference to the 2008 collapse of the investment bank Lehman Brothers that sparked the global financial crisis. While many economists in China are pouring cold water on the idea of ​​possible financial contagion, they point to broad weakness in China’s real estate market, a mainstay of the economy and other long-term threats.

“This is not a Lehman moment. This is too sensational,” said Xu Sitao, an economist in Deloitte’s Beijing office. “The question is next year.”

With Evergrande, it’s not entirely clear what will happen on Thursday, when bond interest is due. On Wednesday, it said in a vaguely worded listing that it had reached an arrangement with Chinese investors to make a payment the next day, without giving details.

It made no mention of an $83.5 million payment owed Thursday to foreign bondholders. Bloomberg News, citing bond documents, said the company has a 30-day grace period before a missed payment becomes a standard. Evergrande did not respond to questions.

It is conceivable that Chinese policymakers will step in and save Evergrande. But that would run counter to their efforts to get companies to borrow less and take some of the steam from the real estate market, where owner-occupied apartments in a number of markets are becoming increasingly unaffordable for many Chinese families.

People familiar with China’s economic policy-making say that big companies often have a lot of collateral on their books, so officials believe lenders won’t be completely burned by a collapse. They also cite Beijing’s tools to phase out debt and mitigate financial disruptions, such as control over the banking system.

However, if you let Evergrande collapse quickly, you risk a broad fall in apartment prices or other potentially unforeseen shocks to the financial system.

Chinese officials have taken steps to boost confidence in the short term. The central bank announced Wednesday morning that it had temporarily injected about $18.6 billion into credit markets as part of a broader effort over the past few days to ensure adequate cash availability.

Real estate sales slowed even before the latest difficulties, in part because of Beijing’s cooling-off efforts, giving Evergrande and other property developers the money they needed to complete other projects. Sales in July fell 7.1 percent in value from a year earlier and 18.7 percent in August compared to the same month last year.

Overcapacity in many industrial sectors, coupled with a faltering construction sector, has prompted economists to forecast slower growth. Bank of America on Tuesday lowered its forecast for China’s economic growth next year to 5.3 percent from an earlier forecast of 6.2 percent.

Growth of more than 5 percent is still strong by most measures. But it would be a much weaker showing than this year, which many economists believe will total 8 percent or more. It would be significantly slower than China’s official growth rates in recent years.

Other questions currently looming over the Chinese economy can be seen in a handful of measures that at first glance seem to have little to do with the real estate sector, bond prices or Evergrande’s 1.6 million unfinished apartments. The measures measure the production and sale of heavy trucks.

Construction companies and manufacturers around the world tend to stop buying big trucks when they see problems coming. Alan Greenspan, the former chairman of the Federal Reserve, cited the strength of the trucking industry as one of his favorite predictors of the future health of the US economy.

The China Association of Automobile Manufacturers announced earlier this month that heavy truck production and heavy truck sales fell by nearly half in August compared to the same month last year. Aside from statistical quirks caused by the timing of the Lunar New Year, it was the worst performance for either heavy truck indicator since the spring of 2015, as China struggled to emerge from a botched currency devaluation.

However, the nosedive in truck production and sales is about much more than the loss of economic confidence. It also shows how China’s policies in recent years have temporarily boosted demand and caused severe overcapacity.

Strict new air pollution standards have come into effect for trucks manufactured from July 1. Stricter safety standards are also being phased in, such as requiring onboard software and sensors to warn drivers when they start to drift out of lane.

Domestic truck manufacturers expanded their factories last year to build as many trucks as possible before the stricter rules came into effect.

China’s truck production capacity has risen to 1.6 million trucks a year in a market where long-term sales estimates are much less than a million trucks a year. Truck dealers across China are now clogged with rows of unsold trucks.

Auto sales were also weak last month, adding to uncertainty as to whether consumer spending in China will remain strong even as Evergrande struggles. After construction and government spending, the auto industry is one of the largest sectors of the Chinese economy, playing almost three times the role of exports to the United States.

An acute shortage of computer chips has separately affected the production and sales of cars in China, obscuring the picture.

“The car sales market is generally in a downward spiral, partly because of the chip shortage,” said Cui Dongshu, the secretary general of the China Passenger Car Association, a Beijing-based industrial trade group.

While China faces wide-ranging overcapacity and other concerns, many economists in China still express more confidence than economists elsewhere that the country can weather its problems. Economists in China note that the Chinese government is more capable than most of setting interest rates and controlling large flows of money in and out of the country.

“China,” said Mr. Xu of Deloitte, “still has a lot of tools.”

Keith Bradsher reported from Beijing and Alexandra Stevenson From Hong Kong. Li You and Cao Lic research contributed.

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