By Jamie McGeever

ORLANDO, Fla. (Reuters) – For now, it’s business as usual. The way China’s Evergrande issue plays out in the weeks ahead could have significant implications for global policymakers next year.

Officials at the Bank of England and Federal Reserve this week weighed down potential contagion threats, as they indicated a earlier start to monetary tightening that markets expected, and Brazil raised interest rates an additional 100 basis points.

However, if China’s record-breaking growth rate and Evergrande crisis in China deepen the current domestic slowdown, they will be able to pause and think about what the future holds.

It is unlikely that the Fed, other central banks, will halt their efforts to reduce growth or tighten financial conditions.

The tail risk is small, however, as the global credit crisis, the spread of the delta variant, weakening economic data, and the spreading of negative credit trends could all make it more likely.

China’s economy is still growing faster than other countries, even though it has been slowing down for many years. China’s contribution to world growth is crucial.

According to George Saravelos at Deutsche Bank (DE:), China was responsible for more than a third of world GDP growth pre-pandemic, a “massive global growth turbocharge” which was double its share of around 17% a decade earlier.

According to Deutsche, China had 29% of the global GDP growth when China’s real estate market crashed in 2015.

According to the World Bank, China is expected to account for about 25% of the global growth in 2018, the same amount as the United States.

Citi Economists point out that China has contributed around 50% to global investment growth during the last decade. They also note that China exerts a “disproportionate” impact on developing economies such as Germany and commodities-dependent countries like Brazil.

While they have an optimistic outlook on the global economy, Citi warns that China has the potential to spread a substantial amount of economic or real contagion worldwide in the short term.

GLOBAL SQUEEZE

Evergrande, the world’s largest property developer, is buckling under the weight of a $300 billion debt load, almost all owed to domestic lenders. In recent months, its bonds have fallen to around $30 per dollar while shares of the company are at 75%.

Although the government is unlikely to intervene, it may still help the company and the sector. Central bank has provided liquidity in the form of hundreds of billions of dollars to local markets.

Beijing is expected to do all it takes to prevent a disorderly default, or a wider implosion in a sector that accounts for as much as 20% of the GDP. However, economists are beginning to sketch out the possible economic effects of this.

In a worse-case scenario, economists at Barclays (LON:) reckon a 10% contraction in property investment could knock around two percentage points off Chinese GDP growth, and UBS economists say a sharp property downturn could push year-on-year growth in the fourth quarter below 3%.

Goldman Sachs’ (NYSE:) economists warned that a worsening of the property market and tighter finances could lead to a 4.1 percentage-point drop in GDP. But, they cautioned, “although it remains more of a left tail threat at this stage.”

All of these scenarios could lead to growth falling below Beijing’s annual target for growth in 2022, which is around 5.5%. This would also put pressure on global growth expected at just under 5%.

These aren’t base-case scenarios, however. Policymakers all over the globe are pushing ahead with domestic agendas.

The Fed has taken a significant step towards ending its bond purchase crisis at its current level and is now looking forward to a rate increase next year. Chair Jerome Powell claimed that Evergrande’s difficulties are unique to China.

Bank of England deputy governor Sam Woods stated that he was cautiously optimistic about the Evergrande situation, but that it may be something to watch out for in the near future.

(By Jamie McGeever, Editing by Nick Zieminski)