“There are many indications that China will be the first falling domino in the global financial system. We should prepare for this by reducing the financial risks of enterprises and financial institutions in China in a short time. But also in Germany itself, we must now take steps to make our economy is more resilient in the long run and better insured against financial risks.”
On February 10, Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, made such an urgent appeal to business and political circles in Germany from the pages of the economic newspaper Handelsblatt.
China’s economic growth slows down sharply
The day before, the Berlin newspaper Tagesspiegel posted the same article on its website. This happens quite rarely: editors usually insist on the exclusive right to publish guest comments by famous authors. However, the head of one of the most influential German economic institutions and professor of macroeconomics at the Humboldt University of Berlin clearly wanted to convey his concern to the widest possible readership, and both publications helped him in this.
Director of the DIW Institute Prof. Marcel Fratzscher
Marcel Fratzscher is far from the first expert to warn German businessmen and politicians about the growing threat of a serious financial and economic crisis in China. The interest of Germans in this country is more than understandable: China is Germany’s second largest export market and the largest supplier of imports, by a wide margin, as evidenced by recent data from the German Federal Statistical Office (Destatis). In this sense, the economies of Germany and Russia are quite similar: in recent years, China has become the most important export and import partner for the Russian Federation.
In the same newspaper Handelsblatt, for example, at the beginning of 2022, a large article appeared, based on the assessments of numerous experts from different countries. It listed five major risks to the Chinese economy: a real estate crisis, a conflict with the United States, ongoing coronavirus lockdowns, growing state interference in the business of high-tech companies, and a slowdown in economic growth that threatens the stability of the system.
The danger of a global financial crisis on the principle of dominoes
Approximately the same conclusions were reached by the German government foreign trade agency Germany Trade & Invest (GTAI). In November 2021, it published an analytical review of the Chinese market under the very revealing headline “Fat years in China are over for now.”
However, before Marcel Fratzscher, no one else in Germany, perhaps, warned so strongly about the growing threat in China not just of a cooling of the economic situation, but of a full-scale crisis, which, moreover, could, according to the domino principle, first cause shocks in countries with developing economies ( Russia is also included in this category in Western expert circles), and then develop into a global financial crisis.
The collapse of the developer Evergrande is just the tip of the iceberg
True, last fall, international media, covering the actual collapse of the Chinese real estate giant Evergrande, constantly drew parallels with the bankruptcy of the American bank Lehman Brothers – this event is considered the starting point of the global financial and economic crisis of 2008-2009. However, such a comparison was used by journalists then rather to illustrate the scale of what was happening and was not perceived as a forecast.
Residential area in Huai’an City, Jiangsu Province, built by Evergrande
But the article of the director of DIW, in fact, looks exactly like a forecast. The head of a large team of scientists points to the financial and debt problems that are accumulating in many emerging economies (“the risks are much higher than many realize”) and warns that in the next two years this could lead to a global financial crisis, and the starting point could very well be China.
According to Marcel Fratzscher, the story of the collapse of Evergrande prevented by the government and the central bank of China was just the tip of the iceberg. Due to the decades-long real estate boom, other large developers and numerous households have accumulated huge debts. But in large debts and numerous state-owned enterprises.
Bankruptcies of China’s large state-owned companies are inevitable
So far, the Chinese authorities are still managing to keep the situation under control, thanks in part to large cash reserves, pressure on the banking sector and capital controls, which limit the possibility of its flight abroad.
“Nevertheless, in China, the moment may soon come when it will no longer be possible to hush up the large-scale problems of its financial system and they will have to be solved. Then the bankruptcy of large concerns in the real estate market, some state-owned banks and the closure of numerous other state-owned concerns will become inevitable,” predicts Marcel Fratzscher.
Many Chinese have invested in stocks and will be hit hard if stock prices crash
Significantly aggravate the financial and economic problems of the PRC can be trade conflicts – ongoing with the United States and growing with Europe. And if it is confirmed that “both Chinese vaccines do nothing or only to a small extent protect against Omicron and other variants of the virus, then this may soon lead – as in the spring of 2020 – to the temporary closure of factories and trade routes,” the expert writes. . The inevitable consequence will be further massive disruptions to global supply chains.
All these problems, the director of the DIW Institute believes, are still underestimated in Germany. So he decided to sound the alarm.
See also:
