- China’s economy has not recovered from the pandemic, and its problems have fueled talks of a “Lehman Brothers moment”.
- Chinese experts and economists told Insider that the problems in the real estate sector are serious, but different from the US crisis in 2008.
- “We will not have a similar banking crisis for the simple reason that you have a state-owned financial system.”
Recent talk of China experiencing a “Lehman Brothers moment” has not come out of nowhere.
President Xi Jinping is presiding over a nightmare mix of economic hurdles that include a huge debt pile, a struggling real estate sector, demographic hurdles, and declining foreign investment and trade. Like the crisis that eventually brought down Lehman Brothers in 2008, much of China’s troubles have their roots in the real estate sector.
But while economists and policy experts say the stakes are high, they also say the situation is unlikely to spur an event like the Great Financial Crisis.
Real estate crisis in China
At the forefront of any comparison between China today and the United States in 2008 is the real estate market.
As in the United States, which was then and now is the main source of wealth for most people, in recent years real estate has come to account for nearly 20% of China’s GDP. A survey conducted by the People’s Bank of China in 2020 found that property accounts for 59 percent of family wealth, and three-quarters of family liabilities. This means that consumer confidence – how people feel – is closely linked to the real estate market.
Alfredo Montovar Helo, president of the China Center at the Conference Board, told Insider he doesn’t expect a Lehman moment, but stressed that China’s old economic model may be coming to an end.
“The boom that characterized the real estate sector in the past decade is over,” he said. “China is at a critical moment where it cannot stop supporting the supply side, because economic growth will slow down, but at the same time it needs reforms on the demand side. We hope that intentions alone can generate more confidence in the market.”
Indeed, Citi analysts wrote in a note in August that default fears for companies such as the Chung Rong Trust – a troubled shadow bank with significant exposure to the real estate sector – had heightened thanks to the real estate downturn, but they also don’t see it. As the beginning of the Lehman moment.
However, given the size of China’s real estate market, policymakers may need to intervene through fiscal stimulus to avert disaster. However, that could make asset price bubbles bigger and increase debt, William Hurst, deputy director of the Center for Geopolitics at the University of Cambridge, told Insider.
“If we think of the US real estate market crash of 2008, driven by the excessive wealth that was invested in real estate, versus what is happening in China with much larger amounts of wealth in this sector, the scale and severity of the crisis is probably much worse.” “What happened 15 years ago in the United States,” Hearst said.
In any case, the majority of Chinese household debt is mortgage-related, and it has risen so rapidly over the past decade that it is hovering near levels seen in the period before the great financial crisis in the US. But unlike in 2008, homeowners in China are paying down their debts, and more people are making good on their obligations than foreclosures, Montovar-Helu said.
“Supply-side stimulus – facilitating financing, lowering taxes, lowering business costs, financial investment – it’s all fast, it has a short-term effect,” he said. But China’s demand-side imbalance is long-term, and it must shift from manufacturing-based economic growth to consumption-based economic growth.
different political economies
Drawing parallels between market-driven economies such as the United States or Japan is misleading, because it detracts from the reality of a Chinese economy that is government-regulated and capital-dominated—although this did not necessarily prevent Global investors become dismayed.
Over the past month, grim economic numbers have come out of China with astonishing speed. Production, retail sales, consumer prices and exports data are trending lower, while major real estate developers such as Country Garden Holdings are trending lower. Missed debt payments Evergrande filed for bankruptcy.
In early August, China slid into recession, and observers turned increasingly pessimistic about the country’s growth prospects. But the government is deeply involved in every corner of the economy, and Beijing consistently prioritizes stability, suggesting that Lehman-style spillovers will be limited in scope.
“Trying to compare what’s happening in China now to what’s happening in the US in 2008 is like comparing apples and oranges,” Nicholas Spiro, partner at macro-advisory firm Laurissa, told Insider. “It’s unhelpful but it has made its way into the narrative, which is troubling. It’s not a Lehman moment. You wouldn’t have a similar banking crisis for the simple reason of having a state-owned financial system.”
However, Spiro said it is unlikely that China will be able to return to the boom times of past decades.
“There will not be a sudden sharp shock or a significant loss of confidence or financial stability,” he added. “Instead, it will be a slow-moving, structural economic crisis that could drag on for years. We are witnessing deep-seated economic malaise that will be long-term,” he added.
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