Ever since China opened their economy to private enterprise about 30 years ago, they have followed in the footsteps of early 20th century America in many ways. I have been concerned for a long time that the Chinese economy, capital and stock markets would have a crash.
After all, even with all our supposed knowledge of economics, the U.S. economy had a financial crisis in 2008. The interconnected web of debt in the shadow banking system led to the Lehman default being only the first domino to fall.
The Chinese have their own economists but they haven’t yet had a major financial crisis. They do have a huge “shadow banking system” and enormously indebted companies.
Troubles at a big trust company are making investors worry about financial contagion from property developers’ distress
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…
Zhongrong is part of a larger, sprawling financial conglomerate called Zhongzhi Enterprise Group that owns several wealth-management businesses. If their repayment problems and defaults snowball, it could imperil many more investment products that were sold to numerous companies and wealthy individuals in China. …
China’s trust industry, which had a total of $2.9 trillion in assets under management as of March 31, has long been a source of funding for property developers. Trust funds typically raise money from wealthy individuals and companies to invest in stocks, bonds, real-estate projects and other assets. …
“The worry is that a ‘Lehman moment’ beckons, threatening the solvency of China’s financial system,” Zhang wrote in a note earlier this week. She added that China’s “regulatory vigilance” meant that would be unlikely. … [end quote]
China’s economic growth is slowing. Other real estate companies, including Evergrande and smaller firms, have missed bond payments.
If China had a “Lehman moment” – a default that drags down other interconnected companies, causing a financial crisis – what would happen? In the U.S., a financial crisis usually involves tremendous financial stress as banks and shadow banks freeze credit since nobody knows who can be trusted. Interest rates spike and lending stops. In the U.S., the Federal Reserve steps in as the lender of last resort. I wonder how China’s central bank would respond.
And how would that affect the U.S. markets?