Economists are wary of China, but many don’t anticipate a Lehman moment. Getty Images / Stringer, Getty
- China’s economy has not recovered from the pandemic and its troubles have fueled talk of a “Lehman moment.”
- China experts and economists told insiders that problems in the real estate sector are serious but different from the US crisis of 2008.
- “There will not be a comparable banking crisis for the simple reason that you have a state financial system.”
The recent talk of China facing its own “Lehman moment” did not come out of nowhere.
President Xi Jinping is grappling with a nightmarish cocktail of economic hurdles that include a mountain of debt, an ailing real estate sector, demographic hurdles, and deteriorating foreign investment and trade. And much like the crisis that ultimately brought down Lehman Brothers in 2008, many of China’s problems stem from the real estate sector.
But while economists and policy experts say the risks are high, they also say the situation is unlikely to trigger an event like the Great Financial Crisis.
China’s real estate crisis
At the center of any comparison between China today and the US in 2008 is the real estate market.
Similar to the US, where real estate was then and is the main source of most people’s wealth, real estate has accounted for about 20% of China’s GDP in recent years. A 2020 People’s Bank of China survey found that real estate accounted for 59% of household assets and three-quarters of household liabilities. This means that consumer confidence – how people feel – is closely linked to the real estate market.
Alfredo Montufar-Helu, head of the China Center at the Conference Board, told Insider he doesn’t anticipate a Lehman moment, but claimed China’s old economic model may have had its day.
“The boom that characterized the real estate industry over the last decade is over,” he said. “China is at a crucial moment where it cannot stop supporting the supply side because economic growth would slow down, but at the same time it needs reforms on the demand side. Hopefully the intentions alone can inspire more confidence in the market.”
In fact, Citi analysts wrote in an August note that concerns about defaults by companies like Zhongrong Trust — a troubled shadow bank with massive real estate exposure — had escalated due to the downturn in the real estate sector, but they don’t see it as a start either a Lehman moment.
However, given the size of China’s real estate market, policymakers may need to provide fiscal stimulus to avert a catastrophe. But that could widen asset price bubbles and drive up debt, William Hurst, deputy director of the Center for Geopolitics at the University of Cambridge, told Insider.
“If we think about the collapse of the US housing market in 2008, caused by excessive wealth in real estate compared to what is happening in China with much more wealth in this sector, the scale and severity of the crisis are perhaps far worse than what happened in the US 15 years ago,” Hurst said.
In any case, most Chinese household debt is tied to mortgages, and it has been rising so fast over the past decade that it is close to the levels seen in the US before the Great Financial Crisis. But unlike in 2008, homeowners in China are paying off their debts and the percentage of people making their commitments is outstripping the number of foreclosures, Montufar-Helu said.
“Supply-side stimulus — facilitating financing, lowering taxes, lowering corporate costs, tax investments — all of these happen quickly and have short-term effects,” he said. “But China’s demand-side imbalances are long-term in nature and the country needs to transition from industrialization-led economic growth to consumption-led economic growth.”
Different political economies
Drawing parallels between market-oriented economies like the US or Japan is misleading as it distracts from the reality of China’s state-regulated, capital-controlled economy – although this hasn’t necessarily prevented global investors from becoming unsettled.
Gloomy economic data has been pouring out of China at an alarming rate for the past month. Manufacturing data, retail sales, consumer prices and exports are all trending lower, while major real estate developers such as Country Garden Holdings have defaulted on debt and Evergrande has filed for bankruptcy.
At the beginning of August, China slipped into deflation and observers were becoming increasingly pessimistic about the country’s growth prospects. But the government is deeply involved in all areas of the economy, and Beijing always prioritizes stability, suggesting that a cascading Lehman-style fallout would be limited in scope.
“Trying to compare current developments in China with those in the US in 2008 is like comparing apples and oranges,” Nicholas Spiro, a partner at macroeconomic consultancy Lauressa Advisory, told Insider. “It’s not helpful, but it’s found its way into the narrative, which is worrying. It’s not a Lehman moment. You will not have a banking crisis like this for the simple reason that you have a sovereign financial system.”
Still, Spiro said China is unlikely to return to the boom times of past decades.
“There will be no sudden, violent shock or dramatic loss of confidence or financial stability,” he said. “Rather, it will be a slowly progressing, structural economic crisis that could last for years. We are experiencing a deep-seated economic malaise that will last for a very long time.”
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