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

Phil Rosen
Sat, August 26, 2023 

Economists are wary on China, but many don't expect a Lehman moment to transpire.
Getty Images / Stringer, Getty

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."


Centaline says mainland China unit has 'huge' unpaid developers' commissions

Reuters
Sat, August 26, 2023 

Sign of Centaline Property is pictured at the company's office in Tianjin


BEIJING (Reuters) - Centaline Property has said its mainland China unit is owed a huge amount of unpaid commissions and so it cannot pay employees their commissions, responding to reports of delayed payments to the unit by developers including the embattled Evergrande.

Centaline's statement comes as a deepening housing market crisis, rising risk of default and a faltering economy are dragging property developers and agents into commission arrears.

The Hong Kong property agency's mainland arm, Centaline Property Agency (Shenzhen), has not recovered some commission fees as property developers grapple with the debt crisis and liquidity crunch, Centaline said in a statement on Friday.

"The current amount of unpaid commissions from developers and agents is huge and Centaline Property is not in a position to advance them to its employees," the company said.

It did not give a figure for the unpaid commissions but the Securities Times state news outlet reported on Aug. 21 that commission owed to the Shenzhen subsidiary had reached more than 1 billion yuan ($137.19 million).

The Shenzhen unit has paid fixed salaries up to July, Centaline said, adding that all of units were operating normally and it would not withdraw from the mainland China market.

Centaline said it had set up a team to handle overdue payments and it would prioritise the settlement of corresponding commissions with employees once funds are recovered.

Liu Tianyang, who is leading the team, earlier told the Securities Times that some developers had used housing to offset commissions, but that often resulted in a loss of revenue for the Shenzhen property agency.

He said the company was operating under major pressure and the payment of commissions due to employees would lead to more difficulties for it.

($1 = 7.2890 Chinese yuan renminbi)

(Reporting by Ella Cao and Ryan Woo; editing by Robert Birsel)

China's economy faces a lopsided supply and demand problem that's been years in the making

Phil Rosen
Fri, August 25, 2023


China has fueled decades of economic growth with industrialization, huge exports, and foreign investments.


That model is starting to show its weaknesses, however, as it's created a lopsided economy with too much supply and soft demand.


"Stimulus functions on the supply side, and on the demand side you need structural reforms. You need to give people more confidence."

Over four decades, Beijing has spurred massive growth and brought hundreds of millions of its citizens out of poverty, but the economic model that drove that boom seems to be losing legs.

By more than one measure China now appears to be slowing down considerably, with slumping trade and an ailing property sector, historic youth unemployment and a lack of consumer confidence, and major firms missing bond payments.

Everything appears to be boiling over all at once, but China's problems have been years in the making.

"China had a very robust if imperfect delivery of high levels of economic growth based on export pricing and foreign direct investment during 1994 to 2008," William Hurst, deputy director for the Centre for Geopolitics at the University of Cambridge, told Insider. "After the 2008 crisis and the end of that model, there hasn't been a new equilibrium."

Policymakers have made a habit of prioritizing strategies that bolster the supply-side of China's economy, much of which entails short-term actions like interest rate adjustments, decreasing taxes, and rapid fiscal stimulus that can boost business.

While this approach can indeed catalyze growth, ignoring the demand side of the equation comes with risks. Hurst said it's long been known that China had to figure out how to boost domestic consumption and motivate people to spend, but that's not yet materialized in policy.

Confidence crisis

These issues have manifested most clearly in the real estate market, which now faces a glut of inventory thanks to years of overbuilding.

When the risks of a property crisis grow, that weighs on consumer confidence — people save money rather than spend it, which then raises the odds of further declines in real estate values, which in turn eats away even more at household wealth.

China currently has enough empty apartments to meet seven years' worth of demand, the New York Times reported, while consumer-oriented sectors like travel or dining have notably lagged behind.

The country also doesn't have a robust consumer-driven economy to fall back on, and it hasn't built a system that includes social safety nets or other means of boosting confidence.

Oversupply leads to speculative buying, and that's created an economy where about 70% of Chinese households' wealth comes from housing assets, according to The Conference Board.

Connected to that is 30% of local government revenues come from land sales to developers — two of which, China Evergrande and Country Garden Holdings, made headlines this month for filing for bankruptcy and missing bond payments, respectively.

"Demand-side imbalances are long term," Alfredo Montufar-Helu, the head of the Conference Board's China Center, told Insider. "To transition from an industrialization-led economy to a consumption-led economy, you have to sustainably increase consumption, and a key driver of this is diminishing the need for precautionary savings."

The fundamental issue, the Cambridge scholar explained, is that China has relied on short-term remedies rather than making any lasting structural changes to its economy. Spending and lending packages make asset bubbles worse, crowd out consumption, and cap more productive investments, and ultimately make systemic changes harder to implement later.

"There's a strong pressure or temptation for the state to intervene with more stimulus to avert a short-term crisis, but that doesn't solve the long-term issues," Hurst said. "There could be a real rapid decline in real estate prices that would hurt a lot of people's livelihoods."

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