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While parallels are drawn between China's current financial situation and the Lehman Brothers crisis of 2008, the question remains whether China will experience a similar scenario. The impact of such a crisis would have far-reaching consequences not only for China but for the entire global economy.

This question is crucial given growing concerns about the stability of China's financial sector, especially in the context of global economic uncertainty. A crisis in China could have far-reaching consequences for the global economy and financial markets.

In the news. "Just because Beijing can bail out bankrupt companies does not mean it will," writes Benjamin Bennett in Nikkei Asia.

  • People often ask whether China could experience a financial crisis like the U.S. Lehman Brothers in 2008.
  • Comparisons between the current situation in China and the crisis in the U.S. focus on the real estate market, the amount of debt and the potential impact on the global economy.

Excessive debt and overproduction

Zoom in. China's real estate sector, which accounts for a significant portion of GDP, is under pressure from excessive debt and overproduction.

  • Last week, it became known that 20 million paid-for homes in China were never completed.
  • The situation of Evergrande, one of China's largest real estate developers, also illustrates the vulnerability of the sector.
    • With billions in debt and looming insolvency, Evergrande is seen as a potential starter for broader financial instability in China.
  • While the Chinese government maintains control over many large financial and real estate entities, there is a clear dichotomy between the treatment of state and non-state-owned enterprises.
    • SOEs, such as China Huarong Asset Management, have received support. This indicates an uneven playing field and the possibility of government intervention in the market. Private companies should not receive direct support.
  • The Chinese government's choices will be crucial in determining the future of the financial sector. The decision whether or not to bail out certain entities will not only affect the domestic market. It will also impact international investors and the global perception of the Chinese market.

Crisis in China would affect the world anyway

Zoom out. China's economy is closely intertwined with the global economy. A crisis in China could disrupt global trade flows, disrupt financial markets and affect global economic growth.

  • Many countries remain dependent on Chinese production and consumption. This makes a financial crisis in China a global concern.
  • The experiences of the Lehman Brothers crisis - which led to a global crisis -, and the real estate bubble in Japan - which had much less impact on the global economy - highlight the complexity of managing financial crises and the unpredictability of their consequences.
  • China's financial market and economy also have unique characteristics, such as strong state influence, which presents both risks and opportunities.
  • How China deals with its current challenges will not only shape its own economic future. It will also set a precedent for other emerging economies.

What next? In 2008, the U.S. government and the Fed finally succeeded in stopping the financial bleeding. The U.S. financial system was thus saved from a fate similar to Thailand's in 1997.

  • China has the resources and administrative capabilities to pull off a similar feat.
  • The country may even be in a stronger position thanks to existing state holdings of major financial institutions.
  • However, the outbreak of such a crisis would still be seen as a "Lehman moment," with a potentially equally profound impact, Bennett concludes.

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