China: Towards an unprecedented financial crisis?

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

That’s what crypto-investor Lark Davis says, he reports that 75% of China’s wealth resides in real estate which leaves the average person highly exposed to the potential bursting of bubbles in this sector.

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

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

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Even the high exposure of some Chinese banks to failing real estate companies has led some of them to halt withdrawals, first in the rural areas of this huge country and then in the major cities.

According to Lark Davis, if China’s real estate market collapses, the fallout could be as bad as 2008, or worse, because China is now a fast-growing country and an integral part of the global economy.

However, some argue that things could get better in the coming year, and that the worst could be what is happening now.

It should not be forgotten that this situation has been going on now for about a year, that is, since Evergrande, the second largest real estate company in China, entered a crisis in the middle of last year, repeatedly coming close to bankruptcy.

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.

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For example, a report from the Chinese Central Bank shows how, unlike the US and European central banks, they did not initiate major quantitative easing in 2020, but waited until early 2021 to start an expansionary monetary policy that peaked in early 2022. The PBoC’s current balance sheet is only 10 billion euros, 6% above its pre-pandemic level, while the Fed’s balance sheet is still more than double its pre-pandemic balance sheet.

So, in theory, China’s central bank still has plenty of reserves it can use if it wants to avoid a widespread real estate collapse, and it does indeed seem to intend to use them if necessary.

Suffice it to say that official inflation in China is 2.7% while in the U.S. it is about 9%.

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

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