Wed. Sep 27th, 2023
    Is China’s real estate market causing a financial crisis?

    The recent payment difficulties faced by Chinese real estate giants Evergrande and Country Garden have raised concerns about a potential financial crisis in China’s real estate market. With Evergrande alone having outstanding liabilities of EUR 300bn, these companies’ struggles have had a ripple effect on global financial markets. As a result, risky asset classes have been sold off in the short term.

    The disruptions in the Chinese real estate market were brought about by the deliberate decision of the Chinese government to curb activity in this sector. This decision is aimed at ensuring the long-term economic stability of the country. Over the years, the real estate sector in China has experienced excesses, leading to a significant increase in the private sector’s debt-to-GDP ratio, surpassing the levels seen in the US or Eurozone. Additionally, the investment-to-GDP ratio of 42% is considered too high for a country experiencing growing prosperity.

    In the short term, the challenge lies in replacing the declining investment in the real estate sector with private and public consumption. This calls for adaptability and flexibility from both companies and employees to quickly adjust to the changing economic landscape.

    The key question now is how much of a threat the issues in China’s real estate market pose to global financial stability. Could a potential bankruptcy of Evergrande or Country Garden lead to a financial crisis akin to the Lehman Brothers collapse in 2008?

    It is important to note that the situation in China’s real estate market is different from that of the global financial crisis in 2008. While the payment difficulties faced by these Chinese real estate giants are concerning, the overall impact on the global economy may not be as severe. The Chinese government has implemented measures to address the challenges in the real estate sector and has a strong command over the country’s financial system.

    However, the interconnectedness of financial markets means that a significant disruption in China’s real estate market could still have spillover effects on the global economy. It is crucial for financial institutions and policymakers to closely monitor the situation and be prepared to respond effectively to any potential risks.

    In conclusion, while the payment difficulties of Chinese real estate giants have caused fluctuations in global financial markets, it is unlikely to result in a financial crisis on the scale of the Lehman Brothers collapse. The Chinese government’s actions and control over the financial system provide some level of stability. However, vigilance and proactive measures are necessary to mitigate any potential risks and uncertainties that may arise from the situation.

    – IIF, Erste Group Research