Similar to the financial crisis in 2008, a real estate bubble could once again cause turmoil on the financial markets. However, the Chinese real estate bubble is far bigger than the US bubble ever was.
China is threatened with the collapse of the second largest real estate developer Evergrande, which has accumulated a gigantic debt mountain of 300 billion US dollars and is on the verge of stopping its payments to creditor banks as well as for asset management products with which small investors could also participate in the real estate boom in China.
On Tuesday, Evergrande again warned of liquidity risks from falling property sales. Evergrande had already defaulted on bond servicing in June. On Tuesday, chinese retail investors had stormed Evergrande’s headquarters in Shenzhen to protest the loss of their savings:
The Shenzhen HQ of Property giants China Evergrande was swarmed by angry protesters after the group admitted a fire sale of assets and properties can’t keep up with their swelling $300bn debt. pic.twitter.com/ewdsTS53dj— Ben Schaack (@BuyingStrength) September 14, 2021
For years, China has been on an upward trajectory, both figuratively and literally. Most recently, five times as many houses were built in China per year as in the USA and Europe combined, as ‘the Economist’ reported at the beginning of 2021.
In recent years, a gigantic speculative bubble has developed in the Chinese real estate market as a result of ever higher, debt-financed investments. Already in 2019, the investment bank Goldman Sachs put the value of all Chinese real estate and real estate projects at a staggering 52 trillion U.S. dollars, as reported by the Wall Street Journal. This is equivalent to 64 percent of the world’s GDP, the value of all goods and services produced worldwide in one year! The Chinese real estate bubble could thus be the largest speculative bubble of all time and would probably also significantly dwarf the U.S. real estate bubble that burst in 2008.
However, observers have been wondering for years that the real estate bubble does not seem to burst. This also has to do with the interventions of the chinese leadership, which plays a far greater role in the economical life of chinese/communist-style state capitalism and can sometimes prevent the debt collapse of companies without this making major headlines.
In view of recent developments, it is likely that the Chinese government will be able to use billions of dollars to prevent a collapse of Evergrande or at least cushion the consequences. But even a bursting of the Chinese real estate bubble as a whole, despite its size, would probably have fewer consequences for the U.S. and Europe than the bursting of the U.S. real estate bubble at the time. After all, the U.S. housing boom was ultimately financed to a large extent by European banks and investors through the use of leveraged derivatives, who also bore a large part of the losses or passed them on to their home countries, which in turn contributed to the outbreak of the euro crisis. The Chinese real estate boom, on the other hand, was mainly financed by China itself, which is why the impact on the rest of the world could be rather limited, despite the gigantic size of the bubble.
However, we cannot rule out a domino effect on western and international financial markets, which are already under tension.