Evergrande liquidity crisis impact persists, bad news for AUD and risk sentiment

The start of 2022 is marred by risks associated with the Chinese property development giant Evergrande Group. reports of missed debt payments are not good news for risk sentiment, the steel industry or the Australian dollar. 

Growth in China, the world's second-largest economy, has been slowing for two quarters amid concerns about a deflating property bubble and Evergrande's debt crisis. The property downturn is projected to continue through 2022.

''S&P Global Ratings expects to see more defaults in 2022 and as much as one-third of Chinese developers to be under liquidity pressure. It also forecasts that China residential sales will fall by 10% in 2022 and further decline by 5% to 10% in 2023, with property prices to fall by up to 3%,'' S&P Global stated. 

Although Beijing had been offering policy supports to property developers such as Evergrande, analysts fear the moves are inadequate and more defaults are still to come. Moreover, Evergrande's crisis could be "just the tip of the iceberg," according to Stuart Burns, founder and editor-at-large of MetalMiner.

"Firms like Evergrande are off-loading stock to meet interest payments, depressing prices, and the resulting fall in residential property prices is dissuading new construction," Burns said in an interview. "A depressed construction sector in China will weigh on iron ore, steel and aluminium prices in 2022, extending the depressing effect it has already had in the fourth quarter."

Australia has the world's largest estimated reserves of iron ore with 52 billion tonnes, or 30 per cent of the world's estimated 170 billion tonnes. More than 80 per cent of the Chinese import volume comes from Australia and Brazil. Subsequently, Australia runs a surplus current account balance which helps to support the value of AUD in the forex space.

However, China's steel demand is expected to fall 0.7% to 947 million tons in 2022, following a 4.7% decline in 2021, dragged down by weakening property sector and COVID-19 uncertainties, Reuters reported Dec. 15, citing government-backed think tank China Metallurgical Industry Planning and Research Institute, or MPI. The Evergrande crisis and China's ambition to increase domestic production by 30 per cent will hurt Australia's most valuable commodity export.