Skyline in Beijing, China
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Here's What Could Happen If China's Economy Crashes

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Sep. 21 2021, Published 12:11 p.m. ET

As property development giant Evergrande's debt repayment deadlines loom, the question of whether China's economy will crash is becoming more urgent. The Chinese government could bail out Evergrande or let it default on $300 billion of debt.

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If China's economy does crash, here's the impact we'd likely see within the country and around the globe.

China has been prioritizing development over debt for years

china
Source: Getty

Evergrande is in deep, deep debt—but it's not alone. In 2015, extended borrowing equaled up to 250 percent of China's GDP. In 2019, that total grew beyond 300 percent. This shows that the debt bubble has been growing across the board for some time, and property developers like Evergrande are just one layer.

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China can no longer justify more spending

Evergrande chairman Xu Jiayin said in a letter to employees, "I firmly believe that Evergrande will walk out of its darkest moment and resume full-speed work and production." In order to do that, the company has a long way to climb, and little time to do so.

China has the option to bail out Evergrande, cementing its status as "too big to fail." However, with a Sep. 23 deadline fast approaching for the company, the government has shown no signs of being ready to rescue it from default.

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An analyst from S&P Global Ratings said on Sep. 23, "We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy."

The expectation of an economic crash in China

Regardless of whether Evergrande defaults, the possibility of an economic crash in China is real. The country's massive debt, lack of funding from banks, and bad loans pose a real risk of a financial crisis.

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China itself would see issues like reduced spending and investing, the disassembly of businesses, work being outsourced from China, the loss of currency value, and more.

How a crash for China's economy would impact the world

China accounts for about 20 percent of the world's population, and the country's manufacturing industry plays a pivotal role across the globe. An economic collapse could lead to plant shutdowns and shortages worldwide. Processed foods and groceries, technology parts, chemical fertilizers, cement, and steel are just a handful of industries that would be impacted.

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Meanwhile, impoverished nations would lose the support they've been receiving from China, leaving them struggling to survive. For years, the Chinese government has been investing in developing countries—it even created its own development cooperation agency in 2018. An economic crisis would likely put this to a halt.

Furthermore, if the economy crashes, educated laborers in China will flood international job markets, seeking new opportunities in stable countries. Ultimately, fiscal expansion can only go on for so long when it's at the cost of insurmountable debt.

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