Why China's Evergrande Crisis Could Be Worse Than the U.S. Crash
With 30% of its GDP at risk, China’s economy is more vulnerable to a real estate bust than either America’s or Japan’s was when their bubbles burst.
A painful adjustment awaits.
Source: Bloomberg
The world is anxiously watching the Chinese housing market, in the wake of property developer China Evergrande Group’s potential default. Market watchers have been drawing comparisons to the U.S. crash in 2008, and some even to Japan’s property bust two decades earlier. But although there are some similarities, China’s situation is fundamentally different from either of those two episodes.
The most obvious comparison for a potential Chinese real estate crash is the U.S. housing bubble that burst after the fall of Lehman Brothers. By now, we know that land bubbles are especially pernicious since they involve so much debt. When they pop, they tend to take the financial system down with them, causing lenders to pull back out of fear of insolvency and illiquidity. That’s what happened to the U.S. But as commentators have been quick to point out, China is not really in danger of this kind of scenario, because the government controls the banks. If President Xi Jinping tells Chinese banks to continue to lend, they will do so, no matter what sort of toxic Evergrande-style sludge is on their balance sheets.