China: unprecedented financial crisis? – The cryptonomist

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The real estate sector in China is currently experiencing financial problems. In this regard, some argue that the country is actually experiencing an unprecedented financial crisis with banks on the brink of bankruptcy.

This is claimed by the crypto investor Lark Daviswhich, however, may not be impartial in its judgments towards China.

The financial situation in China: real crisis or temporary difficulty?

Davis reports that 75% of Chinese wealth resides in real estateand this highly exposes the average citizen to possible bubble bursts in the sector.

Moreover, defaults on Chinese bonds reached $20 billion in 2022, more than double the figure in 2021, and 18 of the 19 companies that went bankrupt overseas were real estate companies.

Banks’ claims on those who took out mortgages to buy property are also deteriorating significantly in China, in some ways similar to what happened in 2008 in the United States with the collapse of subprime mortgages. who followed.

Even the high exposure of some Chinese banks to failing property companies has led some to halt withdrawals, first in rural areas of the huge country, then spreading to major cities as well.

According to Lark Davis, if the Chinese real estate market crashes, the fallout could be as severe as that of 2008, or even worse, because China is now a part of the global economy.

However, some argue that the situation could improve over the coming year, and the worst could be what is happening now.

We must not forget that this situation has now lasted for about a year, at which time EvergrandeChina’s second largest real estate company, went into crisis in the middle of last year.

China is facing a severe financial crisis, but inflation is holding up

China’s economic interventions

So far, the Chinese state has always intervened to prevent the collapse of the sector, and apparently it has always succeeded.

For example, the Chinese central bank balance sheet shows how, unlike the US and European central banks, they did not initiate major quantitative easing in 2020, but waited until early 2021 to begin an expansionary monetary policy that peaked in early 2022. The current PBoC track record is not that 6% higher than its pre-pandemic level balance sheet while, on the other hand, the Fed’s balance sheet is still more than double the pre-pandemic balance sheet.

So, in theory, the Chinese central bank would still have a lot of cartridges to fire if it wanted to avoid a general collapse in the real estate sector, and it indeed seems determined to use them when needed.

Suffice it to say that official inflation in China is at 2.7%quite within the norm, whereas in the United States it is around 9%.

So while the problems are there, and the risks in theory too, the scenario is of a country that might still be able to react and avoid the worst.


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