Opinion | China real estate and global debt woes show problems that led to 2008 financial crisis remain

History shows that easy money inflates asset values but everything eventually comes crashing down in a reversion to the mean

The global financial crisis was a textbook example, and its trajectory suggests a replay is likely soon

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Unfinished blocks of flats stand at a residential complex in Guilin, Guangxi Zhuang autonomous region, on September 17. The struggles of China’s property market are reminiscent of the woes that plagued its US counterpart before the 2007-08 global financial crisis. Photo: Reuters

Published: 3:30am, 17 Oct 2022

Central banks are raising interest rates to quell inflation, China’s real estate market is imploding and public debt is at record levels worldwide. Could the maelstrom that is building turn into another global financial crisis to rival the one that started in 2007, which at the time was the worst since the Great Depression?

The bandwagon is filling fast, with many warning that the likelihood of disaster increases daily. The Asian Development Bank says “several downside risks loom large”, notably “a deeper-than-expected deceleration” in China.

Nouriel Roubini, who is credited with predicting the global financial crisis, has an even bleaker outlook. He sees a “hard landing”, beginning by the end of the year, with a “long and ugly” recession. Meanwhile, fund managers scurry to lower their forecasts for investment returns.

Equally sober were bankers attending the annual International Monetary Fund-World Bank meetings. The Federal Reserve’s tightening in response to strength in the US labour market is forcing them to counter depreciation in their currencies.

Will all these fears prove true? Some clues lie in parallels between now and the Great Recession.

Side by side, both periods are marked by a long stretch of prosperity with low inflation, home prices outpacing income growth and equity valuations exceeding historical averages – the still-puzzling distortions of Covid-19 notwithstanding.