Macroscope | China’s property-driven economic crisis is real but it’s not facing a ‘Lehman moment’

While the acute risks in China’s real estate sector should not be downplayed, their effect on global markets is prone to misinterpretation and exaggeration

Stability is the overriding priority in China’s state-controlled financial system, and more aggressive stimulus are available if needed

Reading Time:4 minutes

Published: 3:30pm, 21 Aug 2023

Nomura has been bearish on China for some time. Even by the standards of its own bleak outlook, though, its latest research report published last Friday makes for particularly grim reading.

Not only did the bank cut its growth forecast for this year to 4.6 per cent – even lower than the government’s modest target of 5 per cent – it warned of a dangerous “chain reaction” stemming from the government’s failure to stem the crisis in the property sector.

“Slumping home sales may lead to a rising number of developer defaults, a sharp contraction of government revenue, falling demand for construction materials, declining wages of employees in the property and government sectors, weaker consumption and faltering financial institutions,” Nomura warned.

As recently as a month ago, such a dire prediction would have been treated by global investors as either overly pessimistic or a risk not worth paying too much attention to. Yet by the end of last week, investors had become far more sensitive to vulnerabilities as another China scare began to take hold.

For the first time since China Evergrande Group defaulted on its US dollar-denominated debt in 2021, fears are growing about widespread financial contagion. A cash crunch at Country Garden Holdings – a top developer with heavy exposure to smaller cities that missed payments on two offshore bonds earlier this month – is being exacerbated by mounting losses among previously stable state-owed developers, imperilling their ability to take on unfinished projects by their distressed private peers.

Just as worryingly, the property-induced troubles of Zhongrong International Trust have fanned fears over China’s vast shadow banking industry, exposing a prime conduit for contagion.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | China’s property-driven economic crisis is real but it’s not facing a ‘Lehman moment’

Macroscope | China’s property-driven economic crisis is real but it’s not facing a ‘Lehman moment’