China is facing an energy crunch and a debt crisis, and economists are sounding the alarm

• The Chinese economy is grappling with the Evergrande crisis and a major energy crunch.
• On top of this, the government is cracking down on debt, big business and cryptocurrencies.
• Many investors and analysts are worried about a slowdown in the world's second-biggest economy.

China was the only major economy in the world to expand in 2020, after it managed to rapidly stamp down on coronavirus. Yet the world's second-biggest economy now faces some major challenges that are worrying investors and analysts.

Property development giant Evergrande is teetering on the brink of default and an energy crunch is weighing on growth. On top of this, President Xi Jinping is keen to reform the country, slashing the economy's reliance on debt and reducing the power of the biggest companies.

Evergrande poses big dangers

Evergrande is an enormous property developer that owes more than $300 billion, but has failed to cough up for a number of key loan payments. It has customers and suppliers across the country and investors around the world.

However, a consensus has built up on Wall Street that Evergrande is unlikely to cause a huge global shock. Analysts by and large think the Chinese government will step in to limit the damage that a default would do.

Yet Kevin Lai, chief Asia economist at Daiwa Capital Markets, told Insider that Wall Street is being too complacent.

He said the government is likely to protect homeowners but "the shareholders, the creditors, the bondholders will suffer." He added: "Then you have to think about what will happen next, how that will change the whole market risk appetite."

Lai said the wider Chinese property development industry, which makes up a large chunk of the economy, is now facing much higher borrowing costs as a result of the Evergrande crisis. Other analysts have said a property slowdown could slash demand for global commodities such as copper.

An energy crunch threatens the economy

As well as Evergrande, China is facing an acute energy crunch that has led to blackouts and rationing across the country.

Energy is in short supply after a long winter and a rapid economic rebound that caused demand for power to spike. A government drive to cut pollution ahead of the Beijing winter Olympics has also weighed on supplies, while sky-high natural gas and coal prices have hit energy producers.

For many economists, the energy shortages are the biggest threat to Chinese growth. Goldman Sachs downgraded its 2021 GDP growth forecast to 7.8% from 8.2% previously this week. Other institutions such as S&P Global Ratings and Nomura have done similar.

The energy shortages have cut production in a number of energy-intensive industries, which Goldman Sachs said adds to the "already significant downside pressures in the growth outlook."

Xi Jinping's crackdowns could spill over

Many of the gyrations in China's economy are due to President Xi Jinping's policies. The president's desire to reduce debt across the economy has been a key factor in the Evergrande crisis.

Xi has also launched a "common prosperity" drive that is aiming to reduce inequality and has seen the government crack down on some of the biggest companies in China, especially in the tech and education sectors. It has hit US-listed Chinese companies hard and weighed on the domestic Chinese stock market, with the CSI 300 index down 7% so far this year.

China has also clamped down on cryptocurrencies, banning mining and transactions outright. The moves have hit bitcoin - the world's biggest cryptocurrency - over the last few months. It last traded at $42,205, down from an all-time high of above $64,000 touched in April.

Lai said Xi wants reform and appears willing to accept slower growth to achieve it. Whereas China was once all about growth, it looks like "the pain threshold is much higher this time," he said.