China: unprecedented financial crisis?

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

China is facing an unprecedented financial crisis with the housing markets on fire and banks on the verge of collapse!

Just what da fook is happening?

— Lark Davis (@TheCryptoLark) August 21, 2022

This is claimed by crypto investor Lark Davis, who, however, may not be impartial in his judgments toward China. 

The financial condition in China: real crisis or passing difficulty?

Davis reports that 75% of China’s wealth resides in real estate, and this greatly exposes the average citizen to possible bubble bursts in the sector. 

In addition, Chinese bond defaults reached $20 billion in 2022, more than double the 2021 figure, and 18 of the 19 companies that went bankrupt offshore were real estate companies. 

Banks’ claims on those who took out a mortgage to buy property are also deteriorating significantly in China, in some ways similar to what happened in 2008 in the U.S. with the subsequent subprime mortgage meltdown. 

Even the deep exposure of some Chinese banks to defaulting real estate companies has led some to halt withdrawals, initially in rural areas of the huge country, and then spreading to major cities as well.

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

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

It should not be forgotten that this situation has now been going on for about a year, which is when Evergrande, China’s second-largest real estate company, went into crisis in the middle of last year. 

China’s economic interventions

Until now, 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’s balance sheet shows how, unlike the U.S. and European Central Banks, they did not initiate a major Quantitative Easing in 2020, but waited until early 2021 to begin an expansionary monetary policy that peaked in early 2022. The PBoC’s current balance sheet is only 6% higher than its pre-pandemic 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 plenty of cartridges it could fire should it want to avoid a widespread collapse of the real estate sector, and it does indeed seem intent on using them should the need arise. 

Suffice it to say that official inflation in China is at 2.7%, absolutely within the norm, while in the U.S. it is around 9%. 

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