Evergrande-Prompted Slowdown Would Pose Risks for EMs

• The scale of the escalating difficulties at Evergrande remains unclear, but the house builder’s financial problems are focusing attention on long-running problems in China’s property sector. 
• The highly-leveraged firm appears to be unable to service its debts, which could force a state-backed bailout or some form of restructuring on a scale never before attempted in China. Since the firm’s liabilities are believed to exceed USD300bn (about 2.0% of GDP). 
• Over the past week growing fears surrounding the situation at Evergrande have hit emerging financial markets. Currencies have weakened against the US dollar, while equity markets have sold off. While Asian markets suffered, so did widely traded emerging market (EM) currencies, which suggests that investors are worried about economic conditions generally. 
• Fitch Solutions maintained its 2021 growth forecast for China at 8.3% for now but admits that the risk that Evergrande's difficulties will cause meaningful damage to the Chinese economy is growing.

(Source: Fitch Solutions)