China’s crumbling property sector, its stock market crash, and its gummed-up economy have drawn some comparisons to the 2008 crash in the US.
A few weeks ago, the Chinese property giant Evergrande received a liquidation order from a Hong Kong court, forcing the sale of its assets to repay the company’s $300 billion worth of debt.
This has spurred on the question: is the Evergrande collapse China’s “Lehman moment?”
The answer, according to one think tank, is no. But it does pose an obstacle to an economic rebound.
“Evergrande’s bankruptcy is not China’s Lehman moment; its downfall is unlikely to immediately trigger a contagion across the entirety of China’s financial system,” Zongyuan Zoe Liu, a Council of Foreign Relations expert, wrote on Tuesday.
Back in 2008, Lehman Brothers, choked by a credit crisis, filed for bankruptcy with $613 billion in debt. The dramatic fall was the climax of the subprime mortgage crash, sending shockwaves through the economy.
One famed hedge-fund boss said China’s property crash was like the Great Financial Crisis from 2008 “on steroids.”
But what happened with Lehman is not exactly what happened with Evergrande, Liu said.
“[Lehman] failed because of its aggressive lending, facilitated by the overuse of novel, risky, and opaque financial engineering products and excess risk-taking without sufficient risk management,” Liu wrote. “Unlike Lehman, Evergrande’s insolvency is due to its excessive borrowing and aggressive use of leverage, not over-securitization.”
Also, Evergrande’s loans made up just 0.2 percent of total financial institution lending, Liu explained. Its corporate debt was 0.04 percent of China’s domestic bond market.
But that doesn’t mean China’s economy can climb out of its hole any more easily. Evergrande’s creditors include homebuyers and companies in the property development supply chain — think construction companies, appliance makers, and home decor firms. So its implosion allows weak investor and consumer confidence to metastasize.
“[Evergrande’s bankruptcy] brings another negative confidence shock to Chinese households and is likely to put more potential homebuyers on the fence about buying,” Liu wrote. “Restoring confidence takes time. Meanwhile, low confidence weakens housing market demand growth, dragging down the broader property sector, which constitutes nearly 30 percent of the Chinese economy.”