China’s economic model isn’t working, but that doesn’t mean the country’s headed for a ‘Lehman moment’

Economists are wary on China, but many don’t expect a Lehman moment to transpire.

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China’s economy hasn’t rebounded from the pandemic, and its troubles have fueled talks of a “Lehman moment.”
China experts and economists told Insider that the troubles in the property sector are serious, but different from the 2008 US crisis. 
“You’re not going to have a comparable banking crisis because of the simple reason you have a state-owned financial system.”

Recent chatter of China facing its own “Lehman moment” hasn’t emerged out of thin air.

President Xi Jinping is overseeing a nightmare cocktail of economic hurdles that include a huge pile of debt, an ailing property sector, demographic hurdles, and deteriorating foreign investment and trade. And, similar to the crisis that ultimately toppled Lehman Brothers in 2008, much of China’s troubles are rooted in its property sector. 

But while economists and policy experts say that risks are high, they also say the situation is unlikely to catalyze an event like the Great Financial Crisis. 

China’s property crisis

Front and center for any comparison between today’s China and the US in 2008 is the real estate market. 

Similar to the US, which both then and now counts property as the primary source of most people’s wealth, real estate in recent years has come to account for roughly 20% of China’s GDP. A survey by the People’s Bank of China in 2020 found that property accounted for 59% of household wealth, and three-quarters of household liabilities. That means consumer confidence — how people feel — is closely tied to the property market. 

Alfredo Montufar-Helu, the head of the China Center at the Conference Board, told Insider he does not anticipate a Lehman moment, but he maintained that China’s old economic model may have run its course.

“The boom that characterized the property sector of the last decade is over,” he said. “China is at a crucial moment where they cannot stop supporting the supply side, because economic growth would decelerate, but at the same time they need reforms on the demand side. Hopefully the intentions alone can generate more confidence in the market.”

Indeed, Citi analysts wrote in an August note that default worries for firms like Zhongrong Trust—a troubled shadow bank with massive exposure to real estate—have escalated thanks to the downturn in the property sector, but they, too, don’t see it as the start of a Lehman moment. 

Still, given the scale of China’s property market, policymakers may need to step in with fiscal stimulus to avoid catastrophe. That, however, can make asset price bubbles bigger and drive up debt, according to William Hurst, deputy director for the Centre for Geopolitics at the University of Cambridge, told Insider. 

“If we think about the 2008 collapse in the US property market, driven by excessive wealth plowed into real estate, versus what’s happening in China with much higher amounts of wealth in that sector, the scale and severity of the crisis is potentially much much worse than what happened 15 years ago in the US,” Hurst said.

In any case, most of Chinese households’ debt is tied to mortgages, and it’s climbed so fast over the last decade that it’s hovering near levels seen in the US pre-Great Financial Crisis. But unlike in 2008, homeowners in China are paying off their debts, and the share of people fulfilling their obligations outpaces the number of foreclosures, Montufar-Helu said.

“Stimulus on the supply side — facilitating financing, decreasing taxes, reducing business costs, fiscal investment — all that is rapid, and has a short-term impact,” he said. “But China’s demand-side imbalances are long-term, and it needs to transition from industrialization-led to consumption-led economic growth.”

Different political economies

Drawing parallels between market-driven economies like the US or Japan is misleading, as it detracts from the reality of China’s government-regulated, capital-controlled economy — though that hasn’t necessarily prevented global investors from becoming spooked.

Over the last month, bleak economic figures have rolled out of China at a startling clip. Production data, retail sales, consumer prices, and exports are all trending lower, while major property developers like Country Garden Holdings have missed debt payments while Evergrande has filed for bankruptcy

In early August, China tipped into deflation, and observers have turned increasingly bearish on the country’s growth outlook. But the government is extremely involved in every corner of the economy, and Beijing consistently prioritizes stability, which suggests a cascading, Lehman-esque fallout would be limited in scope.

“Trying to compare what’s going on with China now to the US in 2008 is like comparing apples and oranges,” Nicholas Spiro, a partner at macroeconomic consultancy Lauressa Advisory, told Insider. “It’s unhelpful but it’s made its way into the narrative, which is worrying. It’s not a Lehman moment. You’re not going to have a comparable banking crisis because of the simple reason you have a state-owned financial system.”

That said, Spiro said it’s unlikely China can return to the boom-times of decades past.

“There isn’t going to be a sudden sharp shock or dramatic loss of confidence or financial stability,” he said. “Rather, it’ll be a slow-moving, structural economic crisis that could last for years. We are seeing a deep-seated, economic malaise which will be very prolonged.”

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