Adverse effects in Brazil of Chinese real estate crisis go beyond foreign trade

RIO DE JANEIRO, BRAZIL – The crisis of the Chinese real estate developer Evergrande will affect the economy of the Asian country but does not mean the risk of collapse of the local financial system.

The conclusion is from specialists gathered yesterday in a panel organized by the Brazilian Center of International Relations (Cebri) and by the China-Brazil Business Council (CEBC) and that foresee impacts over Brazil mainly in foreign trade and the global contagion of risk indicators.

Marcos Caramuru, former Brazilian Ambassador to China, member of the Advisory Committee of the CEBC, and international advisor of Cebri point out that the Evergrande crisis is the result of a “heterodox administration” of the company and “powerful” reforms by the Chinese government to reduce the growth of the real estate sector.

“Reforms basically imply reducing growth rates and reducing the expectations that are in people’s heads. It is always difficult for governments to make these reforms,” said Caramuru.

The ambassador said that the Chinese government has been working on three aspects: increasing consumers’ participation in the GDP, reducing the leverage of strategic sectors, and carrying out a major fiscal reform, which will make local governments have more transparency in their management.

Fabiana D’Atri, the coordinator of the Department of Research and Economic Studies of Bradesco and director of the economics of CEBC, pointed out to Valor newspaper that the crisis in the Chinese real estate sector can impact Brazil in three ways.

The first, directly in commercial relations, since China is the destination of 30% of Brazilian exports, reaching 70% in iron ore. The second way is global risk contagion, while the third is for a positive agenda in the future.

The economist projects a growth below 5% for China next year. However, she points out that this advance is on a solid base: “China is not shrinking, it is growing less, that is, the growth, all else being equal, should impact the quantity, with much more adjusted prices. This certainly takes billions of dollars out of our exports.”

She also pointed out that today there is no repetition of what happened when investments from the real estate sector moved to infrastructure.

If a few years ago, the infrastructure in China was for the construction of railroads, highways, and airports; today, with the urbanization movement, infrastructure in the Asian country means water and sewage treatment and structure of data centers.

“Infrastructure today is technology,” she said. “The elasticity is not the same. One unit of infrastructure no longer demands the same unit of steel and iron ore as in the past.”

On the other hand, the economist calls attention to the positive agenda of the Chinese government to strengthen the domestic consumer market, which will mean greater purchasing power for the population. On this point, she advocates the construction of a positive plan.

“This agenda has to be put on the table to bring up structural issues that at this moment fit into this plan, not only of growth but of quality. I understand that these impacts for Brazil can be minimized and, why not, optimized with this agenda if we understand what this new model represents in terms of opportunity,” she said.

The specialist, however, highlights that an effect is still expected on the country’s economy, with estimates pointing to growth this year between 7.5% and 7.7%, dropping to 6% next year.

Source: Valor