CHINA’s real estate sector has been in a bad situation these past several weeks, and the reason is Evergrande, China’s second largest real estate developer.
The company’s debts, coupled with the People’s Republic of China’s (PRC) announcements that it will not bail out ailing real estate companies, has caused a lot of people to ponder what would happen to the Chinese economy if its real estate sector goes bust, with some commentators calling it China’s Lehman Moment.
The Lehman Moment they are referring involves Lehman Brothers, a financial institution whose mismanagement caused the 2008 financial crisis. That crisis affected the world, most notably Europe, which was exposed to the American financial system.
China’s Evergrande, on the other hand, is not likely to cause the same level of damage for the simple reason that China’s economy is not structured the same way as America’s. It will have negative effects on raw goods and construction materials, but nothing too Earth shattering.
So if the Chinese real estate market does fall, it will mostly hurt only China. And this is an important point which segues to my point last week. China is not as exposed to the rest of the world as America.
The Chinese economy plays a big role in global trade, sure, but it does not function as part of the global commons; that is, the borrower/customer of last resort. And it is very unlikely from my point of view that the PRC will want to take up that role.
Businesses only stop when there are no more customers/borrowers, and that is not China’s function in the global economy. China for the past several decades functioned as the global factory. It used the proceeds from being that factory to build up the standard of living in China, which manifested itself in home buying (i.e. real estate).
And now China’s real estate market looks like it’s in a bad place thanks to Evergrande. But thanks to China’s relatively closed market, we can at least be thankful that it is not as likely to lead to a Lehman Brothers type recession./PN
