China grapples with looming ‘Lehman Moment’


The property market slowdown, regulatory crackdowns on tech giants, and concerns about rising debt levels have raised concerns among investors that a ‘Lehman moment’ might be looming…reports Asian Lite News

The Wall Street Journal on Saturday reported that investors fearing a ‘Lehman moment’ in China are threatening the solvency of the country’s financial system.

The American business and economic-focused daily said that signs of financial stress at a large asset manager in China are making investors nervous about contagion from the country’s slumping property sector, rekindling a debate over whether a “Lehman moment” could occur in the world’s second-largest economy.

According to CNN Business- at least three Chinese companies had in separate stock exchange filings in recent weeks stated that the Chinese firm Zhongrong Trust had failed to pay the interest and principal on several investment products with the missing scale of payments exceeding 110 million yuan ($15 million).

CNN said videos uploaded on social media app Douyin and WeChat showed demonstrators outside Zhongrong’s office and held protests demanding payments related to investment products issued by the company, which is one of thousands of wealth management firms in China.

The term ‘Lehman moment’ refers to the catastrophic event in September 2008 in which Lehman Brothers, then the eighth-largest investment bank in the United States filed for bankruptcy, triggering a domino effect that sent shockwaves throughout the global financial system, resulting in the worst economic crisis since the Great Depression.

China’s financial system, one of the world’s largest, has been under scrutiny recently due to a series of challenges, including a property market slowdown, regulatory crackdowns on tech giants, and concerns about rising debt levels.

The August 18 Wall Street Journal report highlights that these factors have raised concerns among investors that a similar systemic crisis might be looming.

Investors and financial experts are closely monitoring the situation, as China’s financial stability plays a vital role in the global economy.

According to analysts, the potential implications of a ‘Lehman moment’ in China could be far-reaching, affecting international trade, investments and economic growth.

CNN Business report said that Zhongrong had on Monday issued a statement saying “criminals” had sent false notices to customers about the cancellation of investment products. It warned investors to be vigilant of fraud, but has not commented on the issue of missed payments to investors.

Zhongrong is linked to the Zhongzhi Group, one of China’s largest private conglomerates with operations in financial services, mining and electric vehicles.

Realty crisis

The filing for bankruptcy by Evergrande, Chinese real estate giant signals the beginning of Beijing’s real estate crisis, CNN reported.

It serves as a cautionary tale about the “growth-at-all-costs” model that underpinned China’s spectacular growth over the past 30 years.

For decades, Evergrande, once one of China’s most successful real estate developers, gobbled up debt as China’s economy exploded. Demand for housing was so strong, homebuilders often pre-sold apartment units to buyers before construction was complete, CNN reported.

But a sudden shift in policy by China’s leaders two years ago has left the country’s property developers scrambling for cash, compounding financial risks within the world’s second-largest economy.

As per CNN, the story of Evergrande’s downfall began in 2021, when the central government moved to curb excessive borrowing to try to slow the rise in home prices, effectively cutting off a major source of funding for property developers.

Evergrande, which had 300 billion USD in liabilities, couldn’t shore up cash fast enough to make its debt payments.

It defaulted in December 2021, triggering a market panic. A wave of defaults followed, and China’s vast real estate market has yet to recover. The building was suspended on dozens of projects, leaving many “pre-sale” buyers left with no new home and a hefty debt burden, according to CNN.

The steps that will be taken by Beijing to restructure billions of dollars in offshore debts have massive implications for China’s financial system.

Earlier on Thursday, Evergrande filed for Chapter 15 bankruptcy, which is a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has roughly 19 billion USD in offshore debts.

Evergrande’s liquidity crisis was just the beginning of the pain. Other large builders in China have since defaulted as they struggle to shore up cash and demand for housing has fallen, CNN reported.

Notably, investors around the world are watching the development cautiously as Country Garden, which employs some 3,00,000 people, missed two payments on its multibillion-dollar debt and said it was considering “various debt management measures.”

The cash-strapped developer’s debt is now seen as a “very high risk” asset, according to Moody’s, which downgraded its rating on Country Garden last week, CNN reported.

Country Garden has until early September to make the payments it missed.

It’s hard to overstate the importance of the property market in China. The industry accounts for as much as 30 per cent of the country’s economic activity, and more than two-thirds of household wealth is tied up in real estate.

But nearly three years of “Zero Covid” restrictions sapped China’s economic growth, and consumers have been reluctant to buy new homes in the face of higher unemployment and falling property values, as per CNN.

Notably, China’s economic engines have been sputtering after a brief surge in activity earlier this year.

Consumer prices last month fell for the first time in more than two years; youth unemployment has been rising so fast, Chinese authorities simply didn’t release the July data. Retail sales, export demand and factory production are all down as well, CNN reported.

While Beijing has made some efforts to help jumpstart demand for housing and free up cash for developers, the days of big, state-funded bailouts for bloated industries appear to be over. It also seems unlikely that China will bail these companies out.

“We must maintain historic patience and insist on making steady, step-by-step progress,” CNN quoted President Xi Jinping as saying recently. (ANI)

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