Chinese Economy Exhibiting Lehman Brothers-like Characteristics
After Evergrande sold its stake in a Hong Kong development, homebuyers found they risked losing deposits due to the financing unit's withdrawal. PHOTO: BERTHA WANG/BLOOMBERG
China's economy is facing a series of challenges that have some experts drawing parallels to the 2008 Lehman Brothers collapse. Recent data and events paint a picture of an economy grappling with both cooling growth and overheating debt markets.
Slowing Growth
The world's second-largest economy grew by just 0.4% in the second quarter of 2022 compared to the previous year, falling short of the 1% forecast and far below the government's 5.5% annual target. This significant slowdown has raised concerns about China's economic trajectory.
Real Estate Troubles
At the centre of China's economic woes is a brewing crisis in the real estate sector. Property developers, including industry giant China Evergrande Group, are facing a revolt from homebuyers. Many Chinese citizens who took out substantial mortgages for unfinished properties are now refusing to make payments or threatening to do so. This situation has led to losing confidence in the property market, a key driver of China's economy.
Banking Sector Concerns
The stability of China's banking system is also under scrutiny. Minxin Pei, a China expert at Claremont McKenna College, notes that confidence in mainland banks has been "badly shaken" following the failure of several small banks in Henan Province in April.
Adding to these concerns, the city of Zhengzhou, Henan's provincial capital, has seen mass protests in recent months due to frozen bank accounts. This unrest highlights growing anxiety about the health of China's financial institutions.
Debt Burden
Since the 2008-2009 global financial crisis, China has relied heavily on debt to fuel its growth. Much of this borrowing has occurred at the local government level, away from direct central control in Beijing. Analysts have long questioned the sustainability of this debt-driven growth model.
Echoes of Lehman Brothers
The combination of slowing growth, real estate market instability, and concerns about the banking sector has led some economists to compare the conditions that preceded the Lehman Brothers collapse. While China's economic challenges are unique, the potential for systemic risk has raised alarms among investors and analysts alike.
As China grapples with these interconnected economic challenges, the global financial community watches closely, aware that significant disruptions in the Chinese economy could have far-reaching consequences for the world economy.
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